I don't get it...Why does anyone spend good money betting against themselves....I hear all the time, buy protection against your stock position....If you need protection against a position IMO, then you should not be in that position ....If a trader does his homework and takes a position long or short, they should be committed enough to follow thru with their trades and exit plans, without throwing good money away in the options pool...Seems to me it is betting against yourself and I don't do that...on the other hand trading options without a long or short position in an equity makes more sense to me....What am I missing here..????
Because stuff happens that you can't always predict, no matter how much homework you do. And not everybody moves in and of stocks. People like me who bought puts against their long term income portfolios when the DOW started going south from 14,000 made a lot of money to offset their losses in principle equity and are now already back to previous $$$ levels even though the DOW still has a long way to go.
Whoa, you really ARE missing something. The content of your post suggests that the complexities involved with effective option use are beyond your capacity to understand them. Perhaps you should call the CEO of Annaly Capital Management and ask him why he uses swaps to hedge his MBS portfolio. This might be a starting point for you to understand why someome would spend money for protection, that is, why you would want to "bet against yourself" in some situations.
P.S. Weren't you the same guy who guessed that nly's dividend would come in at .52 this past quarter?
Let me give you one example.....Over the last few days I have purchased 12,500 shares at an avg of 17.47. I turned around and sold 125 Jan 17.50 calls for .17. If they don't get called next week I will have made $2000 after fees or reduced my cost basis to $17.30), which I believe is very good. If they do get called I make .20 ( or $2500) in 2 weeks. I hope they don't because that will allow me to turn around and sell Feb $18 calls and make a little more gravy.
Here's another example: I purchased NLY at about $17.45 today; then then immediately sold Feburary $18 calls for $0.29. If these get called away, I can walk away with the equivalent of $0.84 dividend; if they don't get called, I pocket the $0.29 per share and can still collect the dividend.
As a short term trade, I have the same exact play going with 4,700 shares in a cash account. On new year's eve I bought these shares just before the close of trading at 17.41 and sold the jan 2010 17.50s for .22. My plan is exactly the same as yours. Take the short term .22 + .09 profit per share if I get called or sell the feb 18's. Looking more likely now that we'll get called. We'll see on the 15th.
To the creator of this thread who questioned the value of using covered options, I would suggest you do some research. There is a whole science out there that is well developed and no one here is going to be able to explain to you what you're missing in a couple of posts, nor would they want to with your attitude. Making a statement such as "Option traders make me laugh" only reveals your lack of knowledge and makes you look foolish and immature.