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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who started this subject12/19/2001 10:45:02 AM
From: rydad  Read Replies (2) of 5205
 
Good Morning Everyone,

I hope everyone is having a nice Christmas season. With all the hustle and bustle and commercialism that accompanies Christmas, let's not forget the real meaning of the season. Peace and Joy to everyone.

I was wondering about something yesterday. I had read something about this on one of the boards last year. I think someone was kidding about it. But I started thinking about it some last night.

What if a person sold a large number of put contracts on something like NTAP NULOU March 2002 (7.5), Bid price is .1 and ask is .25. Now if one was to sell like 50 contracts you would receive 5000 x .1 = $500. Realistically,
what is the odds of NTAP dropping to $7.5 by March? I realize anything is possible, but how likely? If NTAP did drop to 7.5 or lower on expiration and I got assigned, I would be on the hook for $7.5 x 5000 = $37500. Assuming I set aside the money to cover the assignment, would you buy into this strategy?

I figure if NTAP dropped to $7.5 I would be happy to buy it at this price. When it dropped down that low this year, it didn't stay down that low for long. Also considering the possibility of a recovery around the corner (who knows when?) it would seem like a calculated gamble in my favor. If I did get assigned 5000 shares of NTAP at expiration, I could always write calls very close ITM the following month and dump the stock, or hold for an eventual gain.

What do you think? Where is the fallacy in my logic?

Merry Christmas all
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