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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: rydad who wrote (1978)8/14/2001 11:01:38 AM
From: Road Walker  Read Replies (1) of 5205
 
rydad, re: buy/writes

I think you are on the right track, but a few comments:

1. Need to buy a good stable stock, with low downside risk.

My number one qualifier for a buy/write stock is that it is a company that I would feel comfortable owning long term. If the worst happens, and the stock drops quickly, you become an investor. If a stock drops slowly, you can cover your short calls and sell the lower strike, and keep the trade close to even, while lowering your average cost per share, with the presumption of an eventual rebound.

Stock with low downside risk also have low premiums. The second quality I look for in a buy/write candidate is a stock that has a lot of intermediate term volatility. This provides good premiums. SEBL is my current favorite.

re: 2. Write call ATM or near OTM

Slightly OTM usually gives the best returns. Pick your strike depending on if you feel more comfortable with more downside protection (ITM) or are looking for a higher return (OTM). As of a little while ago, a SEBL buy write Sept ITM would give you a potential 11.11% return and 11.34 downside protection; OTM would give you a 15.6% return with 7.15% downside protection.

One other point. If you do this on a regular basis, it becomes very tempting to buy the stock when you think it will go higher, then wait to sell the calls a few points higher. This can dramatically increase your % returns, and just as dramatically increase your risk.

John
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