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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dominick who wrote (3271)1/17/2002 12:36:33 PM
From: rydad  Read Replies (1) of 5205
 
Dominick,

I was looking at some random numbers and was wondering if you could help me analyze this random case:

If one bought a Juniper LEAP Jan (2003) 17.5 for $6.00

then wrote a call for Feb (2002) 17.5 for $1.60

First off, I would collect $1.60 from the call premiums.

If Juniper closed at or above $17.5 at Feb expiration, then my Leap would be sold for $ X.
If Juniper closed below $17.5 at Feb expiration, then I keep my Leap.

With time the Leap will lose value due to the time component of the option deteriorating. (right?)

Since the Leap only cost me $6 if I continue to be able to write monthly (ATM) calls for about $1.50 my cost basis would be $0 in about 4 months. (right?)

I realize that this strategy is much like the basic CC strategy with stocks but I was a little confused since one is dealing with the value of the Leap rather than the actual price of the stock itself.

Now, basically if the cost basis of the Leap becomes $0 in about 4 months then the remaining 8 months until the Jan 03 leap expires would be pure profit. Is this also correct?

As you can tell, my thoughts are a little jumbled. Its difficult to put all of one's thoughts down on "paper". Thank you again for helping to clarify this strategy for me and other novices on this thread.
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