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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: holland who wrote (3285)1/18/2002 6:02:51 PM
From: Dan Duchardt   of 5205
 
holland,

Example stock at $35. Buy a $25 leap and sell a $40 Call.

This is one of those things that is "relative", and one really has to look at the specific stock and its volatility to make the bast choice.. $10 is about as far ITM as I think you should go on a $35 stock. For a $35 stock with a volatility of 75%, a 2003JAN25 long call and FEB40 short call the maximum theoretical gain in the first month (if the stock closes at 40) is $507. If you drop the strike on the LEAPS to 20, the maximum gain only goes up to $548, but it costs almost $300 more to open the position. My point is only that one should not get carried away trying to minimize the time premium for the LEAPS, especially in an environment where a substantial pull back is relatively likely. If the stock does retreat into the 20s, rolling the LEAPS down to 20 or lower might be attractive since the price difference between the original LEAPS and the new one will then be compressed.

Dan
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