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: NateC who wrote (10044)	3/23/1999 5:17:00 PM
From: RDHickman	Read Replies (1) of 14162

Nate, This is a copy of Private e-mail I sent you on Sunday. I am beginning to appreciate all of Herm's effort. Let's see...... #1 The Investor's intention is to make a small profit on a monthly or semi-monthly basis using Deep-in-the-Money L.E.A.P.S as a stock substitute and Writing Out-of-the-Money conventional Calls. Why Buy DIM's? Because, if there is a rapid run-up in the Stock Price AND you are Called Out, you are covered dollar -wise. Assume the Leap has increased in price by some delta figure in keeping with the Stock Price. Let's say it's value is $21 at exercise. Stock Price = $72 The Leap Strike = $60 Investor's Cost = $17 Value of Leap + Cash = $77 Total Covered = $77 Conventional Call Strike = $80 (more than $77) New Value of Leap + Cash = $81 ($77 + $4) Profit = $ 1 Plus the $2 premium = $ 3 total for the play And this is a "worst-case" scenario. If you don't get called-out, you can do it again and again. For your AOL projection, you should be able to plug-in your own numbers. I believe the above is a reasonable work-sheet. In following up, I found AOL closed at 129.87 yesterday (Monday). The stock drop to close at 121.50 today (Tuesday). The Jan 00 80's are approx. 54.50 and the Jan 01's are 63. I cannot determine how you paid $34 for them on Monday. Footnote: AOL is a highly volatile equity. I look for more stable stocks with less volatility to use L.E.A.P.S as a Stock Substitute to Write conventional Covered Calls. Need to sign off for the day. Good Luck /Dick

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