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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Georgecc who wrote (11061)	6/17/1999 11:13:00 AM
From: FruJu	Read Replies (1) \| Respond to of 14162

Why buy upstrike calls? I'm guessing they tend to be priced right (inline with actual volatility) vs. the to ATM calls? This was a part of hpeace (Steve's) strategy a long time back [see the Ask Steve thread, now sadly defunct]. His philosophy was sort of midway between the "just write the covered calls" and the WINS approach with sideshows. He used to advocate that if you wrote covered calls, but there was a major event coming up between then and expiry that could affect the stock price (e.g. an earnings report), then you should buy the upstrike calls and downstrike puts as insurance against the stock reacting to the news and running away from you. The most disheartening thing to watch (which I've seen a few times) is you sell the covered calls, then immediately the stock starts running up another 5-10 points. For someone who usually deals in 10-20 option bundles, that's $5-$10K you just see evaporating away since you've already sold the CCs [remember, CCs protect your downside risk, but they also limit your upside return]. In this case I had sold the JUL 25s, and the next upstrike was the JUL 30s (I wish the 27.5s had been open, since I would have made a much bigger % profit). Steve used to always advocate trying to buy the upstrikes at a very low price (he used to say 1/8 or 1/4 was the max, but with volatility of stocks these days, those numbers might be low), so that you weren't risking more than your original covered call premium. Steve's approach was not to worry about buying upstrike or downstrike calls unless were expecting major news out of the company between now and the expiration date.