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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Jonathan Thomas who wrote (13063)	7/19/2000 11:08:16 PM
From: Bridge Player	Read Replies (1) of 14162

<<If you bought the stock for 12 1/16, then sold the Oct. 12.50 Puts for 2 1/16 (bid) and the Oct. 12.50 calls for 2 1/4 (bid). Your NUT would be 7.75. You have downside protection to 7.75, upside to 16 13/16.>> Ryan, please help me to understand this analysis. When you say that you have downside protection to 7 3/4, I assume you mean that if the stock closes on October expiration day at exactly 7 3/4, that you would break even on these trades. If there is another meaning that you intend, I missed it. Lets see now. On the long stock with covered calls, you paid 12 1/16 for the stock and sold October calls for 2 1/4. That makes your cost basis on the stock 9 13/16, so at 7 3/4 you would be holding the stock with a net loss of 2 1/16. On the naked puts, you sold the October 12 1/2 for 2 1/16, and thus, after assignment at 12 1/2, own more stock at a cost basis of 10 7/16. So at 7 3/4 you would hold this stock with a net loss of 2 11/16. All this is before 4 commissions. What am I missing? BP.

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