Good question Chuck! You really do need to first buy the LEAPs before you attempt to write CC calls against them. In reality, you first need a price gain in the LEAPs to make the higher CC strike prices more profitable.
The strike price and LEAP's premie paid is your net cost basis. For example, today a LEAP for CPQ 20 Jan00 last sold for $14 1/2 ($1,450) per contract. Break even = $20 strike price + $14.50 premie = $34.50 plus commissions. If you pick a strike price that covers you net cost basis in the LEAPs ($34.50) if called out, you have an easy profit. So, today the calls for CPQ 37.5s OCT sold last @ 1 1/8. Here is the math! That's $112.50 CC for the premie + if called out a $300 gain over the LEAPs net cost basis (nut).
In other words, $37.70 strike price (CC) - $34.50 LEAP net cost = $300.00. $112.50+$300=$412.50 divided by how much you paid out ($1,450) = 28.45% return in your investment in 2 1/2 months.
Furthermore,consider this! If you can afford CPQ at $31 3/4 stock price ($3,134 / $1,450 = 2.16) you can afford to buy 2 LEAPs and write two CC contracts and double the $412.50 x 2 = $825.00 profit. That beats a poke in the eye with a sharp stick.
If you are a good timer you can gain the increas value in the LEAPs and then turn around and shoot a round of CCs without too much trouble. Once the calls are selling at higher prices, the CCs rate of return are fantastic.
In closing, if you apply the rest of our CC trading strategies you should be able to rack in some very nice returns. Who ever said CCing in a bull market is wrong is really missing the boat! They need to sign up for a CBOE seminar! |
