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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: daryll40 who wrote (14128)	12/14/2003 9:17:50 AM
From: Herm	Read Replies (1) of 14162

Hello Daryll, Thanks for your question on a real situation. And, thanks to the other replies to your question. Forums like this are great for learning about investments and different points of views on the subject. Here are some thoughts on your question that you might consider. I gather you knew you wanted to hold onto the 3000 shares of NCC for the long term. With that objective in mind, here is the strategy I would have used. 1. You indicated you engaged in the NCC covered call this past October 2003. Here is the NCC daily technical chart profile with the setting I use to review my stock picks. stockcharts.com[w,a]daclyyay[dd][pd20,2!b50!f][vc60][iut!Ub10!Lp15,5,5]&pref=G What you should notice is the oversold RSI reading of -29 and full Stocastics of -20 this past October when you got concerned and started writing CCs. For the NCC stock, the rock bottom historical readings was NOT the time to enter into covered calls on the NCC rebound. From the high of $34.97, NCC was in a distribution phase downward. NCC reached the bottom in October. My point here is that you need to use some "gas gauge" or "tool" to help you ascertain the trend and price direction of every stock you invest in. It is part of the homework along with the fundamentals that will also ad you in determining crowd behaviors such as fear and greed. You can see those outcomes in the chart prices. 2. Since you been a long time holder with an exceptionally low net cost basis, you missed GOLDEN opportunities several times before each of those downward price drops. You could have written ATM or ITM covered calls a few months out in time and racked in some big premies. Those CCs would have served as a hedge against the price drops. And, you would have kept every penny of the sold CC calls. Again, you had nothing to lose because you had a much lower NCC net cost basis. The CCs income was gravy and your free downward insurance. That is what I teach im my WINs learning modules at coveredcallswins.com. 3. You could have used the money collected from the CCs to buy long calls in October 2003 and really made a fortune. But, that is water under the bridge now. What to do now? 1. There is major overhead price resistance at $34. The recent attempt failed and this is the second leg of another attempt. Stochastic is dropping and there was one downgrade by the CSFB analyst. I would say NCC will not make it above $34 this time setting up again a bearish double-top pattern. That is what took place the last time in June/July 2003 before the dump from $34 to $29. Get ready now and you could write ATM calls at that resistance point and hold onto the NCC stock into 2005 with the CC dollars in your pocket. 2. What to do with the current sold JAN04 $32.50 CCs? You have 2000 remaining shares without CCs. I would not cover the 10 sold calls at this point. I agree with the others that you should wait for the time decay to kick in mid JAN05. You have more than enough NCC shares that may further appreciate and offset the paper loss. 3. If you are still firm on holding onto NCC in 2005, I would seriously write ATM CCs to hedge your downside. You may not have to pay out much to cover the 10 JAN05 contracts. Lower price support is at around $33. The 1-year NCC target price is $35.50. I don't see NCC going into the upper $35 so soon in the 2005 new year. There is bound to be profit taking which also makes the dividend more attractive. You could milk this stock the entire next year by CCing. After-all, you net cost basis is peanuts at this point. Final suggestion. Don't get emotional about the stocks you own. You can never lose money taking money off the table.

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