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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: PoetTrader who wrote (2894)11/6/2001 11:33:37 AM
From: Uncle Frank  Read Replies (2) of 5205
 
>> I got whipped on my calls I sold for November on Nvda -- sold Nov 30's at 3.30 (my cost basis is around 30.00 so I wouldn't lose money --but would obviously like to capitalize on their phenomenal move)

The rvukf's are very dim, and the time premium has been squeezed out of them. If you buy them back to uncover the stock, it would be equivalent to taking a new position in the stock at 49, in the belief that the run it began at the start of October will continue and be sustainable. In light of the current economic outlook and recent market history, I'd think that would be a risky approach, and would lean towards one of the following:

1. Take your profit on the trade as if it were a successful buy/write and move on. You'll receive 33.30 on a 30.00 investment, which is a handsome 11% return, and will have cash in hand to buy nvda or something else on a dip.

2. Roll way out and way up. You could roll the November30s into January 2003 50 strike price LEAPS. The math would be as follows:

Based on a RTQ quote, nvda is 49.01
Buy rvukf at 19.30
Write oliaj at 16.20

You'll give up all but .20 of the premium you received for the November 30s, but if you get called, you'll receive a profit of

50 - 30 + (3.30-19.30+16.20) = 20.20, which would be a return of 67.3%.

and if nvda dips, you'd be able to uncover the position at some lesser profit.

Obviously the same logic applies to qlgc.

duf
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