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: Amit Raj who wrote (11977)	12/2/1999 1:43:00 AM
From: Dan Duchardt	Respond to of 14162

Amit, I was in a similar situation with LIPO a couple of months ago, but misread the risk involved. LIPO is a profitable company with an established product line. I assumed (incorrectly) that an unfavorable outcome from the FDA panel would not hurt the stock too badly, and I thought puts were "too expensive". The FDA panel voted not to recommend approval, and the stock got hammered. Thankfully I at least had the calls I had written to soften the blow, but I'm still in the hole on this one. I also own some ATIS, which has a very promising skin replacement product, holds many patents, and long term could be a great stock to own. I first owned it at 10, just before it went to 4 on a non-approval from the FDA. It's been drifting between 2 and 4 for most of the last 2 years with an occasional burst toward 5. I'm waiting for that approval to finally come and ignite this thing. I don't know much about CYGN, but since it has negative income, negative book value, not all that much cash, and recently sold off other interests to focus on this monitor, I'd be pretty nervous holding your current position through the proceedings. As their own press release says "There can be no assurances that the panel meeting will result in a recommendation for approval to the FDA. There can be no assurances that a recommendation for approval from the advisory committee would result in approval from the FDA to market the device. Also, there can be no assurances that if the Company receives marketing approval from the FDA that the product could be successfully manufactured or marketed." If the panel does not recommend approval, the stock could lose 50% or more in a heartbeat. I don't like what I see in the chart. It doesn't show a lot of confidence in a positive outcome. Based on your numbers, you could close your position with a 1/4 profit on the calls, and another 1/4 on the stock. 1/2 point is not bad on a 7_1/4 investment in two weeks. Alternatively, buying Dec7_1/2 puts would cost you 1_1/8 and limit your loss to 7/8 (9_1/4+1_1/8-2-7_1/2). If the news is good and the thing jumps over 10 you would net a return of 1_5/8 (10+2-9_1/4-1_1/8) without any further changes in your position. This seems like a reasonable risk/reward ratio if you have confidence in the product. If the stock does tank, you could buy back your calls and exercise or sell your puts any time before expiration. Depending on how the stock behaves after a dump, you could wind up owning it at effectively a fair after-dump price. But at that point the stock might be sub $5, and you might not be able to sell any options. Closing half your position for the 1/2 profit and buying the protective puts would leave you at risk of losing net 3/8 and potentially gaining 2_1/8 on 1000 shares. I would be pretty comfortable with that. Dan