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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: alanrs who wrote (1240)6/30/2001 2:38:21 AM
From: Uncle Frank  Read Replies (2) of 5205
 
>> As premiums came down over the last 3-6 months or so I have gone to the 3-4 month area for exactly the above reason. Since I typically write 1-3 contracts at a time, I need a larger premium in absolute dollar terms for CC's to make sense and often cannot get that with nearer term OTM calls.

The seemingly fat premiums make it tempting to write 3-4 month expiry calls, but are they really that juicy? Since time premium varies in proportion to the square root of the time remaining on a call option, you only get twice as much for a 4 month call as you would have for a 1 month call, or to put it another way, the "rent" per month is only half as much. I just went through the math comparing the time premium for qcom jan02 calls versus jan04 leaps on the g&k thread, and cross post it for general review:

Message 16016571

>> The one big advantage to this is that I have had ample opportunity to buy the calls back at very good prices without worrying too much if the stock spends some time above the strike price.

The problem as I see it is that dips in the price of the underlying don't affect a cc with 3-4 months remaining on it very much. To my way of thinking, the danger of the stock "getting away" from you (going deep itm) is much greater on long calls. That's why I've stuck with front monthers.

jmho,
uf
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