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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herm who wrote (8182)8/10/1998 9:11:00 PM
From: ScamSeeker  Read Replies (1) of 14162
 
Hi Herm,

I was doing a case study on writing CPQ CC's against CPQ Leaps and was
unclear about the cheap puts required for insurance.

I was looking at the 25 Puts since CPQ has shown strong support at that level but was unclear about the correct month to purchase.

Here is my analysis:

Buy a Jan 00 30 Call $10.5
Sell a Jan 99 40 Call $2.125

Profit 20% w/o put insurance or commissions, annualized 48%

Buy a Jan 99 25 Put $0.625
Profit 14% annualized 33%

Buy an Oct 99 25 Put $0.25
Profit 17% annualized 40%

I did some extrapolations on the various puts/calls and came to the
conclusion that if the stock dropped $10 to its support, the leap would lose about $3.5 in value and the Oct put would gain about $2.75; the Jan put would gain about $3 in value. So the delta would be about $0.50 loss on the position.

Do you have a rule of thumb on a protection put strike price and month til expiration versus overall position profit.

I was also wondering what your strategy would be if the stock would drop $10. I was looking at:

1. Buying back the Jan 00 Call
2. Selling the Jan00 Put
3. Buying some cheaper puts i.e. 20 for disaster insurance.
4. Write some further out 35 or 40 calls.

Would you wait to write the calls (4) until the price rebounded to the upper BB, or would you immediately write for premiums?

Thanks for your advice.

Richard
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