How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Kevin who wrote (961)	3/14/1997 8:51:00 PM
From: Aries	of 14162

Kevin, Re: Your question on Paper trade on ASND See if I can have a swing at this. SCENE 1. Bought stock @ 53.50 Sold cc Jun 97 55 @ 7.25 Bought PUT Jun 97 50 @ 4.50 RESULT: Net Cost Basis is 53.50 - 7.25 + 4.50 + commissions NUT > 50.75 For argument's sake let's say your NUT is 50.80 No we play "what if" game. SCENE 2.A: STOCK CRATERS ------------------------- Stock Craters below $50 and does not recover by Jun expiration Being rational, you exercise your PUT option, and recieve $50/share, BUT YOUR COST IS $50.80!! So you lose 80 cents/share plus selling commissions SCENE 2.B: STOCK ZOOMS ++++++++++++++++++++++ At or before expiration, the stock hits 55+. You get called out! You sell the stock and receive $55 minus commissions. You make $4.20 / share MINUS selling commission. SCENE 2.C: STOCK WAFFLES ++++++++++++++++++++++++ Here comes expiration date, and the stock is somewhere between $50 and $55. Your COST is still $50.80 So your PAPER position is POSITIVE if the stock trades > 50.80 and NEGATIVE if stock trades < 50.80 CONCLUSION ++++++++++ You limited your downside (the PUT) but also seriously impaired your upside potential. The maximum you'll get out of this baby s $4.20 / share minus selling commission! Cheers, Willy

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