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

To: Pat W. who wrote (604)	5/16/2001 6:17:45 PM
From: TimF	Read Replies (1) \| Respond to of 5205

Since this is the dummies thread, I will ask what may be a stupid question. In doing buy/writes, why be concerned with what the price of a particular stock may be at the time? It seems the premium % remains about the same. 1 - If by price you mean valuation then you might not want to consistently apply this strategy to overvalued stocks because you don't want a stock that will go down enough that you lose even after collecting the premiums. 2 - If you are just talking about the stock price then a smaller price has an advantage because you can only sell covered calls on lots of 100 stocks. If a stock had a price of 460.5 (like SDLI had at its peek) you would have to buy $46,050 worth of stock to be able to write one covered call contract. Lower prices give you more flexibility to be exactly how much you want to bet. If you have $7500 to buy stock with (includeing the premium involved in the buy write) and the stock is at $50 you can only sell one contract covering $5000 worth of stock. If you do a buy write on a stock priced at $25 you can make the $7500 bet. This is more of a concern for small investors like me then it is for someone with plenty of money to invest. Tim

To: Pat W. who wrote (604)	5/16/2001 7:53:30 PM
From: Mannie	Respond to of 5205

Pat... That is certainly not a dumb question. The Premium will remain the same, yes. But if the price of the shares drop, that drop erodes the value of that premium you received. If you buy ABC at 30, write June 30's ABC calls @ 2.75, that's a great premium. But, if at expiration ABC is selling at 25, or 23, 22, etc. at expiration, then that wasn't such a great deal. Buy/write is a great tool in a flat to rising market. In a falling market, the premiums give you some insurance to the downside, but in a market like we have had over the last 6 months, it is very difficult to keep up with the share prices as they drop. ( I have learned this lesson well.) As the market returns to an upward bias though, a buy/write approach works wonders. Scott