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: Herm who wrote (8295)	8/20/1998 9:52:00 PM
From: Wayners	Read Replies (2) of 14162

writing deep in the money CCs a few months out takes care of a great deal of downside protection. I just wanted to point out that the further you write a call or put in the money, the less you get for time value and the more you get for intrinsic value. When you write calls or puts you are trying to sell time value (extrinsic value) not intrinsic value. Lets say for example you buy a stock for $20 and it rises to $30. If you sell the deep in the money $20 call, you'll get about $10 for it after you take out the MMs spread. Why sell the call at all. Just sell the stock and you collect the same amount. If you write the call and say the company comes out with an earnings warning and the price drops to $15, you are down $5 by writing the call. If you had just sold the stock at $30 and the warning occurs, you lose nothing. My point is, writing deep in the money puts or calls results in the writer still assuming stock risk (for long periods of time--months) whereas the guy that just sells the stock has no additional stock risk--he/she is out and is onto the next play (new stock risk, but mitigated by buying on a fresh dip).

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