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

To: JohnM who wrote (1147)	6/20/2001 11:05:36 PM
From: FaultLine	Read Replies (1) \| Respond to of 5205

JohnM, You are not going to get called -- at least not yet. When you sold the calls at 2.15 that was all time premium. The intrinsic portion of the call was 0.00 because the stock was below the strike and so there was no built-in value to the call , just a potential, a possibility that the call would eventually be more valuable. That potential is the 2.15 in time premium that you received. Today the situation has changed. The stock is quoted at about 41.40 and the call at 4.20 options.nasdaq.com So we see that we are 1.40 above the strike -- that is the intrinsic value of the call. Now, since the total premium is 4.20 and the intrinsic portion is 1.40 then the remaining time premium (the probability of future growth) is 4.20 - 1.40 = 2.80 so the possibilities for growth are considered by the buyers and sellers as increasingly optimistic. At this point the call holder could sell the call back for 4.20 and keep the profit over whatever the originally paid. Anyone selling JUN 40's today will get 2.80 in time premium as opposed to the 2.15 you received. But what if they decide to exercise today instead? It seems like they could exercise at 40 and immediately sell for 41.40 and turn a 1.40 profit...except for one small detail...they had to buy the call first. They would have paid you or someone else 2 or 3 for the call awhile back and then today they would have to pay you another 40 for the stock. Well heck, that totals up to 42 or 43 dollars which is more than the stock can be sold for on the open market. So, whenever there is still some time premium in the call, it make no sense to exercise because the exercisee will lose money. Only when there is about 1/8 of a point or less left in time premium do you need to worry about exercise. This is not to say that some misinformed call holder won't make an irrational decision to exercise -- it just is not a rational decision. They should always sell the call rather than exercise as long as time premium remains. That time premium will bounce up and down a bit but overall it will inexorably slide toward zero as we approach expiry in mid-July. I see GMST trading up and down between 35 and 45 since mid-April. I'd bet it will fall back over the next couple of weeks and you will be able to gracefully, and profitably, buy-to-close at less than the 2.15 you received. Please be understand that this is just my opinion and not advice to buy or sell anything. --dfl

To: JohnM who wrote (1147)	6/21/2001 8:57:09 AM
From: James F. Hopkins	Read Replies (1) \| Respond to of 5205

John; One option you didn't mention was buying puts.., it may not apply to this case & I don't have the time to look. However there have been several times I wrote CCs and the stock went on up to where insurance got cheap via puts. I'm still holding CNC that I bought when it was cheap..at the time I sold CCs on it ( leaps ) I said to my self if it gets called I make a double & that's good enough for me. It turned up enough that buying back the calls didn't look good to me, so I just bought put's at the same call strike. The time premo went up on the calls but fell on the puts , so I was buying a cheaper time premo. As it is I now don't worry about CNC my profit is just a little less BUT it's locked in. ---------- I used the outlook when I wrote a covered call I do so at a strike I will be happy enough to get called out at, then I don't troble myself latter with the "well I could have made more" in fact I'll give up some of the profit if the put gets cheap enough. ------------- In short If there is a "spread" or if a spread shows up , it's write the high time premo and buy the cheap one. Jim