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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: JGoren who wrote (1226)	6/27/2001 12:13:47 AM
From: BDR	of 5205

<<how does one write "against" Leaps? >> One is creating a calendar spread. It is sometimes easier to think of it as a covered call with the LEAPS being substituted for the long stock position. Buy the LEAPS, preferably in the money, sell the calls at a higher strike price, usually out of the money. The strategy takes advantage of the more rapid decay in time premium for the calls (closer to expiration) than for the LEAPS and if the stock runs up the delta for ITM LEAPS should be equal or higher than the OTM calls. The potential yield is higher than on the equivalent covered call because the amount paid for the long position (the LEAPS) is less than the cost of the stock while the premium received from the short call is the same. Because the LEAPS expiration is so far in the future it is possible to write calls against that position several times just as one can do if one were writing calls against the stock. <<how?>> The order has to be entered as a spread. I use Fidelity and that means you can buy the LEAPS online but to sell the calls you have to call and talk to a rep. From: schaeffersresearch.com Calendar spread : The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the time value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices. Delta (also neutral hedge ratio): The percentage of the price movement in the underlying stock that will be translated into price movement in a particular option series. For example, a delta of 50 percent indicates that the option will move up (down) by one half point for each 1 point rise (decline) in the underlying stock. Call options have positive delta; put options have negative delta. Deltas increase as the stock price rises and decrease as the stock price declines. The delta is also an approximation of the probability that an option will finish in the money.

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