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To: Voltaire who wrote (25021)	7/11/2000 4:12:23 PM
From: cowgirl-ona-1eyed-horse	Respond to of 35685

Hi Voltaire, I've been watching LPTHA and waiting for it to break out of it's trading range. It may have done that today. Thought I might add a few shares. Pleeeze show me how to REALLY do it re: CCs (your post #24891). I ain't most people. love, cowgirl

To: Voltaire who wrote (25021)	7/11/2000 4:21:04 PM
From: Dealer	Read Replies (2) \| Respond to of 35685

COVERED CALL INFORMATION: I found this and just thought I would share it. Easy reading. The basic covered call strategy is straightforward. Monthly cash income is generated by writing call options on stock that you own. When writing a call option you contract the delivery of stock owned at a price (strike price) for a specific amount of time (option month). In other words, the buyer has the right to buy your stock (at the strike price), and you are paid a premium (price paid for the purchase right). This investment strategy works best in a rising market economy. Why? It helps to maximize the yield (premium) of the held stock. What's safe about options investing is that the strategy works well in a declining market, too. How? Use it to minimize losses by offsetting your stock's devaluation with premium income. If you plan to hold the stock you buy or own for a long period of time, then writing covered calls (sell call options on owned stock) can greatly enhance the yield performance of your stock portfolio. Call options can be written every month on the stocks you own. This is because the highest premiums are realized over single-month periods, rather than two or more months out in time. The stocks you choose to hold or buy should be stocks you plan to own for a long period of time. They should be steady growth stocks that have done well over the long term and can be prudently held even if a market decline occurs. To keep commissions down, it's best to write calls in contracts (lots) of five to ten. Since each contract is for 100 shares, plan to hold 500 to 1000 shares of each stock. It is also desirable to have a least six or more diverse stocks, e.g. pharmaceuticals and automotive and computer software. In general, the stocks you wish to write a covered call on should be priced between $10 and $30 per share. This price range makes the yield higher. Since the call premium (money received for sale of the option) does not go down as fast as the stock price, a higher yield is usually obtained with lower-priced stocks. The table below illustrates this: Price Variation Table Call Strike Price Call Premium (One Month Out) Yield on Premium per month $100 $2.50 2.5% $50 $1.50 3.0% $20 $1.00 5.0% $10 $0.60 6.0% As shown when the strike price came down by a factor of 10 (from $100 to $10), the price of the option only decreased by 4 (from $2.50 to $.60). The lower-priced stock will give a larger yield value. The example yield calculations above move from 2.5% to 6.0%, favoring lower price. There are three price movement situations that should be examined: Constant stock price Rising stock price Falling stock price 1. Constant Stock Price A typical situation might be: E-Trade (EGRP) stock price on 05/23/97 was $17 1/8. The June 17 1/2 Call had a bid price of $1 1/16 (premium). If the price remained the same for the entire month, you would receive $1,0625.00 (1 1/16 X 1000) for every 1,000 shares we owned. This would yield: Yield = Premium Income / (Purchase price of shares - Premium Income) Yield = $1,062.50 / ($17,125.00 - $1,062.50) Yield = 6.61% (if "Not Called") You can calculate the yield by subtracting the premium from the purchase price in the denominator. This treatment of yield is consistent with references like "Options for the Stock Investor", by James B. Bittman, pages 99-103. The yield is increased slightly using this technique because the premium is immediately made available in your account, and can be re-invested. It should be noted that this yield is for one month only and can be multiplied by 12 to find the annualized yield. The calculation also assumes that no margin borrowing was used to purchase the stock. Assuming a 50% margin, twice as much stock can be purchased to generate twice the strategy yield. However, the use of margin increases the risk considerably in the event of a market down-turn. Covered call strategies can generate substantial income even when the stock price remains the same for a month, or an entire year. Continuing with this scenario, assume the stock price remains the same over the period of the contract. You continue to own your stock and it is not sold to the option holder. You retain the premium and a call can be written for the following month. Note: an option must be written each month to realize annualized yields. 2. Rising Stock Price If the market is rising, you can choose a strike price that is slightly above the actual stock price. Accordingly, if the call option is exercised (assigned), your income will be the call premium on the option plus the appreciation of your stock valuation. This technique can enhance your yield by several percent. If the stock price rose in the previous example the yield would have been: Appreciation = Strike Value - Purchase Value Appreciation = $17,500 - $17,125 Appreciation = $375.00 Yield = (Premium Income + Appreciation) / (Purchase Value - Premium Income) Yield = ($1,062.50 + $375.00) / ($17,125.00 - $1,062.50) Yield = 8.95% (if "Called") Also as the market rises, the stock generally moves in up/down cycles and not in a straight line. The price will spurt upward for several days and then decline for several days. Stock purchases should be made on dips and the call writing should be done on the spurts. This can enhance yields for all cases of stock movement. During a rising market the stock is called (call option exercised) more often. When it's called, the base stock is sold to the call holder to fulfill your contract. Subsequently, the stock must be repurchased with the proceeds to continue the cycle. There are two alternatives available to the investor: 1. Let the stock get called and re-purchase each month, or 2. Purchase the option back before it expires. Deciding which approach is best (1 or 2 above) depends on several conditions. Two examples include tax implications of the stock sale (long term gains) and the cost of commissions for stocks versus options. It generally pays to buy the option back. The yield calculations shown in the examples above of % if "Called" and % if "Not Called" are the basic calculations. These calculations apply to all optionable stocks. 3. Falling Stock Price When the market is falling, pick a strike price slightly under the actual price of the base stock. This circumstance is referred to as "in-the-money", providing greater income (if "Not Called") while allowing for falling stock prices. If the stock falls rapidly, consider buying back the call option and re-writing the call at a lower strike price to increase the yield. This may be done several times in a month with the strike price following the stock price's downward movement. During the call option interval, if the call price erodes at a rate faster than expected, then buy back the call option. If 80% of the premium is gone it may pay to buy back the option and write calls at a lower strike price, or out an additional month. For example: if an option is sold for $1.50 and in 2 weeks drops to $.25, buy it back and write another call for around $1.50, picking an option for the following month or picking a lower strike price. This makes it possible to collect the option premium several times during a month, providing improved yield.