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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who wrote (2314)8/31/2001 4:18:59 PM
From: Road Walker  Read Replies (2) of 5205
 
dfl & 100,

As the market, or a stock, goes down, generally speaking the option premium goes up as a percentage of the strike price to the stock price. Certainly the call option itself goes down in price, because the portion that is tied to the actual value of the stock goes down. An example is that the VIX almost always increases as the market declines.

Say you have a stock trading at $10, and the $10 strike price call is trading for $1. If the stock declines to $9, the call might go to $.50. At $10 you have a $1 premium. At $9 you are $1 out of the money plus $.50 premium. Your short option didn't appreciate at the same rate as the stock went down. The premium, in relation to the stock prices out of the money position, increased.

Hope you get what I mean, I played 18 holes in the Florida sun today, so my explanation might be less than clear.

John
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