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Strategies & Market Trends : Rande Is . . . HOME -- Ignore unavailable to you. Want to Upgrade?

To: bobkansas who wrote (23621)	4/8/2000 10:14:00 PM
From: bobkansas	Respond to of 57584

Back from dinner, so here goes: Your example was as to 1000 shares of AMCC. Current price per share as of Friday's close was $144 15/16. Total current market value of all shares approx. $145,000. Hypo: you write i.e. sell 10 covered calls with a $165.00 strike price which would expire on May 20, 2000. You would get a $14 dollar per share premium which times 1000 shares equals $14,000. You get this money in your account right away. IF on May 20th, the price of the stock is under $165 a share, you know you will keep your stock and not have a taxable transaction i.e. sale of the stock. You in the mean time have made 14 grand by renting out the right for someone else to purchase the stock. You can then rent the stock out again and make more money. Can you live with this outcome, especially if you did this on a monthly basis during the summer? If AMCC in the mean time is down to 80 bucks a share, what do you care, if you have the stock as a ltb&h. You have a strong conviction that it will go up in the long run anyway. IF on May 20th, the price of the stock is $165 per share or higher you will be called out. You still keep your 14 grand, AND get the increase in value of the stock from approx $145 to the strike price of $165 per share figure i.e. 20 dollars which times 1000 is another $20,000. So you make a total of $34,000. Is this a bad outcome? Are three negatives here. First, you are in that stock and in the stock market so you have to assume these risks. Moral is you better do this on stocks you like. You like AMCC and thus are willing to assume this risk. Are you also willing to be in stock market during the period covered by the covered call? Seems like you are willing to assume this risk. Secondly, IF AMCC does a "1999 QCOM" on you and goes lets say to $590 a share you will have lost the opportunity to make a lot of money, hence you lose some upside profits. You will have missed making a ton of money. But if you think AMCC will not sky rocket this summer and are willing to assume this risk of losing opportunity income then you should be happy regardless of the outcome. Third, taxes. If you do not want to take risk of get called out so that you will have to pay taxes on a short term capital gain than you should either pick a very high strike price (strike prices our at several levels at, above, and below the current market price)and not get as much in the way of a premium OR do not do covered calls at all on this stock. I hope the above example helps. According to poweroption.com at the 165 strike price your return on this option (ticker AZVEM) is 11.4 % if not assigned, 26.8 % if assigned, and has a 9 % naked yield to it. Not bad imo for 42 days in the market. There is certainly some thinking as to what strike price level you pick, etc. Think for yourself as to what your goals are with this. I think the above shows some of the power of covered calls. In a declining market, covered calls can minimize paper losses by offsetting the stock's devaluation with premium income. This can be done in an IRA so that one could care less in the short term as to tax results as you made money either way that is not currently taxed. Best regards, BOB