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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: Dave Pestle who wrote (11854)	11/19/1999 10:01:00 AM
From: Herm	Read Replies (1) \| Respond to of 14162

Hi Dave, Welcome to the forum. It's good you took the time to post a question. Thanks for that effort. Let me repeat your question: "I had always thought it was best to sell CC's on a stock that was in a slight uptrend. The opposite seems to be the recommendation- if a stock is about to bottom, CC's should be covered. I guess I'm not seeing the big picture here or something. THE SHORT ANSWER: If you sell CCs when the stock is about to reverse downward, you generate an insurance premium from the CC. That protects your downside as a hedge against a big loss. If you cover cheap when the stock bottoms, you should have enough profit in the CCs sold along the way to offset the drop in the stock valuation. Hence, you are ready to average down and ride the stock upwards. It is a process to make a profit. That is as short and sweet as I can make it. THE LONGER ANSWER You are correct about what you have been lead to believe and instructed by the majority of the early writings on covered calls. The sad part is very little information is provided by those experts on how to find the stocks to write covered calls. What you described is one CC possibility out of many. It would do very little to really prepare you as an investor in all market situations. For example, when you learned what you just stated above, what else they say about the technical or fundamental conditions? Would it not be the same advice if I stated "place a worm on a hook and drop it into the water to catch a fish?" The statement or advice is true, but, it's not that simple is it? In like manner, your statement about buying low and selling CCs at higher strikes is some what true. Like going fishing, you may get lucky, or you may get a heck of a sunburn waiting at that boat or dock. :-) WINs is a package for a novice investor to build on. It is a tool shed for the expert investors that take bits and pieces of it, apply it, and do very well. How many times have I heard, "you could read the charts and just sell the stock when it peaks." Yes, you could! "You could just wait for the bottom and then buy the stock." Yep, you could. "I only use your WINs for my defensive moves." Yeah, that will work as well. I have never heard it does not work or that it does not make sense. On the contrary, it has made better investors. I get such a charge when folks tell me how much they made and much to their surprise. That is so cool to hear their appreciation. It also teaches me something about my own investing. Good question Dave. Apply WINs as a long term holder of stock as stated and you will protect your stock value on pull back cycles. You will lower your net cost basis in that stock. You will learn how to gauge the direction of your stock and you will become a heck of a confident investor that is capable of responding to ANY market condition with the right tools. In closing, the big picture is to make investor better thinkers for themselves and to make a profit doing it!

To: Dave Pestle who wrote (11854)	11/24/1999 11:19:00 AM
From: David Lind	Read Replies (1) \| Respond to of 14162

Dave, like you, I have wondered why in the world someone would write a covered call on a stock that apparently has peaked (high RSI), and is likely to drop. Frankly, I am still wondering. However, it apparently was one of the founding principals of this thread. IMHO, it is a ridiculous concept. There are certainly more efficient ways to profit on a high RSI stock with a projected fall in price. The only logical reason to write a covered call is if you expect flat to slightly up performance. But locking yourself into a stock that you feel may drop is the craziest notion I have ever come across in 30 years of investing. The only person who is going to love this scheme is the broker who is handling your trades as your try to cover your ass on the way down.