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: robwin who wrote (12888)	6/4/2000 11:03:00 AM
From: Herm	Read Replies (2) of 14162

Hello RobWin, You ask an interesting question! STOCK SPLIT QUESTION In a stock split situation (say 2 for 1) where you have written covered calls previous to the split announcement, what impact does this have on the calls? Assuming the calls do not expire until sometime after the split date.. Is your account automatically credited on the date of the split for the same amount of calls you originally wrote? If so, how do they determine the amount of premium you are to receive for these post split calls? Yes, you account will reflect the new adjusted value of the the split. Example: if the stock price was $30 in a 2-1 split, the stock after the split would be worth $15 and you would have twice as many shares credited into your account. The overall value would be worth the same, "hopefully more!" Likewise, if you wrote the XYZ CCs before the split for say the $30 strike price, you would then have twice many CCs at the $15 strike after the split. Again, your brokerage handles all of the paperwork. There is a hidden benefit to splits for CCers or buying long calls buyers. The commissions tend to be reduced per unit as a percentage. You do realize that the commissions at many brokerages for options takes a fair bite out of the profits. The more option contracts you trade, the cheaper it is for each unit of sale as a percentage. I have seen commissions go from 5% down to 3% of the transaction overall value. That is why is barely pays to CC with less than 300 to 400 shares of stock. You really DON'T WANT to do LESS THAN 3 contracts at a time. Five is good and 10 is even better since the market maker must put that size bid on the market or handle it themselves. One last caution! Watch the stock chart plots after splits. Sometimes there is a lag in time until the data is adjusted and reflected in the chart....

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