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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: garnett50 who wrote (1387)7/10/2001 11:37:44 AM
From: Stock Farmer   of 5205
 
Hi Garnett50 - two useful questions.

Listed options are sold at strike prices. They are what they are and you can't sell in between. I suppose if you were a sophisticated player you could take your options private... but CBOE sets the strike prices for listed options.

The interval between strikes depends on the price of the underlying and the volatility. I bet BRK would have strike prices separated by several hundred dollars.

As to why the folks here use tech stocks, well, it's what they had in their baskets of stocks. The concept of "covered call" implies an underlying. One could go out and get one, or one could use what one has. When sitting on a pile of trashed tech and unwilling to sell, one thing people can do is write calls on their holdings. Certainly is less boring than watching portfolio value flounder and flatline itself. Also brings in some cash.

But you are perfectly right any underlying will do. There's another great CC thread which started a set of examples based on ROST (Ross Stores). Decidedly non-tech. I suggest the first few thousand posts there were very much worthwhile. Subject 12574

Ok, not any underlying.

When writing covered calls one should be neutral or mildly bullish about the underlying. It should be volatile enough that premiums after commission are worth the bother and can generate a reasonable return. It should be something you understand well and is a legitimate store of value at current price. The choice of underlying for a CC strategy is more difficult than for straight investment. Often the best CC underlying is not the best investment strategy and vice versa.

John.
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