Thursday, November 20, 2003 11:36:18 AM
There was this group at Intel that "found out" about writing covered calls. They thought they had found this free money printing machine. The options always expired worthless and they had money in their pocket. Then one month came along where the stock had a HUGE run up. Should they give away their stock? ... They lost everything in that one month that they had made in the previous 12
No, that is not lost money - it is lost opportunity. A big difference! Opportunity can be made up in other ways. That is why I do not worry about the AMD shares that will be called from me this weekend at $11. I make money on those shares, and I make money from the covered call. In addition, I recouped my opportunity by purchasing calls long, and cashing in every few dollars the stock rises. I'm holding Dec 18s now, I pocketed all the profits from two lower options.
If I were simply holding shares long and the stock takes a dive then I am out unrealized value. However, since I've been taking my profits on options, if the stock dives to zero then I still walk away with a healthy profit.
Your friends lost profits because they simply wrote covered calls without studying options more fully. However, they did not lose money, they made a lower profit.
Note on gambling: The difference between gambling and trading is that gambling is based on a random result in a zero sum game while trading attempts to profit on the rise in value of a company, sector or economy as a whole. Not a zero sum game. When you purchase a call option, you are making a decision that the growth of the underlying security will be more than the cost of the purchase - the company is adding value. If you research your company and have reason to believe the value will rise then it is not gambling.
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