selling covered options vs uncoverd options

[Paluka]

[ QUOTE ]
There are many good books that can be read about options and their pricing. I think that people here mean well, and some of the information is quite ok, but there is also a bit of "guesswork" and out and out falsehoods being told to you. Selling puts is actually far riskier. Puts do not trade higher because people buy puts and sell calls. Puts trade higher because market returns are negatively skewed, meaning that most days on the market are up days, but most large moves (e.g. more than 2 or 3 standard devs.) tend to be down moves. So market makers and specialists require increased insurance against this downward move. This is also why selling naked puts is usually riskier than selling calls. Even though stocks could in theory go as high as they want, the actual truth of market dynamics is that a large downward move (usually timed with market information such as earnings, an FDA approval, etc.) is far more likely. There are also other considerations on option pricing. Options are priced based on the dividends and interest rates applied to the underlying stock. Some stocks are "impossible to borrow" meaning that they cannot be sold short, so there is a tremendous "pump" put into the value of the put because no one wants to sell it. But the most important pricing consideration of an option is the volatility of the underlying. The more volatile a stock is, the more expensive the options are. So you can really sell some expensive puts on books like GOOG, KMRT, TASR, etc. But there is a reason for this. These stocks move dollars at a clip, and are very dangerous, even for the professionals.

Lastly, selling covered options is a bit of a misnomer. Selling a call and buying the stock is nothing more than selling a synthetic put, and selling a put and selling stock against it is nothing more than a synthetic call. Think about a position. Buy the stock and sell the call. If the stock drops, call ends up out of the money and you still control the stock after expiration. But you lose on the long stock position the whole way down, same as if you just sold the put. The situation would be different if, for instance, you already owned the stock, and were planning on holding it long term no matter what. In that case, selling the call would be ok. Market makers on the floor of America's exchanges are professionals who have been working at their "craft" for a long long time. Your money being saved for retirement is too valuable. No one ever got really rich by diversifying small amounts of money. But no one went broke that way either. Just like at a poker table, there is no "free money" in the world. My advice to you is to leave the options trading alone, and to invest in mutual funds and ETFs which are highly diversified.

Good Luck,

Eric

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I see you are from Philly, do you work for SIG?

[CalRisk]

In my opinion covered options far outweigh non-covered with both risk and reward aspects. I use Bull Put Spreads and Bear Call Spreads. Go to coveredcalls.com for explanation of them. I'll briefly describe Bull Put Spreads, Bear Call Spreads are the same thing upside down. This is an example I used a few months ago:
Bull Put Spread:

First Energy Corp. (FE)
Stock Price: 40.71

Sell the OCT04 40p @ .55 (share)
Buy the OCT04 35p @ .05 (share)

.50 difference (40p sold .55 - 35p bought .05= .50)
5 held by the Brokers (price difference between the puts total possible loss is 4.50 (5 - .50 gained on the premimum)
Investing 5 we're making .50: a 10% return in one month.

When you're naked your brokerage account will hold more in margin reducing your profit points(Reward). Also you don't have a safety net(risk). But be careful whatever strategy you use.

[Redsox]

no, i don't work for susquehanna. I do trade on the floor, but for Smith Barney. I have several friends who trade for sig.

[Dan Mezick]

Probably not a good idea. You might consider Larry McMillan's books on options.

They are very good. He has a few things to say about naked options in these books.

His books are very good.

Options as a Strategic Investment by Lawrence McMillan

[adios]

[ QUOTE ]
Selling puts is actually far riskier.

[/ QUOTE ]

What I pointed out was that max downside in shorting puts is less than in shorting calls. The probability assessment of where future prices will lie is a far different matter as you point out more or less.

What I would gather from your post that selling covered calls is a poor strategy since:

Selling covered calls == shorting a put (selling a synthetic put as you put it) for exactly the reasons you gave that selling puts is risky.

[Yads]

I'm no expert at buying/selling options. My only expertise comes from the fact that I work for a company that makes software that prices options and derivatives. However, aren't options more used to hedge other investments? Ie, you won't make a lot of money from buying options that you consider to be improperly priced, but you open yourself up to a huge loss if you're wrong. Or are people that are option traders here basically use options to bet on whether certain stocks go up or down?