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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: George Cowsar who wrote (11381)	8/14/1999 11:03:00 AM
From: Herm	Respond to of 14162

Hi George, You have been doing your homework, I see. Good questions. 1. You tend to write calls 4 to 6 months out right? say the stock hits the upper BB, you write a call (say 5 months out) and buy a put. How far out of the money on the put and how far out in time? Yes, for me the longer time works out better. One factor is that I work and I may not be able to get to a computer at work all the time. So, the longer time spans on the CCs allows me several opportunities to unload the CCs or let the time decay the CCs. In the meantime, I have some very large premies in my account to work with. How far out in time and out of the money on the PUTs? OK! I have had a change in opinion thanks to David's and others experiences on sideshow PUTs. If you truly follow and have confidence in WINs and you have a good feel for reading the BB and RSI indicators, you will find that at the money or deep in the money sideshow PUTs will generally payout very well because of the high level of predicting the reversals. With that said, it is more important that you buy PUTs at or in the money based on what you can afford for as much time as you can afford. In other words, buy less PUTs with longer times and more in the money intrinsic value. With the CCs to cushion and pay for part of the PUTs and the sideshow PUTs as your hedge, you should do very well on the pullback. The risk vs. rewards are much in your favor doing it this way. Now, there are times when the upper BB tags and a news event like an earnings report occur about the same time. Cheap PUTs sideshows ONLY during those times would be conservative and wise move in order to avoid earnings bombs that shocks the street or profit taking madness around the end of the year. Two strike prices down from the current stock price would be a good level. 2. When you CC leaps you like to own a leap that is 1.5 to 2 years out right? When you buy the leap I guess you are at the lower BB with low RSI hoping for a turnaround. Do you buy an at the money leap? Well, George. When I commit to a play I like to buy as deep into the money as possible. I may buy early at times, but, I can afford to wait it out until my net cost basis is in the black and I can add a margin of additional profit in the LEAP/CC calendar spread. Yes, I look for a buying opportunity when the RSI is very low and the stock is hugging the lower BB and the center moving average line between the upper and lower BBs is level. You will notice the narrowing of the upper and lower BBs when a pending gap is being set up. Now, the stock may gap to the upside or downside. If the RSI is super low and the price is beaten up. There is far more upside potential. That is when you need to step up to the plate. 3. (Corollary to question 1) When you buy a side show call it would be in the same condition as in (2) above, right? Out of the money? how far out in time? a couple of months? The only reason I would buy a sideshow CALL is when I have a runaway price on a CC I'm holding. I hate to cover at a loss. I much rather buy sideshow CALLs to capture the upside capital appreciation in the stock for myself. Now, I may cover at a loss ONLY when I'm so sure that it is worth being long in the stock OR I'm very close to a long term capital gains and I don't wish to be called out. Under those conditions I would eat the loss by covering my CCs and rolling up how ever many strike prices and go out as far as possible to recover my CC loss, repairs cost, and get into the long term capital gains end zone. 4. Do you sell the side show put or call at the same points (as you would buy the opposite) or do you tend to cash them in a little sooner? They do then to occur fairly close. One transactions sets up the other. I take the cash profits from one and move in into the next phase of the process. My profits tend to fund the purchases of the next 100 shares as I build up the number of CCs contracts I sell. Each time bringing in more premies. Rarely, do I have to add new dollars. Of course, that does speed up the process and avoids dipping into margin when you don't need to. 5. The point of reversal is a tricky to pick. There are short term reversals with bounces towards the opposite band that are head fakes, sometimes they go all the way to the opposite band but the longer term bias is still unchanged. When you're looking at the "hard right edge" how do you make this decision on whether to buy back your call? And how do you decide when to do a side show? Is it partly based on whether enough of your CC premie has bled off (75 to 80%)? Can you expand on this. Yes, you are correct! What has really helped me is setting the charts to weekly rather daily to step back and see the overall major trend rather than the fluctuations and whip saws that will drive you nuts and cause you second guess. I move from weekly to daily. Daily is perhaps more useful for the actual execution of buy and sells. Otherwise, I want to know trend within that earnings quarter relative to the earnings dates and options expirations. I use the phrase, "let the trend be your friend!"