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

To: i-node who wrote (881)	6/1/2001 11:20:44 AM
From: Dr. Id	Read Replies (1) \| Respond to of 5205

I believe ccs offer a safer way to speculate on the random price movements that occur on any given day -- just as the buyer of the call can. The difference is the cc writer has time on his side, where the buyer has time working against him. I wonder if this is a good argument for selling calls further out than most of us have. For the most part, we have been selling calls for the current month or the month after that. I wonder if it's a safer play for the call writer to write calls much further out (say Jan AOL calls rather than July AOL calls) with the plan to cover much sooner than January. For example, (and these numbers are not real and purely theoretical), rather than sell July 55's for 2 and try to cover for .25 if the stock drops (and risk a short term run in which you have the stock called away), you sell Jan 65's for 4 and cover when the stock dips at some point and buy them back for 2. It seems that this strategy is closer to what McMillan advocates, and would lend a lot more safety to those of us who want to sell calls and play the volatility but also want to hold onto our stock. It also would provide a better price for the stock should it get called away. It's not foolproof (and potentially ties up our money longer, but not necessarily), but it may be a safer play. Dr.Id@BWTFDIK.com

To: i-node who wrote (881)	6/1/2001 12:28:31 PM
From: Seeker of Truth	Respond to of 5205

I think it's a mistake, and one which I have often made, to think that the person on the other end of a trade is a complete idiot. Certainly this has to be so some of the time, but not necessarily most of the time. To be sure, time is on our side when we sell calls and time is against the buyer. But the buyer knows this also. Good luck on your AMD transactions. But if "a couple of dollars" rise in the price would leave it nowhere near being overpriced then there is some chance that in the duration of the call the price will advance to a level where the call buyer has a good profit. That profit is your loss of opportunity. You could have just held the stock and you'd be ahead. The question is, are such occasions more frequent than the occasion where the stock turns down and you are left happily holding onto both the stock and the call proceeds. If you are really right about the stock being nowhere near overvalued then the former case is more likely. In other words CC's are an inferior game if the stock is really undervalued. They are a juicy addition to income if we wouldn't mind selling. The latter occurs when the stock is overpriced or nearly so.