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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who started this subject8/6/2001 2:03:26 PM
From: rydad  Read Replies (3) of 5205
 
Hello all,

I have a question and I was hoping someone could tell me if they see any fault in my reasoning.

If for example, I currently hold 500 shares of a stock, say, Newport (NEWP) that I bought at $40/sh. It is currently at 23.72 as of 10:45 am PST on Monday Aug 8.

If I sell 5 covered call contracts for Aug 25 I would receive a premium of $0.9 (.9 x 100 sh) x 5 contracts = $450 (not counting commissions).

If the stock goes above $25, I will get called at which my stock will get sold at $25/sh. I will realize a loss of ($40-25) = $15/share. ( $15 x 500 )= $7500 loss. I will at least have a tax write off at the end of the year. Then I will reinvest the money in some other stock and write calls on it.

Now here's the question:

If I didn't sell the calls, my stock will still be at $25+ and I would not have the $450 premium in my account.

The way I see it, as long as NEWP doesn't zoom up way past approximately $26/share ($25 + .9 = $25.9) I won't lose money (lost income opportunity) (I'll at least break even).

I only lose if it goes way past $26. But I feel the chances of that happening by August expiration are slim (imo). And I realize that is the BIG IF.

I know this is basic Covered Call Writing 101, but I want to make sure there is no flaw in my reasoning.

Thanks all.
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