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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: rydad who wrote (3274)1/17/2002 2:38:55 PM
From: Dominick  Read Replies (1) of 5205
 
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, although I've been day trading for over 6 years, I've only started trading options since October. So I'm a newbie at this myself. I would not recommend to anyone whose just starting to use options to write calls against leaps. I started my buy/writes with stocks that I felt were still going to be here years from now and I wouldn't mind owing them.

As for the above case, the short call is basically at the money,(ATM), and there's a good chance it could be called.
This is going to require you to sell the leap and buy the stock. And if the stock ends ATM, the leap will be less due to the time component. There are repair strategies but they could become headaches.

I believe the goal of writing calls on leaps is NOT to be called but to derive a monthly income by writing out of the money, (OTM), calls.

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?

Yes.

As you can tell, my thoughts are a little jumbled. Its difficult to put all of one's thoughts down on "paper"

That I understand. And it is for that reason that when I make an option trade I have a WRITTEN LIST of various strategies to use when things go south or in my favor. I recommend you do the same.

Best of luck,

Dominick
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