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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Dan Duchardt who wrote (3139)	12/14/2001 6:49:41 PM
From: Uncle Frank	of 5205

Corrected (I hope) Repair Analysis Scenario 1 (letting it ride) Cost of 300 ALLY @19.17=5751 Sale of 3 jan20 cc's @1.10=330 Adjusted cost =5751-330 =5421 Revenue if called =300X20 =6000 Net return =6000-5421 =579 or 10.7% Scenario 2 (rolling it out) Cost of 300 ALLY @19.17 =5751 Sale of 3 jan20 cc's @1.10 =330 Purchase of 3 jan20 cc's @9.40 =2820 Sale of 3 jan25 cc's @4.7 =1410 Adjusted cost =5751-330+2820-1410 =6831 Revenue if called =300X25 =7500 Net return =7500-6831 =669 or 9.8% Note that if you roll up, your adjusted cost basis will rise from the current 18.07/share to 21.03/share. The return on the jan25s is actually less, and it's also based on the assumption that ALLY will stay above 25 at expiry, which makes your risk level significantly higher. At this point, it's clear (now that Dan has corrected my sloppy math) that rolling up your deep-in-the-money ALLY covered call is not a useful repair strategy. You'd have to roll up and out for it to make any sense. duf Note: I truly merit the dummy title based on my earlier analysis <lol>. Thanks for the save, Dan

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