HOW TO WRITE COVERED CALLS - A REAL CASE STUDY!
==================================================================
Date: Wednesday, March 12, 1997
THE STOCK:Our case real case study is ROSS STORES (ROST). At this point in time, we are waiting for the stock to upcoming earnings report on Tuesday, March 18, 1997 and options expiration date for March. That makes this stock a very good case study because of:
a. the stock's fundamental qualities.
b. we get to see what happens when a stock splits.
c. we get to see what happens when a stock pays out dividends.
d. we get to see how we can make money using all those factors
in our favor as covered calls option cowboys (writers or sellers).
That is, we want to earn 10% to 25% rate of return per month (yes,
every month) writing covered calls!
-------------------------------------------------------------------
ROSS STORES (ROST) made a fine comeback today up +1 to close at $27 3/4 on volume of 334,700 shares. This stock appears to be willing to break that $30 barrier. All we need is a better than expected earnings report next week and we are off to the races. If you feel bullish on this stock you may want to buy those March 27 1/2 or the March $30 calls. If ROSS is going to climb that mountain it will be next week!
For those of you serious covered call writers, get ready to LOCK IN THOSE COVERED CALLS strike prices when the stock starts to peters out! The volume should reach and exceed 700,000 as a top! If the earnings are real good and you are assertive, write April or May calls in the money depending were you are ($25, $27 1/2 or $30) with your nut (over your net cost basis)! The stock should sharply pull back shortly afterwards and you will begin eroding your call buyer's premiums of the contracts. We should be able to cover later and write another round of calls.
For those that are greedy and hugry, when you write (sell) your covered calls deep in the money, go ahead and buy a good double shotgun load of cheap ROSS puts to milk the pull back some more! This carries more risk. Think of it this way, your using your call buyer's money to pig out on profits! Read the next paragraph below. That should increase the volatility somewhat and erode your call buyer's premium even more so!
VIX Volatility:
The VIX increased today by +.910 to close at 21.630. That is lower than usual. Things should get pretty hairly between this Friday and next Wednesday as traders rock and roll before the Friday, March 21, 1997 option expiration fiasco! Use that against your call buyers. Selling calls on those days will boost your premies. You may want to pick up the puts this week to save some money!
10-Yr.T-Bill:
This indicator got my attention today as it creeped up +.030 to close at 6.57%. Plotting this indicator with a 300-day moving average will give you a no questions asked dependable predictor of a mini pull back (like the July 1996 blow off!) which is scary enough. Or, if the 10-yr. T-bill interest rates stay above the 300-day moving average for a month straight, FOLKS sell your stocks and BUY, BUY, BUY, BUY ALL THE PUTS YOU CAN AFFORD because we are going into a MAJOR recession. The last five have been pinpointed by this indicator.
************************************************************************************
DISCLAIMER: The writer is presenting a real stock and a live ongoing case study. No recommendations or endorsement to actually buy this stock are suggested nor implied. Trading stocks and buying calls should not be attempted without first understanding the risk/rewards of this type of investment! The writer assumes no responsibility for the opinions being expressed!
Buyers always be aware!
************************************************************************************ |
