How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Joseph F. Hubel who wrote (11997)	12/4/1999 5:04:00 PM
From: Dan Duchardt	Read Replies (1) of 14162

Joseph, Who would think the stock price drops and the call premie goes up. It makes a lot of sense actually. With the highly anticipated outcome from the FDA ruling, the demand for these calls is growing from zero on many trading days a month or so ago to 3431 contracts yesterday. The implied volatility is going way up because this thing is almost certainly going to move big in one direction or the other. Paying about 1_3/4 for calls with a delta of 80% (now) will allow one to reap over 80% of the stock appreciation if it goes up, while limiting losses to the premium paid if it falls apart. No one is going to let the call buyer into such an attractive position without incurring substantial risk themselves. You have placed yourself at substantial risk with this play since the most you can get for a return is 11_9/16 (strike+premie), or net $2 per share. You are protected down to $8, but bad news could easily pull this thing down to $5 or less. In this case, I think the side of the call buyer is a lot more attractive than the CC position, with lower potential loss if the news is bad, and greater potential reward if the news is good. Good news could easily carry CYGN to new highs (52 week high is 14). You can of course repair if it falls, buying back your Dec10s and selling lower strike calls, as long as it doesn't fall so far that there is no longer an options market. But then you are committed to living with this position for a while. Even if it goes well for you, you will have to wait for expiration to get called out and realize the full potential. Meanwhile, the buyer either licks his wound and moves on, or takes his profit or rides his gains. Wishing you a favorable outcome. Dan

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