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: Brad Griffin who wrote (13718)	6/20/2001 11:42:05 AM
From: Herm	Read Replies (1) of 14162

Hello Brad and Dan, Ditto what Dan said. Dan has a very good working knowledge of your "hedge wrapper." Let me just add a few more points. ----------------------------------------------------------- PSFT $39.65 Sell July 40 $3.60 Buy July 35 (2.05) Net Prem = $1.55/39.65 = 3.91% return for 30 days ----------------------------------------------------------- Using your figures just as an illustration. 1. The reason for this type of spread is to protect your downside and still make limited profits on the upside. No doubt, the software and technology sector at this point is still wild and crazy. Thus, the higher volatility and higher payouts for the calls and puts. 2. PSFT is at $39. Your July 35s PUTs is OTM by $4.00+ dollars at this point. If PSFT is at $30 level three days before expiration, yes your July 35s PUTs would have some value on it and would be worth more than what you paid for it. Your break-even on the PSFT PUTs is approx. $35 strike - $2.05 cost = $32.95. When PSFT approaches $32.95 you should be thinking about your exit point to cash out. 3. The opposite would be true about the CALLs. Break-even is $40s Strike + $3.60 preemie = $43.60. As PSFT moves at or past that price you are losing out in the capital appreciation and have a fixed profit. To need to take some action if you wish to reduce the "give back." Yes, you might want to cash out the PUTs to recover as much of the remaining intrinsic and time value . 4. Finally, you astutely noticed the fact that your parent long PSFT stock is subject to appreciation and depreciation in this equation. You can imagine the difficulty trying to calculate a "true ROI" when you factor that in. Readers can review my notes on the real stated ROI%. coveredcallswins.com Thanks for your question Brad and answer Dan!

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