HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
==================================================================
Date: Monday, April 07, 1997
ROST SPURTS TO NEW HIGH TODAY!
The stock: ROSS STORES (ROST) Last traded at $28 5/8 up a whoppin 2 5/8 on moderate volume of 315,900 shares. Well, this is the second test of the last high of $28 1/2. Tomorrow should tell the whole story.
TIME TO REFLECT!
The ROST April 22 1/2 calls I was holding today leaped up in value +2 1/2 to close at 5 5/8. That's a real nice profit to cushion me in the event I am called out of my 4 April 25 covered calls. The stock is at 28 5/8 and in the money. If you recall I purchased 4 ROST PUTS and made money on the recent ROST downside. I also purchased calls deep in the money just in case of a runaway ROST stock.
If I'm called out, I still make money off the 4 ROST 22 1/2 calls. If I don't get called out I make a hugh windfall of profits. My net cost basis is below $20 and it drops with each point the 4 April 22 1/2 calls appreciate. That is why I like to aggressively sell at or in the money covered calls and work the stock for several profit hits. In the front end, the premiums are fantastic and you have earn enough working capital to cover all your bases. In the back end, iIt seems like I get away with it the majority of the time and you can also. Playing both sides of the fence is exciting and once you fully understand the dynamics the skills never leaves you. ROST is a great stock to do this kind of milking.
Another stock that my buddy is milking is HELIX (HELX). That stock has been rolling up and down in within a $4.00 range for a very long time. That kind of stock is a gold mine to write covered calls and not lose sleep about the stock taking a nose dive. It's easy money!
Here is a refresher on different ways to play the covered call game.
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!
***********************************************************************************
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!
*********************************************************************************** |
