Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Jon Tara who wrote (11653)	10/9/1999 6:08:00 PM
From: Ira Player	Read Replies (1) \| Respond to of 14162

Jon, I think people tend to look at covered call writing, whether covered by stock or a LEAP, from the wrong perspective. I view covered call writing as business of selling a decaying asset, like ice cream on a hot day, in the anticipation of it expiring worthless. However, there is the possibility, however remote, <GGGGG> that I am wrong. I buy the underlying asset, hopefully one that will not also decay, to protect myself from the deadly position of having the option suddenly skyrocket in value because of a change in the company news, weather, phase of the moon ... A leap performs as an insurance policy as well as the underlying stock would, with one exception. When you purchase the LEAP, you are paying for a significant amount of extrinsic (time) value. When the underlying suddenly moves up, the extrinsic value of the LEAP decays at a faster rate than the nearer term option. This is an additional source of loss. Taken, as an example to an extreme, if the stock price moves to near infinity, the extrinsic value goes to zero and the LEAP and the near term option have the same value. The premium you paid for a longer life has zero value. A real example AMAT, stock at 82 1/4: AMAT JAN00 90 is 7 1/4 by 7 1/2 AMAT JAN02 90 is 26 5/8 by 27 3/8 A 2 year premium of 19 3/8 to 19 7/8. AMAT JAN00 40 is 41 1/8 by 42 1/8 AMAT JAN02 40 is 50 1/4 by 51 The 2 year premium has deflated to 10 1/4 to 8 7/8. The further into the money the options go, the more money lost by the short term writer. When you purchase the stock and sell against it, the stock has not extrinsic value and appreciates faster than the option sold, therefore there is no additional loss, no matter how high the stock rises. Of course, if it goes down... That said, I do CC's against LEAPS routinely. But in this case, you must be ready to close the position if the stock starts a serious run, to avoid loosing all of the extrinsic value. Ira

To: Jon Tara who wrote (11653)	10/10/1999 2:15:00 PM
From: Herm	Read Replies (2) \| Respond to of 14162

Hi Jon, Let's take a look at your three high flyers. These three stocks have done exceptionally well over time. By the way, what brokerage do you use for your spreads and LEAPs? What are the requirements in order to trade spreads? I'm sure many would be interested. CMGI NASDAQ: (CMGI : $112 1/2) $10,723 million Market Cap at October 8, 1999 Loss Expected for 1999; Internet Products & Services SubIndustry priced at 253.3X PE Internet Products & Services SubIndustry up 1.75% / Technology Industry up .30% Today CMGI SPLITS GALORE I would be amazed if CMGI splits again in Jan. 2000. The last three 2-1 splits have been 11 May 98, 11 Jan. 99, and 27 May 99. According to the CMGI weekly plot it sure looks like it will continue an upward bias with another split likely. RSI is relative low for this stock at about 50 RSI. OBV is increasing, and the upper and lower BBs are diverting outward with a upward moving average in between the BBs. All very positive signs considering that this stock is not turning a profit yet. CMGI incorporated 1986 in Delaware. Closely-held by Microsoft, Intel, Sumitomo, and Compaq. Intending to integrate AltaVista into its network of 50+ Internet sites, traded 16.4% of CMGI and $220 million for 83% of Compaq's (NYSE: CPQ) AltaVista search engine and Shopping.com and Zip2 units, issuing 20.8 million new shares. Agreed to acquire Flycast Communications Corp (Nasdaq:FCST), CMGI will issue 0.4738 CMGI shares for every share of Flycast. iqc.com CMGI LEAPs Expect CMGI to move to a higher price with the potential for another split in Jan. 2000. Buying the 70s JAN 01 LEAPs @ $57 and hold for higher prices. You could CC the 130s CALLs @ 12 or more and cover your nut of $70 strike+$57=$127.00 if called out at $130 with another 2 points. That a total of $14 points or 25% by Jan. 2000. Not too bad! Plus, if you get called out it would taxable in 2000 and you would not pay taxes until 2001. The previous 52-week high for CMGI was $152.00 and with a 50% growth rate, this stock is smoking at this point. The next earnings report is 23 Dec. 1999. I will return and comment on the other two. I'm playing catch up on the emails and the newsletter column for next week. I'm tweaking a WINs Technical Summary list donated by a lurker. Sign up for the free newsletter at coveredcalls.com