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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dan Duchardt who wrote (2003)8/15/2001 3:50:02 PM
From: Dan Duchardt   of 5205
 
Hey Dan... That is too good to be true!!!

Something was bothering me about that last post. Even as I was writing it I had a hard time believing it was as good as it looked. Somewhere in la la land before sleep fell, I realized that a $300 profit after collecting a premium of 1.50 at a strike that is only .65 above the underlying value (total 2.15) just doesn't add up, and that assuming the LEAPS price was going up $10 for a $9.15 rise in the underlying was a real stretch. So what gives?? I used the projected fair value of the LEAPS call in September, but I used the quoted offer for purchase now. The fair value for those LEAPS now is $24.40. So why are they selling at $23.30? No good reason I can think of. They are practically giving them away. Come September, chances are pretty good they will still be discounted, so you will not be able to clear $300 on the trade if called out. $190 to $200 is more like it, at least for closing prices just above the strike. BUT, If GE really did go up that fast to 51, the LEAPS might not be discounted. A run that fast would increase the volatility, and you might actually make the $300. Buying low volatility is always a good thing if you can do it. Selling high volatility has the same advantage.

Dan
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