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: stockycd who wrote (10778)	5/13/1999 9:13:00 PM
From: Jon Tara	Read Replies (1) of 14162

"I noticed that as the price of a stock with a high premium (or implied volatility) moves up, the premium on that call goes down. " Are you sure of what you are seeing? I notice that you propose writing at-the-money calls. Keep in mind that: 1. Premium will drop with time 2. Premium is highest at-the-money So, the premium isn't really going down "because the stock is going up". It's going down because the time value is eroding and because the stock price is moving away from the strike. Because of this, sure, your strategy will work - unless you are assigned before you can execute it! (Think hard about "premium is highest at-the-money". This is why it's a conservative move to purchase in-the-money calls. If the stock drops, premium increases as the stock price approaches the strike price. In-in-money calls have a "cushion" that builds up as the stock drops, and so the call falls more slowly than the stock. I think many people avoid in-the-money calls because they seem "expensive" and they are so used to thinking of options as a win big or lose-it-all game, and think they are a HIGHER risk because there is more to lose.)

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