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

To: Seeker of Truth who wrote (851)	5/31/2001 6:14:26 AM
From: the dodger	Respond to of 5205

"I'd like to add one more point, though. Of course we want to hold a stock forever, as long as the fundamentals look good, but IMHO we must sell if the price gets unreasonably high." I have no qualms with that -- (and that's mainly why I read this thread). If I feel that a stock's price has gotten too far ahead of itself in relation to its future ability to generate earnings, I will write an ITM covered call to "capture" that excessive market valuation -- normally with a three to six month time horizon, using what I consider the current "fair value" as the strike price. Then -- if my assumptions were correct -- and a pullback does occur, my long-term position remains intact, and I get a little new $$$ to re-invest. Another nice benefit about using this approach -- normally, there's a bit of a premium in the covered-call -- which help offset the inevitable taxes that become due. I often use the mirror-opposite approach in establishing a position. If a stock I own -- or want to own -- appears to excessively under-valued, I sell a put at what I consider "fair value". I've found that using this technique smooths out the roller-coaster ride the market often tries to take you on. td