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

To: Judith Williams who wrote (151)	4/23/2001 12:10:09 AM
From: BDR	Read Replies (3) \| Respond to of 5205

<<NTAP closed on Friday at 23.55, almost double its low of 12 or so on 4/4. If NTAP closes at May expiration at 25, you pocket 1.45 for the underlying and 2.8 for the call (excluding brokerage), for 4.25 total or 18%. >> Judith- I believe the option mavens calculate the return a little differently and more favorably. The gain of 4.25 is 18% of the starting stock price of 23.55. But your yield if called away is actually about 20%, calculated thus: Initial investment = Stock price less call premium received Final return = strike price Yield = (Final - Initial)/Initial In the case you referenced the initial investment is 20.75, 23.55 out for the stock less 2.80 in for the call. When called away you receive back 25. Yield = (25 -20.75)/20.75 = 4.25/20.75 = 20.48% (dUF - if you are confused, I must have screwed up again. I would hate to find out at age 51 that I am dyslexic.) <<While the absolute time value is greater for the outlying calls, on a per-day or month by-month basis it is not. >> True, a nine month call is not equal to nine times the front month call but you need to be right more often than when you sell the nine month calls to collect all those premiums. If you are selling front month calls and you have to roll up to avoid being called away you will not get the full premium of the next month's call. If the stock drops dramatically you will have to write lower and lower strike prices to get the same premium. That will work until you have a week like last week and you either get called out and take a loss on the stock, buy back the calls at a steep loss or are caught scrambling to roll up at little or no net premium. It depends on how close you want to follow the market and how much time you have to devote to trading, especially around option expiration time. I guess there is something for everybody in options. dDR