Herman, Steve et al
HOW NOT!! TO WRITE COVERED CALLS, A REAL LIFE DISASTER
I have been following this thread since it's inception and Steve's "Covered Call" thread for a few days before that. I was going to solicit your help through private E mail, but decided the others on the thread might be interested in some of the pit falls out there.
I opened a brokerage account last August with $5000.00. Armed with a copy of the Wade Cook book I set out on the road to wealth and fortune. At that time I did not even have internet access, so with no experience and little information I began. Using nothing but yesterdays WSJ I used big premiums as my only criteria. I bought 500 shares of AMTX at $16 .25, sold the Sept. 15 call for 2.365, got called out and made about $450.00 after expenses. Not bad for a couple of weeks. Obviously there is nothing to this strategy and I was on my way.
Again using a nice premium as my only criteria, I bought 700 shares of madgf at $12.75. I decided to wait a few days for the stock and the premium to rise. Lo and behold, this baby went into the tank. It quickly dropped into the mid $8 range. I had all my money out, and the dog had fallen so far so quickly that I didn't see any way out. As 1996 drew to a close, madgf did start to come back some, but I was impatient. I mean after all this dog was holding me up on my road to riches. I sold the stock on 12/31/96 for $10.00 after selling a nichol dime call along the way. I ended up with my original $5000 down to abought $3400. But now I have learned my lesson, right. Wrong!
Now it is January of this year. I buy 100 shares of ZITL at 48.75, still based only on high premiums and volume. Again decide to give it a day or two, and again ZAP, into the tank we go. This is a real white knuckle stock though and it does come back enough that I can sell the January 50 for not much, but I would have got a little capital gain. I did not get called out and sold the February 40 call for $6. At this point I just wanted out with out too much blood loss.
As expiration day approached, it looked like there might be a run up, so I bought the call back for 2 5/8. And of course right back into the tank we go. Meanwhile I used the premium money plus what little cash was in my account to buy 100 shares of wstl at $20 1/8. I was going to let it rise a little and sell the feb 25. Hi HO, Hi Ho it's into the tank we go. This one dropped so far, so fast I still haven't managed to sell a call because my cost basis is so high.
Bottom line for the above, zitl is at 30 1/8, my cost basis has me at 45.50. Wstl is at 9 5/8 and my cost basis is $20.50.
While all of this foolishness was coming home to roost, I got internet access and found SI. Discovering Steves strategy, to late, I discoverd that I had done everything wrong right from the start. Oh yeah, I forgot to mention that I got a margin call last week.
At this point I am in the process of opening a 2nd brokerage with Lombard with an additional $4000. I will buy rost if it is still the thing to do although it will be a week or so before I am ready. Meanwhile I will try to repair the damage in the original account. I think wstl will come back. Zitl is another story and hard to tell. Any advise reletive to repair will be appreaciated.
The absolute bottom line of this whole thing is simply this:
If I would have had access to and used the advise so freely given by Steve and Herman, I would be ahead of the game instead of nearly buried.
Sometimes it is just the simple things. Had I exercised some patience with madgf I would have eventually made a nice profit in January. Steve mentions this mistake as a classic beginners error.
Any how the thread will be hearing from me in the future with updates on how not to do it and hopefully something positive later on. As I say any advise is more than appreaciated..........
..........Leroy
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