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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herman J. Matos who wrote (1199)3/16/1997 10:46:00 PM
From: Don Lloyd   of 14162
 
Herman, Current profits on ROST

I have a question on looking over your numbers on the current position.

From your numbers, you are not using the present liquidation values
of the long calls and puts, so ignore those for the moment.

You are using the present value of the stock at $28 and subtracting
$22.49 for a profit of $5.51 per share. The problem is that you are
not entitled to sell the stock at $28, but rather at $25, the strike
price of the covered calls. If the stock price were to remain at
$28 and all options were allowed to expire, you would sell the stock
at $25, allow the puts to expire worthless, and buy back stock at
$27.5 by exercising the long calls $0.50 in the money. In sum,
you are overestimating current profits by $2.50 per share because
of the prospective sale at $25 and buy at $27.5. Of course, a good
deal of this would return if you marked the long options to market
and the eventual profit is likely to be much greater.

Regards, Don
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