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Technology Stocks : The New QUALCOMM - Coming Into Buy Range
QCOM 178.63-1.3%3:59 PM EDT
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To: Art Bechhoefer who wrote (7621)6/22/2011 3:57:53 PM
From: lml1 Recommendation   of 9128
 
Art,

Writing covered calls is a conservative strategy, but belief that it is particularly so if the call expiration is @ least 6 months away belies that hypothesis. It explains your conclusion that covered call writing is not the best candidate for such strategy.

Fact 1. QCOM is a volatile stock. As a result, option premiums are going to reflect that volatility.

Fact 2. The longer the expiration, the greater the implied volatility, and hence the risk that the option will expire in the money (if your objective is to earn income and maintain your long position as the stock appreciates).

Bottom line, the more conservative strategy to generate income is keep the expiration term relatively short, 45-60 days, when the time premium begins to deteriorate and accelerates over the final 30 days to expiration. By the same token, the risk of having the stock assigned (called) is more easily managed. It can be substantially reduced than if one goes out 6 months, while providing ample time to adjust the position should price movement goes against your initial position.

As Dan stated, you manage this by entering into roll over spreads to adjust your position, which can either generate income or cost an amount you're willing to absorb to reduce your risk. It's a management tool.

Personally, I find going out more than a few months on QCOM somewhat risky. But the key is to MANAGE that risk as well as the risk/return tradeoff by making adjustments to your initial position by rolling into another short call position with a higher or lower exercise price with a later maturity.

What I like about writing options is that time is always on you your side. Just gotta figure out how to make it work for you.
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