HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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Date: Tuesday, June 17, 1997
1. VIVUS (VVUS)
The stock: VVUS breaks past the $50 price range like butter! VVUS last traded at $50 5/8s up +1 3/8 with a high for the day of $52 3/8 and above average volume of 1,138,800 shares. I discovered that 800,000 shares has been the average volume for the past three months. Today, 12 large blocks of VVUS stock traded. Yesterday, there were only 3 large blocks with a total volume of 879,100. So, the market makers are doing their thing to "raise the price" of VVUS.
A cute side note. A close married female friend of mine commented on the VIVUS product which her husband needs to take. She claims it the greatest product and she is amazed by this wonder drug. It has saved their marriage. I almost died laughing when she told me that once her husband takes it the affects and effects last ALL DAY LONG! In other words, the drug does not ware off anytime soon. So, don't plan to walk around the malls or go swimming in a public pool! VVUS is a major all night or day event! :-) More power to you and may the force be with you!
stocksmart.com
The VVUS June 45s Calls had a volume of a whopping 1,549 contracts traded today. That pegs the total open interest at 2,494 contracts. Folks, that is going to drive that stock and option prices up for sure! Even the VVUS July 45s Calls traded 319 contracts today. The open interest is pegged at 1,129 contracts. Plenty of serious money for the month of July when the earnings report is due out.
stocksmart.com
2. TECH DATA (TECD)
The stock: TECH DATA (TECD) Back on a track.....TECD last traded at $32 1/6 up +1 3/8 on serious volume of 746,400 shares which was above average. 8 large block of stock traded today.
3. Quick overview of Entry Strategies:
This a rewrite for the benefit of the new readers joining our forum. But, it does not hurt to review the ways to ease into a covered call target stock. Our first stock for this case study was ROST, TECD, and now VVUS. By far, VVUS is perhaps the most risk potential stock we have taken on! For starters, the company has no real track record with a profit making product(s). But, that is not uncommon for the bio-medical field. They have to start some where and many of those companies don't earn a dime for years. VIVUS (VVUS) is in the product introduction phase and is just starting to make some profits. None the less, we have to watch out for FDA rulings that can sink your plans overnight. Remember! The VVUS profit potential is a great as the risk involved.
I have chosen to buy the VVUS July 45 Calls first. My maximum loss would be the price of the options which I picked up @ 7 7/8s today! I have entered my cost into my Excel spreadsheet. I have calculated several "what ifs" plugging in several split prices. For example, what would happen if VVUS splits 2-1 at $50, $52, $54, $56, etc. I will have 600 shares if I exercise my 3 call contracts and take possession of the stock. My July 45s Calls will split down to $22 1/2. Tack on my cost for the options and my net cost basis will range from a possible: $22 1/2 + (7 7/8 / 2 = 3.94) or $26.44 net cost basis. MY NUT! VVUS must trade over that figure for me to start making a profit. So, if VVUS splits at $52+ down to $26, I will be like the paratrouper behind the enemy lines ready to start my main mission. My main mission IS TO MAKE A PROFIT! I don't believe I will have to wait very long before VVUS starts to rise in price. Afterall, VVUS has a stock buyback program that will turbo charge the buying spree. From $26 and up, VVUS will be a cat and mouse game. Even fund money managers will prime the price pumps with influx of new dollars into the stock. After all, if you had 50,000 or 500,000 shares of VVUS at a net cost basis less than $26.00, don't you think that they will pick up another 20,000 shares to help "firm up the price (like the company's product)" of VVUS in order to capture more profits for their overall porfolio. As the post-split momemtum starts and the price rises the fund managers will be backing out (locking in) some of those shares at hugh profits. Small investors like you and I will be picking off the flies from the big guns! Hey, that's alright. 30% to 40%+ in a month or two is no soft money! And it beats not making any money at all and it kills CD rates of 5% per year.
Slow and Steady Style: Buy Calls First!
1. Buy TECD the April 22 1/2 Calls yourself. Wait for an appreciation of at least your break-even point. Example, strike price + premium paid. $22 1/2 + $3 = 25 1/2 B.E.
2. Execute a Buy/Write TECD April 25 Calls. Meaning, you buy the stock at market price(ask price) and at the same time you write covered calls at a net debit for the April 25 Calls. You will save a little bit on commissions.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
Sneaky Pete Style: Buy Stock wait, Write Covered Calls!
1. Buy the TECD stock. Wait for an appreciation of at least two (2) points. That way your net cost basis is below the current asking price for the stock and you have some margin to play with.
2. Sell covered calls for the TECD April 25 Calls. Meaning, you sell covered calls WHEN YOU HAVE SOME PROFIT TO PLAY WITH! You need to have a locked in profit margin JUST IN CASE YOU DO GET CALLED OUT AND NEED TO DOUBLE DIP another turnaround. The more fat, the more successful your recovery without lost of momentum.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
Show Me The Money Style: Buy/Write Stock!
1. Execute a Buy/Write TECD April 25 Calls. Meaning, you buy the stock at market price(ask price) and at the same time you write covered calls at a net debit for the April 25 Calls. You will save a little bit on commissions.
2. If your stock is a runaway (price takes off) buy TECD April 22 1/2 Calls yourself to capture some of the juice. If you are called out, then turnaround and buy/write your calls that you are holding. Basically, get back on the horse as indicated in step #1 above.
3. When the TECD stock peaks and starts to pull back off the high (sign - look for volume going down) buy twice as many TECD April or May 25 PUTS to capture and retain your up profits until the next expiration date. Then you can sell the puts and cash out your stock if you want to or simply write more TECD covered calls.
Let The Trend Be Your Friend!
The sectors with the strongest covered call writing opportunities can be found at stocksmart.com
VIX VOLATILITY INDEX
It appears like good times are still ahead! stocksmart.com
That's It!
Wishing all of you, the BEST OF GOOD BUYS!
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DISCLAIMER: The writer is presenting a real stock and a live ongoing case study. No recommendations or endorsement to actually buy this stock are suggested nor implied. Trading stocks and buying calls should not be attempted without first understanding the risk/rewards of this type of investment! The writer assumes no responsibility for the opinions being expressed!
Buyers always be aware!
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