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: KB who wrote (7480)	5/21/1998 2:03:00 PM
From: Douglas Webb	Read Replies (1) of 14162

Since the numbers came from my recovery spread page, I'll describe them... NOVL RECOVERY CC SPREADS for 500 shares or 5 LEAPs: Series Long Short Entry Credit Total Gain JAN99 Buy Calls 5 @ 15.0 Sell 10 @ 20.0 ($249.50) $6750.50 Outperforms Stock Ownership in Price Range $10.50 - $24.50 This example shows one spread position that can be played using NOVL. (Herm posted a bunch of different positions that were available; I just grabbed the first one.) First, this is a Recovery Spread. That means that you're going to be buying 1 call and selling 2 calls for every 100 shares of stock you own. You can often do this for a credit, which makes it a no-cost proposition. In this example, you own 500 shares of NOVL. You could buy 5 JAN99 15.00 calls, and write 10 JAN99 20.00 calls. Opening this position would cost you $249.50, based on the option Bid/Ask prices when Herm pulled up the quotes. Herm didn't mention the Net Cost for the 500 shares, but based on that Net Cost and this spread position, you would make a net profit of $6750.50 if NOVL is above $20 when the spread expires in Jan99. On that date, this spread would be better than just holding the 500 shares so long as NOVL is between $10.50 and $24.50. Outside of that price range, just owning the shares is better. As far as CC'ing Leaps: basically, you could substitute 1 Leap call for every 100 shares of stock, and write calls against it as you normally would. There's some extra analysis you need to do because of the time-value depreciation on the Leaps, but that's minimal if the Leaps are long-term enough. I'm sure there are resources around somewhere which describes this in more detail... Doug.

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