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Stuart,


At the risk of this post passing myself of as an option expert, nothing could be further from the truth. I am an amateur at this game.


I thought I'd just summarise some of the key points of this thread with some big quotes to make myself look intelligent...please everyone flame me mercilessly if too much BS appears...hhahahahaha




With that line you have hit the nail on the head with what this particular thread I think has been trying to get across - i.e. the myths surrounding CC's. :hammer:


1) Caveman tactics - its time for evolution

Some people (either thru insufficient knowledge...hehe like myself. :eek:.. or brainwashing) use CC's as the ONLY strategy even when the circumstances do not favour CC's or there are better alternatives.


As many other experienced traders here have alluded to, it is just one of many tools that should be in your arsenal.


There are often other risk profiles better suited to the  market conditions and factors at that time.  There are opportunities to make more than CC's with less capital outlay, with the same or less level of risk. Question is why wouldn't you at least consider it????


Choosing underpriced blue chips whose companies have sustainable earnings, strong operting cash flow and other industry specific factors would be smart, in this case you could be confident riding market corrections since the company you have elected has the operations and controls in place to survive the tough times. But then again im a paranoid fellow...i will come back to this in point 2 below.


Which brings us to the next point:


2) Cowboy selection and attitude

To compound the misery, some folks criteria for choosing the stock for CC's does not take into account all the risks presented by the position.

There are people who choose the stock based on the amount of premium that a particular option series presents.


E.g. Oh hey look LGL premiums are going for $1.50 per contract and the strike is $3 away from current price..... which seems pretty safe and even if it tanks a bit, it wont tank too much, the stock will survive a correction...bargain!!! Its frightening...I know of folks who do this...especially after they've heard certain option "gurus" speak.


 


I hear lots of CC and naked put and hell even investors say this sort of thing..."it wont lose that much".


Its the glossing over this risk which is a large concern.


A few words One.Tel(gonski's), HIH (goneski's), Fortescue Metals Group (use to be $60 now $8 i believe - not exact figures but still), Allco Finance Group.


Im sure other traders will agree with me, the times when you think something isnt going to happen, it tends to happen. Risk management is the key. Again as wayneL has said, you wouldnt be putting all your money on one trade.



3) Be water my friend - Bruce Lee

What the great man is referring to is the ability to adapt to any situtation. The use of CC's or buy-writes by many are done systematically even when conditions do not favour it.


Your post seems to do a bull put spread vs. CC's with the tendency to lean towards the fact that CC's are more safer.


Which leads to the next point:


4) When things go wrong it's someone else's fault, when things go good...it was down to my genius




What if it is more than 10%? this is not impossible.


You could say that with bull put/bear call spreads "as long as you roll up/down spread before it hits predetermined break even/stop loss points" you wont get decimated.


Some people are guns at managing that risk while others arent. Its the person managing the trade not the strategy that will determine if you get decimated.


In your case, it sounds like you would get decimated and then some if you were trading a bull put spread. Others wouldnt.

It sounds so trivial - manage risk, we all know we should but it doesnt get done very well.



5) One size does not fit all




Agreed. Everyone has their own risk/reward tolerance. Add to that amount of knowledge regarding options and that will determine what strategies you would employ.


However the concerns expressed in this post is, please do not advocate these things as a guaranteed 5% return a month, 60% return a year. Better yet, options arent a "get rich easy scheme", although some of the option guns here might disagree :D


Stuart, there is nothing wrong with your strategy or CC's in general. I think it hits people soft spot to read this stuff and then think " these guys are bagging out my strategy".


Lemme give you an example of an ad i saw for a bull put spread:

"How to turn 20 G's into the equivalent of $1 mill generating 10 G's in a month, and heres how to avoid losing if the share price tanks!"


No mention of Greeks -key to managing risk, no mention of possibility of loss - the rolling down and out of the spread would cover that - (the reality as you know you can get decimated), heavy marketing emphasis on returns - quoting returns on margin.  Thats BS and misleading.


CC's have similar sort of marketing, except that CC's are used to cover interest payments for property investments - i have seen people sell their houses to free up money to do this sh*t. Risky or not risky??? 25% p.a. return and you choose the correct stocks, so why not eh?


Cheers


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