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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: flickerful who wrote (9703)2/22/1999 5:31:00 PM
From: Herm  Read Replies (3) of 14162
 
In closing Flick,

LEAPs can be used as a giant parachute or safety net (hedge). For
example, if the chart reads an upper BB tag and the RSI is sky high, CCing LEAPs in the money will provide a huge downside cushion. As the stock price drops, the LEAP you CCed will devalue quickly and should match dollar for dollar your lost in the stock or LEAP you are CCing.

What I am saying that you can own the stock or LEAPs and sell LEAPs or CCs to buyers of offset your potential losses. For example, you could own the long LEAPs, cover the existing CC to lock in the profit, and then immediately write another CC round using LEAPs at the money strike price of your long LEAP. So, as the stock price moves closer to your 80 DELL JAN00 strike price your are making your CCer pay for your protection by offsetting your lost with their CC premies. It sounds more complicated than it is.

In summary, there is no reason you should allow yourself to get burned if you own a stock and it takes a dive. By executing damage control you can regain some control of the situation. You are taking on the most risk when you simply do nothing and watch your stock or LEAP take a dive.
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