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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Uncle Frank who wrote (637)5/18/2001 2:47:03 PM
From: Dr. Id  Read Replies (1) of 5205
 
The good doctor's reasoning behind selling the January 62.50 aol calls was excellent, and I hope he elaborates on the play for the benefit of our threadmates. Great job, Doc.

Okay. I guess a good play does a little to offset our STUPID Ntap play...well not really, but I'll elaborate anyway. :-)

I had sold AOL May 50's for 2.10. I had thought that it would finish the month below 50, or I'd let it get called away. (I have a fairly substantial long term capital gain on the stock...I originally owned Netscape).

Well, the stock has looked very strong of late, and I was mixed about whether to let it get called. I was originally looking to the June 55's, but the May 50's were selling at around 4.50 and the June 55's at about 1.50. It didn't seem worth it, so I started looking further out. I noticed that the Jan 02 62.50's were trading at parity (the bid on the 62.50's were at about the ask price of the May 50's). Buying back the May 50's and selling the Jan 02 62.50's at no additional cost would result in:

Holding the stock for six months more resulting in an additional 25% gain in the sale, as well as deferring the tax consequences until 2002 (if it should get called).

Also, if the market tanks, I'll be able to buy the calls back at a fraction of their current value.

If the market and AOL REALLY tanks, I'm comfortable holding AOL for the long term. If AOL soars, I'll get called away (but am holding a number of Jan 03 100 leaps).

It seemed like a no brainer. Am I missing something?

Dr.Id@insearchofglitches.com
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