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HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
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Date: Thursday, August 21, 1997
First, I'm posting an old lesson in covered writing for the new readers. Second, thanks to WB for emailing me with a potential CC workhouse for our Under $20 suggested category:
THE STOCK: WNDR (Wonderware Corp)
stocksmart.com
Well, for starters Zack's Research rates them as a HOLD! The last two
earnings have been up there above expectations. The next one is coming
up around Oct. 20, 1997. So, we should expect a steady increase in
price. That's the N, I, A, in CANSLIM for those of you! Picking up the
at the money or in the money calls NOW should perfectly time the
liquidation of the calls with the October earnings report.
The chart looks picture perfect and the stock price is pacing the
overbrought upper Bollinger Band. So, it not heating up faster than
the demand. So, it looks like you have a mini kahuna going! For the
more aggressive trader, you might want to consider picking up an in
the money LEAP PUT when you cash in the OCT CALLS and milk it for the
profit taking. That would be a killer of a play.
Conservative traders can exercise Sept. calls before the earnings and
start round of CCs. If you have a good margin of profit in your net
cost basis, you might even want to write at the money calls two months
out from October to December. You will gather most of the remaining
upside at that point! Review the entry techniques below if you are a
new reader.
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Slow and Steady Style: Buy Calls First!
1. Buy TECD the April 22 1/2 Calls yourself. Wait for an appreciation
of at least your break-even point. Example, strike price + premium
paid. ÿ$22 1/2 + $3 = 25 1/2 B.E.
2. Execute a Buy/Write TECD April 25 Calls. Meaning, you buy the stock
at market price(ask price) and at the same time you write covered
calls at a net debit for the April 25 Calls. You will save a little
bit on commissions.
3. When the TECD stock peaks and starts to pull back off the high
(sign - look for volume going down) buy twice as many TECD April or
May 25 PUTS to capture and retain your up profits until the next
expiration date. Then you can sell the puts and cash out your stock
if you want to or simply write more TECD covered calls.
Sneaky Pete Style: Buy Stock wait, Write Covered Calls!
1. Buy the TECD stock. Wait for an appreciation of at least two (2)
points. That way your net cost basis is below the current asking
price for the stock and you have some margin to play with.
2. Sell covered calls for the TECD April 25 Calls. Meaning, you sell
covered calls WHEN YOU HAVE SOME PROFIT TO PLAY WITH! You need to have
a locked in profit margin JUST IN CASE YOU DO GET CALLED OUT AND NEED
TO DOUBLE DIP another turnaround. The more fat, the more successful
your recovery without lost of momentum.
Wishing all of you, the BEST OF GOOD BUYS!
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DISCLAIMER: The writer is presenting a real stock and a live ongoing
case study. No recommendations or endorsement to actually buy this
stock are suggested nor implied. Trading stocks and buying calls
should not be attempted without first understanding the risk/rewards
of this type of investment! The writer assumes no responsibility for
the opinions being expressed!
Buyers always be aware!
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