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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Mannie who wrote (8106)	10/15/2000 12:35:28 PM
From: Mannie	Read Replies (2) \| Respond to of 65232

*********** COVERED CALLS *********** Position Management: Covered-Call Adjustments - Part II By Mark Wnetrzak With the recent downturn in the market, many of our readers have asked about selling LEAPS as covered-calls to recover lost value in long-term portfolio stocks. This technique can be a great way to offset losses in slumping equities because LEAPS' time value premiums are less affected by short-term market corrections and the rapid movements often increase the implied volatility of the sold options. LEAPS, or Long-term Equity AnticiPation Securities are options with expiration dates far in the future (now available for the year 2003), that allow investors to establish long or short positions. Strategies involving selling LEAPS do not differ much from those utilizing shorter-term options. LEAPS can be sold against the underlying stock in the same manner as near- term call options. The covered write position with LEAPS will have limited profit potential when compared to outright stock ownership but will outperform that strategy if the stock price declines or remains relatively unchanged. A trader that sells LEAPS will take in a substantial premium when compared to the short-term covered-call and thus has a smaller cash investment (since he is selling a more expensive option). In addition, the larger premium of this call also produces a significantly lower break-even price for the overall position and the LEAPS writer has a higher net return if assigned early, because he wrote a more expensive option initially. The long-term equity position can also benefit from regular dividends and the potential for stock splits, spin-offs and other benefits of stock ownership. The most significant difference in the LEAPS options is the slow rate of time decay. These long-term options also retain their time value even when they are substantially "in" or "out" of the money. This characteristic will significantly affect a trader's ability to roll-out of a position because the call option is relatively expensive to repurchase. At the same time, a short- term covered call writer who is faced with rolling down (buying back the call that is currently short and selling another with a lower strike price) may transition to LEAPS as a simple means of retaining a large premium even though he may be moving to a (potentially) less profitable position. The large absolute premiums available in this type of strategy make these positions unusually attractive but the secret to a correct adjustment is comparing the difference in annualized returns from the sale of LEAPS versus those that can be made from repeatedly writing shorter-term calls. Good Luck!