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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: William who wrote (1511)	7/16/2001 3:29:57 PM
From: Mathemagician	Read Replies (4) of 5205

Or, for a relatively conservative play, write a SEBL Jan-02 30 put for 4.2. Your effective purchase price is 25.8 if assigned so you are protected against a 37% decline in the underlying. If SEBL stays above 30, your period ROI is about 16% (32% annualized) with taxes not due until April 2003. That means you can make a 16% return even if the stock drops 25% and stays there. Aside: Some of you may be wondering why I've chosen to cite examples of longer term options when in the past I've advocated front-months. There are several reasons. One is that the larger dollar amount provides greater downside cushion. Another is that on the more volatile or lower priced stocks not only are you less likely to be killed by a brief spike (up or down), but you are in a better position to take advantage of them by trading the option (especially with puts, where you are not as married to the underlying). To me, it makes less sense to adopt a LTBH attitude with options than with stocks. All option premium gains are short-term regardless of the holding period. dM P.S. For uniformity, all figures are pre-tax/commissions.

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