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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: edamo who wrote (1741)8/2/2001 6:18:42 PM
From: Dan Duchardt  Read Replies (1) of 5205
 
ed a,

You make valid points in your reply. Letting the stock go and hoping to buy it back later is the safest approach, but many of the folks here are strongly attached to their underlying stocks and seem more inclined to accept a (hopefully temporary) drawdown than to lose their shares, often writing OTM calls for relatively small premiums. In the particular case of NTAP, rolling up and out to an ATM call avoids the immediate prospect of being called out while being able to capture a decent time premium for a higher strike call. There is no question that if the stock drifts back down, the exchange can be made for a smaller debit, or even a credit if it comes back near $10. But if it stays above $15 letting it move higher will only increase the debit.

We agree that looking farther out in time is a good way to avoid these situations. This is especially true for those who really want to hold their stock instead of letting it go. In fact I just bought back some JAN12.5 calls on RMBS that I sold as LEAPS several months ago when I bought the stock. I will probably write another round of long term calls when this rally ends. I recently posted a note discussing the near term vs long term issue. It was the day before NTAP popped, or I would have used NTAP for my example. This is clearly a case where a longer time frame would have been advantageous.

Dan
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