Hi Ray,
Let's go over the info.
The Question: 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.
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[ Ray Asked] Here I'm wondering why you buy these. That is, how does
this fit into the overall strategy? What are we after here?
The Answer: Ray, you want to move into a profitable position before you write covered calls. You need a lower net cost basis to begin with. So, as a precaution you can buy the CALLS and wait for appreciation in value. Reason? It's cheaper to buy the calls than the stock itself. I did this with my ROST purchase.
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The Question: 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.
[Ray Asked] Here I'm not sure if we do step two after step one? That is,
are we doing this in addition to step 1?
The Answer: A buy/write take place at the same time and saves you a little on commission cost for the transactions. You can execute a buy/write after you excercise your call rights. I did this with my ROST purchase. I purchased the calls first. When I had the money lined up, I exercised my right and requested a buy/write on the spot. I purchased and wrote a covered call simultaneously.
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The Question: 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.
[Ray Asked] Herm, why do we buy twice as many puts? I notice you do this
in all 3 strategies.
The Answer: When the stock price goes up, the CALLS become more expensive. At the same time, the converse is also true for the PUTS, That is, the PUTS become cheaper! Therefore, if you anticipate a drop in stock price, you need to buy the PUTS when they are dirt cheap! Normally, that means buying the PUTS at a strike price one or two down from the current stock price. Example, ROST at 28 1/2, the April 25 PUTS at 1/2. Load up on those babies. The difference between 25 and 28 1/2 is considered a "deductable" like car insurance. So, in order to make up for the deductable you need to buy more PUTS in order to "insure or cover" all your potential loss (in your stock) as the stock price goes down. In other words, your get more bang for the buck from each PUT as it appreciates.
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