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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herm who wrote (6548)1/25/1998 2:18:00 PM
From: Douglas Webb  Read Replies (2) of 14162
 
I've updated the Recovery Spread to fix a calculation error

I added another line to the chart to show the results of just writing the short calls against your stock, and discovered a calculation error which was causing those peaks near the upper strike price.

I see a drawback to this strategy now. On expiration day, if the stock price is lower than the long strike, both options expire; no problem. If the stock price is in between the two strikes, the long call will get exercised automatically; you can't just sell it because that would leave you uncovered on half of the short calls. So you'll lose a bit there buying back the half of the short calls. If the price is higher than the short strike, and you leave everything alone, and you get assigned, you'll probably get charged commissions for 1) exercising the long call 2) buying the stock 3) selling the stock.

I guess the best closing strategy is to always buy back at least half of the short calls, and sell the long calls, on expiration day if the stock price may end up between the two strikes. Buying back the second half of short calls would be optional, if you want to protect your stock.

Doug.
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