HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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Date: Thursday, March 27, 1997
ROST RIDES THE STORM TODAY!
The stock: ROSS STORES (ROST) Last traded at $26 5/8 down a mere -1/4 on a scant 195,100 shares. For the week ROST was up 1 7/8. I'm amazed how little ROST was off by the major DOW blowout today. I watch that last hour of trading today and have never seen such a cliff jumper as today.
I still think that ROST is trading in a normal range with very light volume. The major downturn in the Nasdaq today should reverse on Monday when the market reopens. Those PUTS must be sky high in price right now! It will be very choppy waters.
I was blessed today with no real lost to my overall portofolio. I'm still ahead of last week. My ROST calls took a $350 hit to the downside. But, my PUTS offset that by $25.00. So, I'm glad I'm in the right sectors this time around.
TIME TO REFLECT!
You recall when I introduced the 10-Yr T-Bill Indicator not too long ago? I told you that it has predicted the last five major recessions accurately. If this indicator remains above the 300-day average for the next three weeks, GET OUT OF THE MARKET! WE WILL BE STARTING A BEAR RECESSION. We need to watch this very carefully. One to two weeks of above the 300-day MA results in two to three blowoffs like the one we had today! And, that is no fun.
I'm including something I wrote to a person who contacted me via email. I thought you might want to check it out and see what matches your trading style for covered call writing.
I'm using Tech Data (TECD) as the stock in the example. You could apply this to any stock that trades options.
Slow and Steady Style: Buy Calls First!
1. Buy TECD the April 22 1/2 Calls yourself. Wait for an appreciation of at least your break-even point. Example, strike price + premium paid. $22 1/2 + $3 = 25 1/2 B.E.
2. Execute a Buy/Write TECD April 25 Calls. Meaning, you buy the stock at market price(ask price) and at the same time you write covered calls at a net debit for the April 25 Calls. You will save a little bit on commissions.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
Sneaky Pete Style: Buy Stock wait, Write Covered Calls!
1. Buy the TECD stock. Wait for an appreciation of at least two (2) points. That way your net cost basis is below the current asking price for the stock and you have some margin to play with.
2. Sell covered calls for the TECD April 25 Calls. Meaning, you sell covered calls WHEN YOU HAVE SOME PROFIT TO PLAY WITH! You need to have a locked in profit margin JUST IN CASE YOU DO GET CALLED OUT AND NEED TO DOUBLE DIP another turnaround. The more fat, the more successful your recovery without lost of momentum.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
Show Me The Money Style: Buy/Write Stock!
1. Execute a Buy/Write TECD April 25 Calls. Meaning, you buy the stock at market price(ask price) and at the same time you write covered calls at a net debit for the April 25 Calls. You will save a little bit on commissions.
2. If your stock is a runaway (price takes off) buy TECD April 22 1/2 Calls yourself to capture some of the juice. If you are called out, then turnaround and buy/write your calls that you are holding. Basically, get back on the horse as indicated in step #1 above.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
That's It!
Wishing all of you, the BEST OF GOOD BUYS!
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DISCLAIMER: The writer is presenting a real stock and a live ongoing case study. No recommendations or endorsement to actually buy this stock are suggested nor implied. Trading stocks and buying calls should not be attempted without first understanding the risk/rewards of this type of investment! The writer assumes no responsibility for the opinions being expressed!
Buyers always be aware!
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