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Non-Tech : The Critical Investing Workshop
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To: pinhi who wrote (6306)3/7/2000 9:17:00 PM
From: Voltaire  Read Replies (1) of 35685
 
Hi pinhi,

It is Imperative that all Call writers understand this dynamic.

The point I am trying to make is, that even though one is covered in a stock, the seller of the call still can realize a gain if the stock rises dramatically. Let me give an example. I wrote a call for my friend on CREE on the Mar 165's and it was at the money. Now he just called me and wanted to know what CREE did today and I told him it was down some and he said great and I said NO! You want a stock to appreciate because you will make about a third of that appreciation plus getting your call premium BUT - You must buy the stock or you will be called out at the Strike price or in my friends case 165. So CREE is at say $185, that is $20 bucks above the strike. The only way for my friend to realize this gain is t do what? He must sell the stock before getting called out and that generally will not happen until close to expiration. The reason for this is because the Calls and stock are not connected, they are separate entities, but the stock must be sold while one has possession or they only make up to the strike. My friend has approximately another third of $20 ( $185-$165=$20) or lets say $6 on a thousand shares or an additional $6,000 that can be realized by selling the stock while in his possession. Most will also have to buy their calls back because everyone is not allowed to be naked on Calls. You simply do this close to expiration where you get the most benefit.

Voltaire
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