Yaacov,
Regarding writing covered calls.
I am going to put forth a scenario and then ask you several questions. I would like your imput as to if my asumptions are correct. If not please correct me to the best of your knowledge.
Assume I own 10,000 shares Intel purchased at $150.00/share. I decide to write covered calls aagainst all 10,000 shares. For example, I write June '97 160 calls that are $6.00/share(all these values are hypothetical as I am too tired to look up the correct numbers). So now I own 10,000 shares Intel, I write 100 call contracts for $6.00/share and I have $60,000 handed over to me.
Question 1:The person I sold the calls to has the right to buy my shares from me for $160/share by the expiration date in June '97?
Question 2:If this person calls my 10,000 shares from me I get to keep and price appreciation from $150/share to the current price at time shares are called from me?
Question3:Can the shares be called from me at any time up until expiration day? If so then it is possible I would have to sell them at $154/share or $158/share for example or can they only be called from me if the caller is willing to pay the $160/share and no less?
Question4:If the shares are not called by expiration I keep the 10,000 shares and I keep the $60,000 in premiums I collectied?
Question5:Please tell me if what I am about to write is logical. if the shares are called at $160/share can I not just immediatly buy another 10,000 shares at the then current price. Assuming I can replace my 10,000 called shares 5 minutes after my original 10,000 shares are called what is the harm in the shares being called from me?
Question6:What is the catch? Where is my downside by writing these covered calls?
Question7:If I want to sell my 10,000 shares how would I handle the covered calls I wrote. Would they then be considered naked written calls or do i have to go into the market and buy calls at the then going price to cover the covered calls wrote that are no longer covered?
Question8:The best case scenerio is I pocket the $60,000 in premiums and the calls I wrote expire worthless so I still own the stock too? So I would want the stock to close at a point or so under the strike price at expiration? If so it appears that when one writes covered calls they are jumping into bed with the market makers and start to cheer for the market maker to close the stock just under the strike price on expiration day?
Question9:It appears the only downside is if the stock runs away to the upside and I have to settle for a $10/share profit plus the collected premiums? But if it starts to run up I just buy myself more shares that are my own,yes?
Question10:If the stock does the opposite and drops I still own the original 10,000 shares at $150/share and I am $60,000 wealthier because of the collected premiums? If the stock does drop and I sell the 10,000 shares, once again the covered calls become naked? If so all I have to do is buy back the 10,000 shares at a lower price so the covered calls are once again covered?
Yaacov, I think I am burning a hole in my pocket with my Intel shares while they are stalled here. I don't see any downside to writing covered calls but there always is one, yes?
I think perhaps I am not thinking clearly since I just got back from a night out on the town. I must get to sleep so my head is clear for the morning.
I hope you can find the time to answer these question if you are sure of the answers.
Thanks much,
Kevin
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