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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who started this subject10/15/2001 10:42:40 AM
From: Mike Buckley  Read Replies (2) of 5205
 
I'm glad to be able to report a round-trip transaction that reaffirms my dummy qualifications.

On Sept 21, I wrote SEBL calls that were 33% OTM with 29 days to expiry. The premium was $.65, or 5%. That was the same percentage I had been getting for calls only 15% OTM with the same amount of time remaining.

My thinking at the time: even though SEBL had dropped a lot at the time, even though it would probably rise quite a lot, and even though I understood the cautions everyone has always expressed here about waiting for a clear trading range to be established following a sharp drop in the price of the stock, there was no way the stock would be 35% higher in less than a month in this particular environment. WRONG! With only four more days to uncover and only two days until SEBL reports earnings, the stock was 44% higher when I uncovered. It had been even higher.

Compared to how the option has been priced recently, I feel fortunate that I was able to buy back my contracts at $2.30, a loss of $1.65. (They were in a taxable account. It was cheaper to buy back the options at a loss than to let the stock get called and pay the capital gains tax.)

--Mike Buckley

P. S. Of course, now that I've uncovered I'm confident the stock will fall another 5% during the rest of today's trading. :)
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