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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: JungleCat who wrote (9276)	1/23/2001 11:30:14 PM
From: hobo	Read Replies (1) \| Respond to of 10876

Assuming I write this call for MU (currently trading around 43) - Feb '01 40. Let's say it keeps trading over 40 but then on expiration falls below 40. I know my shares can be called at anytime until expiration. However, what is the probability for that to happen? Will my shares be taken away even if the stock on expiration date is below 40, but had traded much higher than 40 earlier? technically any American style option can be exercised at any time up to and including the Friday prior to expiration date (usually a Saturday). so the answer is yes, but not likely. chances are that they will not be exercised prior to the last day, unless there would be special circumstances (a specific date for an exceptional dividend or something like that). here the expectation of some unique future event will come into play, since, the premium paid for the option could bear some significance in the decision. so if on the Friday prior to expiration market closes and the underlying is below the strike, then answer is NO. the main ideas to write cover calls are to extract additional revenue out of the underlying (by receiving the premium), and to protect the investment against a fall in the price of the underlying. bear in mind that such protection is limited to the extent of the premium received. the strike price should be set in such a way that, if your shares were assigned, you would obtain a reasonable return in terms of your basis and the premium received, against the invested funds. there is, for some investors, a psychological "effect" of having the shares taken away from you. you should consider all the possibilities so you do not get second thoughts as the price of the underlying keeps marching upwards past your strike. so "plan your trade and trade your plan". (no regrets). never get personal with your stocks, they are not your girlfriends (boyfriend -as applicable-) -G-