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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Brad Griffin who wrote (13718)6/20/2001 9:34:54 AM
From: Dan Duchardt  Read Replies (1) of 14162
 
Brad,

I'm obviously not Herm, but assuming you might want an early response I'll throw in my $.02. The numbers I see this morning look a bit more favorable than in your example, but you have correctly calculated the worst case loss for the numbers stated. The maximum possible gain is $40-(39.65-3.60+2.05) = 1.90, which is a 5% return on your net investment of $38.10.

The strike 35 put in this case is not ITM. A strike 35 call would be ITM, but the corresponding put is OTM. Puts and calls are opposite wrt in/out of the money.

Exercising your put at or before expiration is not the only alternative for this scenario. If you are confident the closing price is going to be in the $30 area, you can simply sell your put at a profit. You might also sell the stock and/or buy back the near worthless call depending on whether you want to carry the position forward for another round of options. Or you may just leave the position active going into expiration. Your broker no doubt has a policy regarding the exercise of options that close ITM. Make sure you know what it is, and just to be safe notify the broker of all options you want exercised.

Dan
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