Hello Jen,
Caroline read my mind exactly! You would be better off going with IFMX for CCing. I was checking out NOVL when it was $9.00+ range and I missed that one. It is a bit pricey at the current level.
Both of your picks trade LEAPs so let me jump to IFMX which actually gave me a $$ tickle! That is a potential buying urge for myself!
NASDAQ: (NOVL : $11 15/16) $4,211 million Market Cap at June 9, 1998 Ranks 734th in the Fortune 1,000 on Revenue & 517th on Profit. Employs 5,800. Trades at a 14% Premium PE Multiple of 50.3 X, vs. the 44.3 X average multiple at which the Networking SubIndustry is priced.
bigstocks.com
Unlike NOVL which must overcome big brother Microsoft's Windows NT and SUN, etc. IFMX has alot more upside potential. The stock is REAL cheap compared to the last two years. It has pretty much bottomed out and at $7.00 is a gem CC price range! You can go from $7 to $10 countless numbers of times and make bite size returns with IFMX. Plenty of open interest in both the CALLs and the LEAPs. I would go with the IFMX $7.5 JAN00 @ 2 7/8s LEAPs and buy at least 6 to 10. Then you can turn around and sell at the $10 CC strike price using the LEAPs instead of the stock to cover if called out. Real cheap and more profitable. You would do as many rounds of CCs two to three months out above your net cost basis (nut). Timing will be important for the first CC round. You need to buy the LEAP and then wait for a price increase to clear your nut. That is preparing for the worse case situation.
NASDAQ: (IFMX : $7 5/16) $1,104 million Market Cap at June 9, 1998 Trades at a premium PE Multiple of 104.0 X, vs. the 37.5 X average multiple at which the Software & Services SubIndustry is priced.
bigstocks.com
Here is a summary I wrote not long ago about CCing with LEAPs.
Certain high volume stocks (GM, BS, NOVL, LUV, MOT, KM etc.) sell LEAPs. The LEAPs are much cheaper to own than the shares of stocks they represent. So, you could trade the LEAPs and also write CCs on the LEAPs. It's nuts! You actually write a covered call on an option known as a LEAP. That is one way to trade stocks which would otherwise be too expensive to own outright. The only caution to LEAP covered call writing is that you should unload the LEAP about half way it's remaining time span. For example, buy a LEAP that is one year out and write as many covered calls as you can for 6 months. After that point (6 months in this example) the LEAPs would start to decay from lost time value. The lost time starts to work against you! Just dump it and buy another LEAP if you like the underlying stock.
So, add that to you CC tool shed! By the way, the rate of return for the LEAPs covered calls is FANTASTIC! This strategy is second to the recovery options spreads and better than the traditional equity stock CCing.
RANGE OF CCing PROFITS:
1. Option Spreads using the CCing premies. 40% to 60% margined
Pros: Takes advantage of upward price moves and uses CC premies
to pick up the major cost of the long calls.
Cons: You could lose all of the premies $ if stock moves sideways
or down below your strike prices!
2. LEAPs with covered calls. 25% to 40% unmargined
Pros: Real cheap approach to expensive large cap stocks ownership.
Profits are very attractive for short term plays like
two months with strike prices two or more above your nut.
Works really well when a stock bottoms and is ready
to rebound. Example, MOT as this time!
Cons: You must first have a price increase above your net cost
in order to be assured a profit. LEAPs are not available for
every equity stock. Chart reading skills is a must!
3. Traditional covered calls. 8% to 25% margined
Pros: Fairly straight forward and can be used as insurance for
stock ownership. Returns are good most of the time!
Cons: Premies at certain strike prices may sometimes be very small
and open interest may be small. Stocks can run away and you
are forced to cover or be called out of stock.
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