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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: i-node who wrote (881)	6/1/2001 12:28:31 PM
From: Seeker of Truth	of 5205

I think it's a mistake, and one which I have often made, to think that the person on the other end of a trade is a complete idiot. Certainly this has to be so some of the time, but not necessarily most of the time. To be sure, time is on our side when we sell calls and time is against the buyer. But the buyer knows this also. Good luck on your AMD transactions. But if "a couple of dollars" rise in the price would leave it nowhere near being overpriced then there is some chance that in the duration of the call the price will advance to a level where the call buyer has a good profit. That profit is your loss of opportunity. You could have just held the stock and you'd be ahead. The question is, are such occasions more frequent than the occasion where the stock turns down and you are left happily holding onto both the stock and the call proceeds. If you are really right about the stock being nowhere near overvalued then the former case is more likely. In other words CC's are an inferior game if the stock is really undervalued. They are a juicy addition to income if we wouldn't mind selling. The latter occurs when the stock is overpriced or nearly so.

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