You are asking some good questions Barbara. Let's take your questions
one at a time.
Which CC Should You Sell?
I was wondering how you determine which option to sell. Is it
based on some additional criteria other than ATM or ITM? Do you sell
calls that are more than 2 months out?
THE SITUATION - S
Hummm? The last thing on my mind is the CC ATM or ITM. I apply the
WINs approach by taking a moment to gather the S.T.P. No, not the
additive you add to your car. S = the situation, T = technical
indicators, and finally P = my price of my position(s)in the stock.
Note, the STP will vary from stock to stock. IBM is not like a viper
like Yahoo.
For example: IBM just completed a 2-1 stock split in May 1999. That
will double the float and cause IBM to PERHAPS slow down somewhat. The
stock may not trade as fast. That is called the TRO. You can calculate
that by taking the avg. shares traded daily and divide that into the
outstanding float. The higher the number, the slower the price
movements. I would venture to say IBM have a TRO of maybe 90 days.
Yahoo may have a TRO of 17 days. See the difference? Now, at least
now you have some idea of the potential price advancements or
declines.
Moving along with the situation. IBM is not that over priced yet. The
stock has made some big gains. And, large insider selling (June 10)
took place in June. That is a hint that a top may have been realized.
Those funds will want to take their profits soon!
NYSE: (IBM : $120 11/16) (IBMpA : $26 7/8) $237,093 million Market
Cap at June 16, 1999 Ranks 6th in the Fortune 500 on Revenue & 5th on
Profit. Employs 268,650. Trades at a 1% Premium PE Multiple of 31.5
X, vs. the 31.1 X average multiple at which the Computers SubIndustry
is priced.
TECHNICALS - CHARTS
How do I use the short information? Does it make a difference on
how many shorts there are on my stock at the time I sell the call?
I would NEVER conclude my trading homework without first looking at
the BB and RSI along with other technical indicators.
iqc.com
Look at the chart right now (June 16, 1999). The IBM 52-week high is
at $123 and the stock closed at $120+ up +4 13/16s as of the close.
The RSI is at +72.14 and there have been reversals in the last year
when IBM started to reverse in that range. That is a trading pattern!
Setting the chart to week plot, IBM has tagged the upper BB and
bounced sideways and is making the first attempt to make a new 52-
week after that recent split. The stocastics is starting to go
negative which is an early warning. OBV is leveling off at best.
Finally, IBM is due to go ex-div. (.12/share) on Aug. 6, 1999. Short
interest is starting to build up as you indicated. Further
possibility of shorting against box down the road by the MMs and Fund
manager to protect thier downside.
Price - P
You know your bottom line net cost basis (nut). You would have to take
that into consideration. I'm assumming you have a lower nut than $100.
The chart indicates a solid bottom price support at $85 range. So, the
worse case scenario is an IBM price drop of $120 - $85 = $35 off the
current $120.00 and an upside gap of $120 + $35 =$155? Maybe!
WINs Outcome!
Allow IBM to raise further before you do a round of CCs. The IBM price
should go up as the dividend ex-div date approaches. An attempt on the
new high is most likely before a pull back.
I have 800 IBM shares and want to generate additional income from
them but don't really want to sell them (if possible). Will the WINS
strategy work for this purpose?
I would consider selling CCs for the IBM 125s JAN @14+ or the IBM 130s
JAN @ 12 1/2+. Your CC B.E. would either be:
Choice #1 $125+14=$139 on the upside and $125-$14=$111 on the
downside before you need to take action.
Choice #2 $130+12.5=$142.50 on the upside and $130-$12.5=$117.50 on
the downside before you need to take action.
You noticed the time out for the CCs will give you plenty of time to
take action. I would say the IBM downside danger outweights the upside
potential remaining in IBM at this point. That P/E is starting to get
a bit rich for the DOW. |
