<<RE:if you do buy back it will increase your cost basis by the amount of the option less the original ...>>
edamo,
Thanks for your reply. I have one more question in your hypothetical case (buy Dell common @ $100, sell 01 leap @ $40, net cost is $60): selling leap call might be less profitable than long Dell stock:
If you let the dell common be called away at expiration, your profit would be $40 in 2 years, i.e. 40% in 2 years, 20%/year. But your might miss the profit from Dell common. For the past 5 years, Dell stock doubled its price every year. So by the Jan.,2001, Dell stock price might be at $400 (assuming no split) -- 200% return per year, which is much better than that of leap selling. So in this case, sell and hold of leap is less profitable than long dell common stock. IMO, it better to sell leap when dell at short-term high, and buy it back when dell drops.
Joey |
