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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dan Spangenberg who wrote (4430)8/8/2006 7:33:04 PM
From: Bridge Player  Read Replies (1) of 5205
 
Dan,

I like Goodyear Tire as a covered call (buy-write) candidate.

Closing price on 8/8/2006: $11.67.

Closing bid on Oct 2006 10 strike calls: $2.00 (no guarantee on opening bid on Wed. 8/9)

If you can do this buy-write on Wednesday 8/9 for a net cost of $9.67, the annualized if-called rate of return (the way I like to compute such a yield) is 15.9%.

You may recall from the article at

888options.com

that the formula the author uses is

Annualized if-called rate of return =
(strike price - initial outlay)/initial outlay X (days in year/days until expiration) X 100

Using the formula as written gives
(10.00 - 9.67)/9.67 X (365/72) X 100 = 17.3%

I like to modify these parameters somewhat to be slightly more conservative and maybe account for a little commission: I use 350 days per year, and add 3 days to the days-until-expiration, to account for the fact that it will be the following Monday after expiration before the funds are actually available to be reinvested.

Using these modifications, the formula becomes

(10.00 - 9.67)/9.67 X (350/75 X 100 = 15.9%

Goodyear Tire sells for a P/S ratio of about .11, the latest quarter was profitable, mean estimate for profits for 2006 is $.88 (wide range of estimates) and for 2007 $1.20, the company has a lot of debt, 52-week high $19.31, low 9.75.

I like this trade.
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