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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: JGoren who wrote (105)	4/21/2001 12:36:36 PM
From: alanrs	Read Replies (1) \| Respond to of 5205

I tried to use the cboe site to calculate fair value for an option given the price of the stock and came up with option values much lower than I found in the real world. Haven't had time to re-visit, so it may have been some oversight on my part. Since not understanding the site has not kept me from making money on calls, I'm not in any particular hurry. Using the KISS principle, I find that selling a call at a price that would put a smile on my face if it were excercised, as others here have recommended, is completely sufficient. In fact, I think I've died and gone to heaven since I started doing this. There are many days when prices aren't attractive, or are so low I buy it all back. My buys and sells tend to be clustered around a three or four day period. Since I've only been doing this for 8 months and started slow, I'm going to give it a year or two to believe the results and gauge how I react. So far I'm ahead 21 trades to 0, with no stock being called away. I know it's not the high stakes gambling some do, but it works for me. ARS

To: JGoren who wrote (105)	4/22/2001 4:58:59 PM
From: FaultLine	Read Replies (1) \| Respond to of 5205

Your brief, three paragraph, post raises a number of interesting questions. I'd like to comment (at great length <gg>) on just the first paragraph. I really don't understand your strategy of selling deep in the money calls. I guess I am a simpleton and look at things from a LTBH perspective. I simply try to sell OTM CC's for extra income to pay down my margin debt and keep my qcom, which has a very low basis. It seems to me that when you sell deep in the money calls, the option transactions take over your investment strategy rather than focusing on the underlying stock. I'm very much a newcomer to cc's but here are some conclusions I've drawn. I observe at least two distinctly different styles of using cc's. I discuss these ideas ad nauseam below for other beginners like me. I've been trying to arrive at a more concrete understanding of my own and other's investment actions, 1 - WORKING WITH A LTB&H POSITION A person working with a LTB&H position does NOT want to suffer an exercise on that position. This stock retention requirement can indeed corner the contract seller into a loss during times of strong bullish movement. We've seen exactly that pain discussed here this past week. But let's think about this seller for a minute. You will notice that even this LTB&H seller must select between differing risk-reward motivations This kind of contract writer, believing that the underlying stock is in a small trading range for at least the next month or so, sells an out-of-the-money call at a fairly low premium. The goal is to generate an extra cash flow from the the underlying security which is essentially lying idle. The downside hedge effect is almost nil in this case. The selection of a far out of the money strike is a low-risk low-return proposition and you will sleep well. Selecting strikes closer to the current stock price, especially in-the-money strikes below the current price, entails increasing risks as well as increasing potential gains. If the overriding requirement is to retain the stock position regardless of market swings, then the total position must be closely monitored with the expectation that a loss might be incurred while attempting to close the open contract in an unfavorable situation. These riskier strikes are the ones selected by people who, understanding the risks, are prepared to monitor and close a position if opportunity knocks or if the wolf is suddenly knocking down the door. This person, however, will be hamstrung into a probable loss situation during a period of strong upswing. Depending our your daring, your sleep habits may be altered. 2 - WORKING WITH A SELECTED POSITION On the other hand, a completely different style has been mentioned by a few posters this week. It is a very simple and very conservative strategy thoroughly discussed by McMillian. Select and buy the underlying stock while simultaneously selling an at the money or in the money contract. Then relax and let the contract expire. End of story. Sleep well. The unknown variable will be the market value of the stock. All outcomes ARE acceptable. Your yield curve from the contract is completely established as a function of stock price. The seller, having written a reasonably juicy contract, has a good downside hedge and an assured, but constrained, upside income. The seller basically does not care if the stock is exercised. The return on the position is well understood, very conservative, and completely free of the hamstring effects discussed earlier. SUMMARY OF MY RECENT STRATGIES Several of us are playing both games.. I was playing the LTB&H Game with my QCOM. I've been trying to suppress my Bullish ways and forcing myself to think BEAR. This of course, led me right straight to the in-the-money contracts. I did not think the run-up danger was a viable threat. That's a dangerous idea in the context of the LTB&H Game. I played the Selected Position Game with a block of CSCO and a block of SEBL. I received exactly the maximum predicted return on these positions and they were called from me. Naturally I felt a pang when SEBL almost doubled from my entry point but that is the decision I had made and my plan worked exactly as expected. --dfl