Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: i-node who wrote (13694)	5/18/2001 12:01:40 PM
From: GAB1	Read Replies (3) \| Respond to of 14162

David, I've only been trading covered calls for less than a year. So I probably don't have a license either, but I have not gone a month without solid profits on net premiums. And in most cases, enough profit to pay for far-term puts to cover the downside of the underlying equity's value. That said, I'll offer my 2 cents: I think you may have gone too far out for such a close margin between your share cost and the strike price of the option. I have found that calls more than 60 days out have less downside volatility due to the longer time frame. With less downward movement, it makes it more difficult to buy the calls back and net a good premium. I have been sticking to near-term expiration options (30-60 days or less) and have been able to sell the calls and buy them back within days because the premiums seem to directly follow the underlying equity. Obviously, this does not work if the stock does nothing but go up. However, so far the stocks I own, even those that are trending up seem to do it in cycles (up 2, back 1 etc...) so I usually buy back the calls on the "back 1" day. I pay no transaction fees when I trade, so even if the premium net is less than a dollar a share, I may take it just to free up the position, secure the profit, and be able sell the calls again on the next upward movement. Your current options on AMSC are in the money now and the premiums reflect such. The good news is, AMSC has got a few more points to move before a call would occur. Also, I have never had anything called prior to the exp date. I guess if I were in your position, I would be patient for a down day and if the opportunity arose, buy the calls back, hopefully net a profit, and free up the position. Personally, I think having the opportunity to buy back and sell the calls again is worth more than the somewhat higher premiums farther-term options offer. I have mostly been doing this in the tech sector because the volatility is good. It is not unusual for me to be able to sell and buy back, more than once on the same stock within a week. --Good luck

To: i-node who wrote (13694)	5/18/2001 12:04:58 PM
From: smchan	Read Replies (1) \| Respond to of 14162

David, Note that I'm an option amateur but I sure would like to take a stab at the problem. First, here's the daily chart: stockcharts.com[w,a]daclyymy[dc][pb20!b50][vc60][iUc20!Ug!Uh14,3] Are you bullish? If so, you could spend part of your in-pocket options profit on a higher call such as the July 25 or 30 and still have a small credit. I also thought you could roll out to Jan 02 calls and cover your Jul call, but I don't see those being traded for AMSC. Anyway, you're losing zone is an expiration price between the 22.5 call and whatever call you buy (25 or 30 in this example). Also note that the July's expire sooner than October, so there's a time gap as well. Are you bearish? Use those premiums to buy puts and create a hedge wrapper. The Jul 22.5's are about $2 and the Oct 22.5's are 4.00 (no volume on these today that I see). Let's see, your basis is $19. If it closes below 22.5, that's 22.50 - 19.00 = 3.50 gross profit. You already have 2.80 in hand less $4.00 if you buy those Oct 22.5 puts for a debit of $1.20. So that's $3.50-$1.20 = $2.30 profit after selling the calls and buying the puts assuming you exercise the put. If you were to be called at 22.50, I believe it's the same scenario; $2.30 profit. Basically, a 10% profit for what looks to be a no-risk situation between now and October. Personally, I'd do that and forget about it. (Actually, I'd probably trade those options in and out around the position between now and October.) Here are the delayed quotes I'm working from. Was too lazy to look up the realtime quotes. finance.yahoo.com To the experts here, please point out the errors in my analysis. :-) Thanks, Sam

To: i-node who wrote (13694)	5/21/2001 12:20:44 PM
From: Herm	Read Replies (1) \| Respond to of 14162

Hello David, Thanks for a good question and for starting up some dialog. It has been very quiet on this forum for some time now. First, the other two replies to your situation presented where good and offer a different points of view. That sure makes it educational and informative for lurkers and novices that want to learn. Thanks! Second, I want to point you and others to free resources on the topic of stock damage control, chart reading, and CCing dynamics. Third, I'm going to answer your question using chart reading as the basis for my approach to CCing and investing. It is the driving force to achieving the investment outcomes. Damage Control and Repairs The public is welcomed to download the resources at my web site at leapspreadswins.com. In particular, you should look at: a. Stock Repair Template - Excel 2000 coveredcallswins.com b. The Four Market Phases of Stocks! coveredcallswins.com c. Ten Best Bearish and Bullish Technical Indicators coveredcallswins.com Now, with that out of the way, let's review the current AMSC market conditions. AMSC 1. Since, most technical indicators take approz. 3 to 6 months to form and reveal themselves, using the weekly chart profile is the first step in doing your homework. stockcharts.com[l,a]waclyymy[df][pd20,2!b50][vc60][iLb14!Lg] 2. What I see in the chart for AMSC is a bullish movement in AMSC in the accumulation phase with overhead price resistance kicking in around $30. Why? You can see over the previous past 6 months folks that paid as much as $30 to $70 months ago while the stock nose dived to $12 to $15 range and made the new 52-week bottom. Well, what do you think those folks will do when they finally can break even again? You bet your last dollar, they will sell to get out! Now, that should have been part of your homework to ascertain the potential range of AMSC price swing. I only point this out because of the comments about selling one month out CCs or three months. Personally, I like going out three months and pulling in as much CC preemies as possible. Of course, I look at the chart to determine when and how much I expect the stock to move within the normal cycling. I use the money I collect to either protect my downside by picking up PUTs or by leveraging by buying call options as "sideshows." The repair Excel template will spell that out for you. I picked up that strategy at one of those CBOE seminars. Works like a charm. In fact, you will make more profit using their repair model than simply covering at a lost and rolling up or outward most of the time. The point is this. AMSC will stall at that $30 or so. You want to look at all of the variables before that expiration. Otherwise, you may get whipsawed if you cover at a loss now and later the stock pulls-back on profit taking. 3. As far as other technical indicators on AMSC. The upper and lower BBs are expanding showing an upward bias. The RSI is just about to approach the 70 reading. For this stock, the pattern is a sure sign of over-purchased condition and has been a sure pull-back signal. The last two times of the 70+ reading was the Internet frenzy of last year when folks lost their minds and paid for it dearly. 4. OBV is moving upwards. Meaning? Big money is moving into the stock slowly. It looks like AMSC has the potential TRO turnover to move some 10 points per month up or down. So, AMSC sure falls into the viper category as a high risk stock. Meaning? This sure influence the strike prices you use and not just the preemies being paid. There is a direct correlation between higher preemies and higher risk. Some strike prices are sucker's bets and others are easy money. Picking the strike price of your CCs was too low for this stock unless you wanted to be called out. I'm only pointing out that you need to gauge the potential volatility of stocks. The $2.80 you picked up is now your working cash in which you can buy calls as a sideshow and ride AMSC with those calls and then cash them out when AMSC stalls. Thus, it is possible for your calls to gain capital appreciation and add to the fixed profit that you are losing in the CCs over that 22.5 strike price. What you are doing is leveraging. Nothing wrong with that. A profit is a profit.