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

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To: Greg Higgins who wrote (6488)	1/18/1998 3:50:00 PM
From: Greg Higgins	Read Replies (1) of 14162

I wrote: note that this stock has a Jan 99 LEAPS 20 call available for 21 7/8. I've looked things over a bit more and here's a DEC strategy I like: With the stock at Bid 39 15/16 Ask 40, i.e. 40 Buy Jan 99 20 Call for 21 7/8 Write Feb 40 Call for 2 3/8 Buy Jan 99 30 Put for 2 3/8 In the normal course of events, the stock will trade up and down around 40 over the next year. You make money selling the calls at the high points in the channel and buying them back over the low points hoping to get 1 1/2 to 2 points each month after commissions for a total of 16 1/2 - 22 from writing the calls. The purchased call will be worth roughly what you paid for it should the stock stay around 40. The put will expire, but it was cheap insurance. But suppose you entered the position on Tuesday and that on Thursday: The stock goes to 60 and stays there, you should break close to even by rolling the 40 calls as long as you can and then letting youself be called out on the last play. The puts expire. If the stock breaks to 30, your put increases in value to roughly 8 1/4, your calls decrease in value to roughly 14, you buy back your 40 calls and sell 35 or 30 calls month by month hoping to make 1 - 1 3/4 per month for a total of 13 - 20 from calls and guaranteed 10 from the call. If the stock breaks to 20 and stays there, the scenario is the same except that more of your value is on the puts than the calls. As long as the stock stays above 17.5, you can write 20 calls for 7/8 to 1 or so. If you're confident the drop is done, do that and still break even with the writes and the put. If the stock breaks below 20 and you've lost all confidence, you could still come close to breaking even by closing the long calls (about 8) and closing the puts (about 14) . This is probably best done early, and close to the 20 price since you'll get the maximum time for the calls and some time for the puts. All in all, I see a good potential for 40 - 200% upside and very little down downside potential (10 - 15%).

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