V,
Let's stay with your friend for a moment. You have put a "real time" situation on the table.
1. He now owns 1000 shares of Cree purchased at 163.000, half value margined. (I'm not particularly concerned about the margin aspect yet but other's might be. Process my concern here)
2. He (you, on his behalf) wrote/sold covered calls on 1000 of the shares and received $16,500 cash.
3. The calls expire in March at a price of ? but assume higher than $163.00/share.
4. Assumptions:
a.) The price of cree stays stagnant or goes up but falls below strike price expiration period, your friend still has his 1000 shares of Cree at starting or higher value and $16,500 in his pocket (won't worry about taxes at this point.)
b.) The price of cree at expiration is at/above the strike price and the 1000 shares are called away. He's "lost" his shares and potential "profit" from the increased value of the shares had they not been called away BUT he still has the $16,500 in his pocket and $163,000 to start over again.
c.) The price of cree at expiration is below, say 153.00/share, the purchase price. He keeps his $16,500 and he still has 1000 share of Cree but currently valued at $153,000 instead of $163,000. He would, at that moment, have a paper profit of $6,500 ($16,500 less the $10,000 paper loss of the value of the stock). So, he begins again starting with 1000 shares of Cree valued at $153,000 and $16,500 cash in his pocket.
Scenario and assumptions correct so far? Any corrections, relevant details and considerations that should be injected into this real-time case that might prompt additional follow-up questions.
It's raining like Hell this morning in the Smokeys.
-Alias |
