Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 304

just as risky if not riskier. First of all you won't be collecting much on the January 65 calls anyway. You may even have a hard time selling them for $1/16 premium. And you would have to write a lot of them to at least cover the cost of commission. Even 20 contracts sold at $1/16 premium would get you a measly $125 and after commission you may have barely $90 left in proceeds. Would you risk a huge loss for a mere $90? If perchance Ford even goes to $66, you are looking at a $1,910 ($2,000-$90) loss on those 20 contracts. So much for writing out-of-the- money naked calls.

But what about writing in-the-money naked calls like a January 40 call? This is also risky. You can do the math and you will see that if Ford stock goes higher, you lose. Finally you may say, what if I settle them before expiration? If Ford has gone up in price when you decide to settle, you would have to pay more for settling them than you had originally collected. No matter how you look at it, writing naked calls is risky. As such I advise staying away from them, even if you do qualify.

Should you then avoid writing call options altogether? Not if you write covered calls. In fact, writing covered calls is actually a good move if you are itching to write. With covered calls, you sell call options based on the number of the underlying shares you actually own. Now this is a safe way to write call options. Suppose before writing the 2 FAJ call options, you buy 200 shares of Ford at $50. You may even buy them on margin if you want (but don't forget the danger of buying on margin - remember margin calls?). Then those 200 shares will act as insurance should your contracts get exercised. Remember that when you sell the 2 FAJ contracts, your obligation is to deliver 200 shares of Ford at $50 if the contracts are exercised. With those 200 shares of Ford sitting safe and sound in your account, you can go ahead and collect your $400 for the 2 FAJ contracts and if the contracts are ever exercised, you already have the 200 shares of Ford to sell at $50 and you still can enjoy the $400


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