How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Aries who wrote (410)	3/4/1997 6:41:00 PM
From: Herman J. Matos	of 14162

1, You write (sell) covered calls (3 or more contracts is better - lower commissions) for 1 1/2 x 3 = $ 450.00 2. The stock price in two weeks time goes up 2 points, down 4 points, down 1 points, and unchanged for three days. The volatility has eroded (eaten up) the value of that option. They even sell a option pricing template called Option Wizard that splits hairs to determine how much is lossed per day! I used it so much that I can just about calculated without looking now! 3. You happen to look and discover (Hey look at that!) the same call you sold is NOW ONLY WORTH 1/4 or $25 x 3 = $75. Should I cover my calls? Why would you want to hold on to this if you can grab another premium for more money NOW? 4. You are one week away from the expiration day. You look out the next month out and one or two strike prices lower! 5. You see that you can sell another call at $2 or $2 x 3 = $600. 6. You cover your calls ($75 plus commissions) with your call buyer's money (nice guy). Now, here is where EXPERIENCE plays an important part. You HOLD off selling your next calls because you think the volatility will go down in a day or two and you think your stock will go up in price! 7. Bingo, three days later the stock price starts to shoot up 2 points! All the shorts run for cover (cashing in on the puts and short sellers covering to avoid short squeeze). The market makers stick it to the shorts and jack up the call prices. 8. You proceed with your writing your covered calls one or two months out at a lower strike price (above your net cost basis) Except, those calls are not $2 each but $ 3 x 3 = $900 because they are more in the money. But, your new net cost basis is ALSO LOWER! 9. You go for it! Bingo the math: Original calls $450.00 - $ 75 to cover = net $375 . Second turnover $900 new calls + $375 net above = $1,275 cash in your account! 10. REVIEW: a. You net cost basis is lower. b. You have profits in your account NOW! That money can go to work in your portfolio to average down something else or buy calls for quick profits or insurance against runaways. c. You see constant growth and cash flow. That is VERY IMPORTANT to your state of mind! YOU ARE NOT HUNGRY for a profit! 11. Don't worry about being called out! If you do everthing correctly you can often repeat the same process over, over, and over again! Time is on YOUR SIDE for once! The worse case I have had doing this is that once and awhile you have to wait for a clean profit a month or two. In other words, you break even and don't make money on that particular stock for a month (because it has been dropping in price) until you can move out of the calls or the expiration date comes and they expire worthless. That is rare! The FACT OF THE MATTER IS if you owned the stock without the covered calls you WOULD HAVE A serious loss in your portfolio. That NEVER HAPPENS TO ME! I might GIVE BACK SOME OF MY PROFITS for a short time and then I get back control (net cost basis). You see Willy? It's like applying the brakes on your car to make an emergency stop to avoid a crash and maintain control. Are you going to worry about the excessive brake lining you lost off the pad surface? Heck no! The main thing is you still have your car and your life! For me! I still have my sanity, stomach and my MONEY!

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