36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
144 Part II: Call Option Strategies
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security, the strategist should diversify several moderately sized positions throughout
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a variety of underlying stocks. If he does this, he will probably never have to exceed
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the position limit of contracts short in any one security.
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Even with as many precautions as one might take, there is no guarantee that
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one would have the collateral available to withstand a gain of 1000% or more, such
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as is occasionally seen with high-flying tech stocks or new IPOs. One would probably
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be best served, if he really wants to operate this strategy, to stick with stocks that are
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well capitalized (some of the biggest in the industry), so that they are less suscepti
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ble to such violent upside moves. Even then, though, there is no guarantee that one
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will not run out of collateral in a sharply rising market, because it is impossible to esti
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mate with complete certainty just how far any one stock might advance in a particu
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lar period of time.
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TIME VALUE PREMIUM IS A MISNOMER
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Once again, the topic of time value premium is discussed, as it was in Chapter 3.
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Many novice option traders think that if they sell an out-of-the-money option
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(whether covered or naked), all they have to do is sit back and wait to collect the pre
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mium as time wears it away. However, a lot of things can happen between the time
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an option is sold and its expiration date. The stock can move a great deal, or implied
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volatility can skyrocket. Both are bad for the option seller and both completely coun
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teract any benefit that time decay might be imparting. The option seller must con
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sider what might happen during the life of the option, and not simply view it as a
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strategy to hold the option until expiration. Naked call writers, especially, should
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operate with that thought in mind, but so should covered call writers, even though
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most don't. What the covered writer gives away is the upside; and if he constantly
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sells options without regard to the possibilities of volatility or stock price increases,
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he will be doing himself a disservice.
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So, while it is still proper to refer to the part of an option's price that is not
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intrinsic value as "time value premium," the knowledgeable option trader under
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stands that it is also more heavily influenced by volatility and stock price movement
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than by time.
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SUMMARY
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In a majority of cases, naked call writing is applied as a deeply out-of-the-money
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strategy in which the investor uses the collateral value of his security holdings to par
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ticipate in a strategy that offers a large probability of making a very limited profit. It
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is a poor strategy, because one loss may wipe out many profits. The trader who |