When would you buy a call over selling a put and vice versa?

  A lot of the decision is based on personal preference and your brokerage account. Writing puts requires the proper amount of collateral in your accounts (for margin if non-IRA, and 100% cash for IRA accounts) and enough expertise for your broker to allow you to do it. Those who write a lot of puts tend to do that and not much else. Getting money into the account and not having to come out of pocket with any cash (i.e., not having to buy anything) can get addictive. You are getting paid to make a play that you are confident will go your way.

Some investors do not like the thought of the possibility of a stock being put to you and having to buy it. They would prefer to risk only the cash out of pocket for buying a call. Moreover, a call does not limit the amount of money you make on a play-it could be infinite if the stock continues to run up and the option does not expire.

We buy a lot of calls because if we believe a position will really take off, we want to capture a large part of the gain. If the move is a breakout, we often write puts as well to take in money that we view as a giveaway given our confidence in the play. It also offsets some of the cost of our call purchases. We then benefit with immediate cash and also have unlimited upside on our call purchases. Doubling up on plays can really ramp up your returns, but you have to realize it also ups your risk with respect to the amount of money you have at stake-you had better be right or at least ready to protect your positions if it turns against you. That, however, is what we need to do with any play we make, so we don't get all bent out of shape about that aspect.

You see, we differ from many investors. Many say buy a lot of diverse positions-spread the risk around because that is safer. As with any safety strategy, however, you are increasing safety by reducing your potential take. We have enough confidence in our play choice and discipline in executing the play to allow us to focus resources on a few plays. In other words, we will find a few plays we really like and put a lot of money into those plays. Some of the most successful mutual funds have adopted this approach of a limited number of stocks (e.g., Janus Twenty) as they found having 100 stocks in a portfolio does not give the returns money focused on a few solid choices does.


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