Joe,
Funny you should mention DELL. On 5/18 I did a buy/write for 200 sh of DELL @ 92 « and 2 June 90 calls @ 9 1/8. On 6/10 I was able to buy back my calls @ $1. I felt so smart - now my DELL only cost me $84.79/sh - and it was mine, all mine!
On 6/22 I wrote 2 July 85 calls @ 6 3/8, dropping my cost to
$78.56/sh. Then DELL started to wake up. The stock took off like a rocket. I watched the calls I wrote at 6 3/8 move further and further into the money, becoming more and more valuable, until near expiration they were in the $20's with stock @ $100+. It was painful for me to think I'd have to give up my 200 shares of DELL for a measly $85/sh when the market was well over $100.
So, on 7/14 I bought back my July 85's @ 24 ¬, and rolled up and out to Nov. 90's @ 25 ¬, thus pushing the day of reckoning forward - and, at a slight credit. I felt MUCH better.
Now that expiration has passed and the sense of urgency and emotional reactions that come from watching the stock movement and the ticking clock have subsided, I am beginning to see how dumb I am.
First, I have learned from the "Case Study" thread (Herman, Steve) that it is better to leg into a position than to execute a buy/write. A buy/write never gives you the best of both sides of the trade. I wasn't aware of this thread on 5/18, and was following a buy/write strategy from McMillan's book. Nonetheless, the position had the potential of 7.6% profit in one month if called, or 91.2% annualized. Not bad.
Buying back the calls for a buck - of itself - was OK, but a subtle change was occurring unnoticed in my brain (now my DELL cost was still only $84.79/sh - and it was MINE, ALL MINE!!).
Selling the July 85's @ 6 3/8, lowered my cost to $78.56/sh., but changed my potential profit to 7.7% for 2 months (only 46.2% annualized). This was not smart. I should have waited for a better opportunity (which subsequently did develop as the stock took off).
Rolling the July 85's to Nov 90's, while generating a small credit, only lowered my cost per share to $77.85, and set my profit if called to 14.5% for 6 months (29% annualized). Again, dumb move. I'd have been better off letting the shares (worth $117 5/8 at Friday's close!!) go @ $85.
The purpose of this lengthy post is to thoroughly rub my nose in my errors and to show others how easy it is to lose one's objectivity as a CC position matures in a dynamic market. In the future, I run the numbers - THEN do the trade.
Thanks for your patience.
-Bob W
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