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: Brad Griffin who wrote (13718)	6/20/2001 9:34:54 AM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

Brad, I'm obviously not Herm, but assuming you might want an early response I'll throw in my $.02. The numbers I see this morning look a bit more favorable than in your example, but you have correctly calculated the worst case loss for the numbers stated. The maximum possible gain is $40-(39.65-3.60+2.05) = 1.90, which is a 5% return on your net investment of $38.10. The strike 35 put in this case is not ITM. A strike 35 call would be ITM, but the corresponding put is OTM. Puts and calls are opposite wrt in/out of the money. Exercising your put at or before expiration is not the only alternative for this scenario. If you are confident the closing price is going to be in the $30 area, you can simply sell your put at a profit. You might also sell the stock and/or buy back the near worthless call depending on whether you want to carry the position forward for another round of options. Or you may just leave the position active going into expiration. Your broker no doubt has a policy regarding the exercise of options that close ITM. Make sure you know what it is, and just to be safe notify the broker of all options you want exercised. Dan

To: Brad Griffin who wrote (13718)	6/20/2001 11:42:05 AM
From: Herm	Read Replies (1) \| Respond to of 14162

Hello Brad and Dan, Ditto what Dan said. Dan has a very good working knowledge of your "hedge wrapper." Let me just add a few more points. ----------------------------------------------------------- PSFT $39.65 Sell July 40 $3.60 Buy July 35 (2.05) Net Prem = $1.55/39.65 = 3.91% return for 30 days ----------------------------------------------------------- Using your figures just as an illustration. 1. The reason for this type of spread is to protect your downside and still make limited profits on the upside. No doubt, the software and technology sector at this point is still wild and crazy. Thus, the higher volatility and higher payouts for the calls and puts. 2. PSFT is at $39. Your July 35s PUTs is OTM by $4.00+ dollars at this point. If PSFT is at $30 level three days before expiration, yes your July 35s PUTs would have some value on it and would be worth more than what you paid for it. Your break-even on the PSFT PUTs is approx. $35 strike - $2.05 cost = $32.95. When PSFT approaches $32.95 you should be thinking about your exit point to cash out. 3. The opposite would be true about the CALLs. Break-even is $40s Strike + $3.60 preemie = $43.60. As PSFT moves at or past that price you are losing out in the capital appreciation and have a fixed profit. To need to take some action if you wish to reduce the "give back." Yes, you might want to cash out the PUTs to recover as much of the remaining intrinsic and time value . 4. Finally, you astutely noticed the fact that your parent long PSFT stock is subject to appreciation and depreciation in this equation. You can imagine the difficulty trying to calculate a "true ROI" when you factor that in. Readers can review my notes on the real stated ROI%. coveredcallswins.com Thanks for your question Brad and answer Dan!