How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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

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To: Dave Triplett who wrote (6590)	1/27/1998 11:05:00 PM
From: Herm	Read Replies (2) of 14162

Hi Dave, Thanks for your question. Take your lemon and turn it into lemonade! I plucked in your numbers into Doug's killer Excel template. Basically, you can turn this around by selling 15 Aug. CCs for the August Calls $12.50 Strike and 5 Aug. $10 as the as a debit/credit spread. If called out you would make 2.5 (long calls) x 5 = 12.5 - .375 (difference between what you paid and strike price) = 12.125 clear profit. Buy 9 long calls and the potential max would be $1,875 or 15% profit. Also, you basically would not have to put up additional dollars out of your pocket thanks to your CC buyer! -------------------------------------------------------------------- Stock $ stock Calls $ CCs $Options Total Gain $12.50 ($375) $1,125 $1,125 $2,250 $1,875 -------------------------------------------------------------------- Stock Recovery Overlay ---------------------- Stock Shares: 1000 Net Cost: $12.88 Total Net Cost: ($12,875.00) Buy Long Calls: 9 Strike: $10.00 Aug. Calls Ask: 1 1/4 Cost: ($1,125.00) Write CC Calls: 15 Strike: $12.50 Aug. Calls Bid: 3/4 Credit: $1,125.00 Entry Cost/Credit: $0.00 As the stock price moves up you will gain on your side show calls. You could pull the plug and cover anywhere between the $10 to $12.5 strike price to retain your stock and cover the CCs with a small profit depending the time value left on the options. (see the template for more acturate numbers) Your long calls ($10) would be in the money and the $12.5 CCs would be out of the money and worth much less. If the stock goes down it did not cost you anything for the insurance. Further, no taxable event is triggered since it's an IRA!

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