HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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Date: Friday, May 02, 1997
Sorry to all of you that emailed me and requested the USRX template. I screwed up my Excel spreadsheet using some freebie program and I'm trying to reload the software off the CD and I'm having a problem. As soon as I resolve that problem I will forward the template.
The stock: ROSS STORES (ROST) Last traded at $26 3/8 down -1 7/8 on a volume of 1,858,700 shares. HURRAYYYYYYY! I was looking for a downturn and waiting. I was starting to wonder what was keeping this stock up in price. The volume for the past week had been peanuts!!! That is the first sign of a downturn waiting to happen..... Just look for the signs..... The last tick was down on a 2000 share block! NICE CHUNK! ROST lost 6.64% percent today in price! Now, those of you that sold covered calls should be looking to cover (at 80% of the original premium price - example, sold covered call @ $1 then cover @ $1/8) Wait for the ROST price to recover and write another covered call ABOVE YOUR NET COST BASIS! Of course, don't forget to do all the plus and minue cost factors. You cover your calls (you add cost) you write covered calls (you deduct cost) off you NET COST BASIS or nut.
ROST OPTION PRICES:
Now! Today I unloaded my 8 contract of the ROST May 27 1/2 PUTS at 1 1/2. That was cheap because that PUT actually got as high as 2 5/8s today! MAN that's some climb. But, I was at a workshop for my job and I had to put the computer on auto-pilot! Well, nobody ever lost money taking a profit! The math - 8 May 27 1/2 PUTS contracts x 1/2 pt. profit = $400 or 50% in two and half weeks! Hey, I love those 1/2 points. They add up! If you can sit around and watch your monitor that could have been a 3/4 or 1 point profit for each contract. I have to work for a living! This is just gravy!
I noticed a volume of 152 contracts of the May 27 1/2 ROST PUTS traded today. So, I'm not along by a long shot in this game. Here are the current option prices for ROST from stocksmart.com
Now, hear this! The down tick of 2000 shares today most likely means that the ROST stock will open market with a down bias. I'm almost tempted to BUY THE ROST CALLS AT or IN THE MONEY! Why? There is bound to be a whipsaw effect from all those PUTS being cashed in today! In other words, think of the Herm bouncing ball theory. You throw up a ball in the air (ROST up stock price) and the ball starts to drop (ROST stock price drops) and hits the floor (bottoming out of the stock price and PUTS being sold and cached in) and then it bounces back up for a short while until all the energy is used up. Well, that first bounce is going to make those CALLS At the Money go up in value pronto. All you need is a 1/2 to 3/4 point spread to make some quick cash with CALLS. Over a 1,000,000 shares traded today! Somebody going to cover those PUTS which means the market makers are going to stick it to the PUT writers. Also, there is still an open interest of 227 contract for the ROST May 27 1/2 PUTS outstanding. Now, do you think they are just going to sit around and let those PUTS expire worthless in three weeks when they can sell them and make a real good buck RIGHT NOW? Heck no! ROST will rebound for a while. And, you and me can milk this baby up and down. It's the American way!
Let The Trend Be Your Friend!
Check out the chart for ROST.
View One - Insert 50 days for the moving average, Candlesticks, and Bollinger Bands and press enter at stocksmart.com
View Two - tscn.com
Notice that there seems to be a pattern where ROST pulls back around April and May anyway!
Here are the sectors with the strongest covered call writing opportunities can be found at stocksmart.com
VIX VOLATILITY INDEX
Here is another freebee. You can plot the VIX for a 50 day moving average to get a feel of the volatility at stocksmart.com
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!
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