HOW TO WRITE COVERED CALLS - A REAL CASE STUDY !
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Tuesday, March 11, 1997
You are right B. Anderson! I was answering someone's question and not posting because I was debating what the impact would be on those following this forum.
MY POSITION: Each of you have the Excel template and you should know your net cost basis in ROST. My nut is at $23.30 per share. I decided for my particular situation that I would sell the April 25 covered calls for myself. You may decide otherwise depending on what is your bottom line net cost basis.
I'm risking being called out at $25 in the price of the stock goes up from here! It is at an all time high after the split. It peaked around $27.75 and we saw the pull back yesterday somewhat. In my cast I would not lose money at $25 and I would have almost $1,000 dollars of premies in my hands.
It may bounce around this week and go up to $30 -$32 by the earnings report date which is next week. If your net cost basis is higher than $25.00 then you will need to perhaps 1. average down by buying more share 2. wait for the selling price to go up from here 3. write a covered call and lock in a higher strike price like $30 or $32 1/2.
I expect that ROSS STORES (ROST) with all the numbers showing may pull back after the earning report because of profit taking and scalpers. I wish to use that downward price volatility to eat up my call buyer's value and thus lower the chance of me not making MORE PROFIT! Notice, I said more profit. If I grab the premies and the stock goes sideways for the next two months, I need to be generating cash flow. By selling the covered call now, I will have approx. $1,000 (in my case 4 contracts) to work with somewhere in my portfolio.
It is safe to assume that the ROST fundementals are good enough to not worry about a total wipeout of say more than 20% to $30% for now. Fine, I will grab the money now and it should take two months before ROSS Stores test the old high of $28. If that happens, then the covered calls I sold will just erode away worthlessly and I get to keep the stock and do it again! If ROSS looks like it breaking all the rules and logic and goes straight up. Fine, I will be right there BUYING MORE ROST CALLS TO TRADE FOR THE EXTRA CASH OR EXERCISE to take over the stock and lower my net cost basis.
HOW TO SAIL WITH CAPT. PROFIT!
Welcome aboard mates! You need to understand that I work covered calls writing like I operate a sail boat. Sometimes, I let the sails out (write covered calls) and let it ride with the wind. Other times, I tug in the jib (buy some calls) to gain some more speed (profits) to take advantage of the wind (upward momentum). Many times, when I racing I block my opponent's wind (covered call buyer) by blocking out his wind (price erosion - I let volatility do it to the work!)
Sometimes, a storm takes me by surprise (strong down turn in stock price) and I must make sure I have my life jacket on and I'm paying special attention to the water conditions and so that I can get to safe harbor (cover my calls at a major discount - keep 75% of original premies value). After all, we must not damage the boat (lose our money!) in order to be able to sail on another sunny day (be around with money to continue to write covered calls again!) |
