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

To: Uncle Frank who wrote (210)	4/24/2001 4:24:28 PM
From: BDR	Read Replies (1) \| Respond to of 5205

<<In such calculations think it reasonable to use the price of the underlying at the time of the sale as my "cost basis".>> I am using the stock price on the day I write the call to calculate my return. It doesn't matter what my historical cost is except for tax purposes. I may have bought at 30 but, if the market is telling me that today I can only get 20, I have to decide whether to stay long that stock at 20, sell and take my 20 elsewhere or use the stock to create a different type of investment, a covered call. If I write a call at 10 then suddenly my cash balance increases by 10 X #shares held. I have less invested in the covered call position than I did in the long position. Less invested means I have reduced my risk. Of course, I also have reduced the potential gain as would be expected. The 100% that you could earn is arrived at assuming the stock is called away. That should not be confused with what you will earn. Tables or graphs of the returns at expiration assuming various stock prices are helpful to me in visualizing the risk/reward relationship. If one is just writing calls for income one might not feel the need to do the calculation, but, since I am capping my return, I like to know how much I am limiting my gains by doing so and compare that to my expectations for the stock over the same time interval.