Dwayanu
You are correct about taking anything with a grain of salt these days. But, I am a little unnerved by the same situation I faced a few months back in March when I tried writing calls on ELON. The ATM strike price was 90 and I bought some ELON and covered at 90. You might recall the stock shot up to about 105. At that point, I rolled to the 105 ATM calls. It gave me a loss on the 90's and cost me around 10k in cash to make the trade. Then, all hell broke loose as the stock proceeded to plummet to around 75. I didn't understand the need to cancel out of the stock and re-write. Instead I sold my shares at a ridiculous loss and unwound my cc from the may 105's (as Voltaire explains, I was still better off than if I had not covered), then I sat on the sidelines licking my wounds. Awhile later when the stock firmed around $60.00, I figured it had bottomed and I proceeded to sell Feb '01 puts at 60. The puts yielded around $19.50(so I'm covered to almost $40.00 if I ignore the time value of money, which I have trouble doing, but what the heck, I've got time to see the stock rebound.)
Now, back to CREE. I'm probably more conservative this time around. So, I think I'll let the calls go to expiration and roll the calls at that date. If necessary, I can let the shares be called and start over.
IN SUMMARY: It appears that in a rising market, it can be advantageous to roll-up or just sit tight; conversely, in an unforeseen market correction/slide, you are obliged to unwind your call (at a small cost) and re-write ATM calls based on the current price. My only concern is that in the example of ELON, you may be doing that quite a few times within a 30 day period. Is this making sense? -- Please give me some feedback on the above analysis.
TIA and thanks for the nice summary in your post.
rzw@boythisisharderthanitlooks.com |
