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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: David Lind who wrote (12023)12/11/1999 2:26:00 AM
From: NateC   of 14162
 
David wrote "how far the current price can swing either way before it begins to strongly impact
the leap strike price, one or two years out.
actually the Delta for these LEAPS is published lots of places....I think CBOE has it, and also I believe the Philadelphia exchange's website has it. For some of mine I've seen Delta around 65-75% for these longer LEAPS, such as SCH's Jan 2002 45 strike price LEAP...Delta 72.....So it will move 3 points for a 4 point move in underlying price....even this far in advance. The 30 strike price has a delta of 82.5, while the 55 strike price has a delta of 67 currently.

Further, how long can one continue to write calls against the leap,
before the value of the leap changes.
Not sure what you mean here. I write CC's against the long leap every month or two....and hope the price still below the strike price of the short call (CC). That way I reduce the nut each month, on the long LEAPS call. What you may be talking about is the relatively well known dictum...that you do NOT want to own these long calls when they get within 6 months of expiry....because their time premium begins to erode too fast then. Instead you sell them....and buy another year later (in this case you should know be buying Jan 2002 expiry long LEAPS.)

And in what direction is it likely to change, assuming stock price stays in
the same range?
The long call will gradually erode its time premium.....particularly as you get closer to expiry...so your CCing has to more than cover this time premium erosion. If you buy a long call that is, for example, 10 points in the money.......you will stay be 10 points in the money...if the underlying doesn't move.....and only the time premium will change.
To summarize...buy the Jan 2002 long calls now...and CC them. As soon as the Jan 2003's become available...start buying them.....and CC them right along. I always look for short term CC's that are OVERPRICED...so I'm selling more time premium,and reducing the nut as quickly as possible...look for 10% of the time premium in the long LeaPS call....each month....or 2 months out...if you prefer. Sometimes you can CC every month....andin 10 months.....you've "bought back" with your CC's.....100% of the time premium....and you can just sell the long leap for a good profit

hope this helps

These questions obviously go to the issue of when a trader should start to be concerned about the value of the
leap when using it for writing calls, and when it may be time to jump out of the leap if one doesn't want to hold it
to expiration. For me, it is the only source of confusion left in what appears to be a very good strategy.
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