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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: robwin who wrote (12821)	5/28/2000 3:22:00 PM
From: Dan Duchardt	Respond to of 14162

robwin, As the stock goes up to say $30.00 and you wish to sell, will any profit on the sale be eaten up by having to buy back the calls at a higher price? In a word, yes. But that is not the only consideration. As the price of the stock rises, your written calls also increase in value (unless the stock rises very slowly). At some point, when calls become deep in the money (DITM), the delta approaches 100% and the calls move dollar for dollar with the stock. Depending on how far away expiration is, the calls will still have some time premium. If you wait to be called out, you will not lose any of that time premium. If you sell out early and buy back the calls, your return will be diminished by the amount of time premium in the calls. Or do you wait until closer to expiration when the value of the calls has decreased? There is no universal answer to your question. You have to look at the amount of time premium you are not going to get because of closing out early, and weigh that against the time you must wait for expiration to roll around. In Jim's example of MO, the calls are DITM LEAPS, with relatively little time value. According to my data source the MO 2001LEAPS10 has only 5/16 time premium at the moment, and strange as it may be, the 2002LEAPS10 has only 3/16 at the best offer. If you had accomplished what you set out to do with the dividends right now, would you wait until January for the sake of getting that last roughly 1/4 point out of the deal? You can probably do a lot better than that legging out of the position on a strong market day as Jim has suggested. In general, you will always have to look at this situation for any CC where the stock has moved your call ITM. The questions you should ask are: How much time value will I give up by closing out now? and How long to I have to wait to realize full potential gain of the CC position at expiration? Divide the premium you will not get because of closing early by the time until expiration. If the return per time is not what you think you can get somewhere else, then take your reduced (but in less time) return and move on, or think in terms of working the position with timed purchase and sales of calls while you hold the underlying stock, following the WINS approach. Dan

To: robwin who wrote (12821)	5/28/2000 6:46:00 PM
From: James F. Hopkins	Read Replies (1) \| Respond to of 14162

Robwin; Well there is no hard fast rule to unwinding a position prior to ex-date. You do get some "time premium" for the time you have sold the calls..and you leave the balance on the table. But all that aside the general rule is still timing the exit and legging out on up momentum, and there are also exceptions to taht. It takes some practice and you can count on missing a lot of the timing moves before you get the hang of it, but if you miss more than half it's likely your rushing things to much, I've done it a lot and I still miss a few. -------------- Another thing is to "chart the options" I always chart options to see which strike and were the major volume was traded..it's hard to explain but not all strikes act alike , and the same strike can act different at different times ( even though the stock price does the same sort of move ) in other words "demand" for some strike may be a lot more at times when everything else looks equal or it might be a lot less..the supply/demand does not always coincides with the stock moves and every strike can have "it's own little subset of traders.." the traders and demand are what I "try" to figure out. "chart the options" and do it enough and you'll find the charts will talk to you.. Jim