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

To: fmikehugo who wrote (1317)	7/4/2001 6:03:17 PM
From: alanrs	Read Replies (1) \| Respond to of 5205

coveredcalls.com There are quite a few sites I have added since considering options, this one and the max pain site being particularily interesting for buy/write decisions. Pressed for time right now, or I would expand. ARS

To: fmikehugo who wrote (1317)	7/4/2001 7:20:57 PM
From: Stock Farmer	Respond to of 5205

fmikehugo - you are in a position to use the put entry strategy, because you don't have the underlying. Let's work the whole scenario. I've left out commission costs but you should add them in because they could be significant. First the straight forward "buy-write" CC as you suggest. Start with $50,000 Purchase 700 * QCOM @ 63.87 = ($44,709) Write 7 QCOM Jul 65 @ $2.35 = $1645 Net Cash = $6,936 Wait... Interest earned (0.2%) = 13.83 If QCOM closes over $65, you will be called. You receive $45,500 and are left with a total position of $52,449.87 minus commissions. If QCOM closes below $65 you will keep 700 shares of QCOM at whatever they are worth and hold $6,949.87 in your cash account (minus of course whatever commissions you had to pay to purchase Q in the first place). Now, contrast a cash covered put Write 7 * Jul 65 Put @ 3.60 = $2,520 Total cash position = $52,520 Wait.... Interest earned @ 0.2% = $105.04 If QCOM closes greater than 65, put expires worthless and you keep $52,625.04 minus commissions to write the puts. If QCOM closes lower than 65, you are put the shares at a cost of $45,500 to hold 700 shares at whatever they are worth, and $7,125.04 in your cash account, again, minus commissions on the write and on the assignment. Let's compare: QCOM > 65 C: Cash = 52,449.87 ; Stock = 0 P: Cash = 52,625.04 ; Stock = 0 QCOM < 65 C: Cash = 6,949.87 ; Stock = 700 P: Cash = 7,125.04 ; Stock = 700 It seems that your ending position in QCOM is identical whether it closes above $65 or below, but that your cash position in both cases is improved by $175.17 for puts versus a straight buy-write. That's about $0.25/share or an additional 11% of the call premium. Assuming you are after income and don't really really really want to own the shares, you don't need to bother reducing your profits by paying to chase the stock up if it closes above $65 at expiry... John.

To: fmikehugo who wrote (1317)	7/4/2001 7:32:04 PM
From: Jerome	Respond to of 5205

Mike..... there is plenty of talent here on SI to help you with selection of stocks for covered calls. The paid services essentially screen stocks that have high call premium attached. They all warn you to do your own fundamental and technical analysis. There are a number of outstanding option traders on SI. You might poll a half dozen of them to find out what their favorite picks are for the next three months. Not having a stock tank is probably the most important consideration for the covered call writer. You mentioned AMAT, and I would also suggest, NVLS, LRCX, MXIM, XLNX, TER, HWP LLTC, ATML, VSH, KEM. All of these are sound companies with earnings and more than a decent outlook for the next 3 to 6 months. You are on a good thread here and could ask those whose opinions you respect about stock selection. One last note: Because the next six months are so uncertain, it would be my preference to write all covered calls at the money., or slightly in the money. If AMAT is at 51 write the 50's going forward. Cover your downside or stay out of the market. Regards, Jerome

To: fmikehugo who wrote (1317)	7/5/2001 1:02:28 PM
From: adairm	Respond to of 5205

fmikehugo: I, too, want to trade buy/writes for income. I've written CCs and naked puts before, with positive results most of the time. I did get burned a little with naked puts last fall, which has caused me to be much more cautious now. So, I'm paper trading two alternative portfolios so I can get the feel of how my ideas work. (Previously, I did CCs and NPs "when it felt right", and didn't apply a consistent strategy. I'm trying to improve on that approach!) I'm watching two portfolios: One made up of 4 reasonable tech stocks: CSCO, QCOM, DELL, and TXN. I could have chosen others, but those are the ones my dart landed on. The other 'portfolio' uses QQQ as a proxy for the NASDAQ. Intended to be lower risk. I've been watching the first portfolio since the first of June, and the QQQ's since June expiration. Not long, to be sure, but I can make some observations: The Stock portfolio is more volatile, and much of the return is derived from having the stock price of the underlying shares go up. Generally speaking, I wrote 1 strike OTM calls. None of the stocks were 'called out', in fact from the time I sold them they were on average down 11% at June expiration. (I used $400K, as starting capital, and the CCs generated $14.4K of "income". The value of the stocks deteriorated to $356K in about 3 weeks! This was only partially offset by the $14.4K in options premiums received.) So far in July, the stocks have rebounded. DELL and QCOM would now be called out, but the CSCO and TXN would not. I made the assumption that I would re-sell options on the same stocks if they were held over. The value if expiration were today of the stocks is $382K. Again, I have received another $14.2K in premiums. In all, my stock is worth $382, and I've recieved $28K in premiums, so I'm ahead about $10K. Contrast that with QQQ. Mind, I've only followed QQQ closely since June expiry. (Since my capital dropped so badly during June, I wanted to research "safer" alternatives.) I bought $400K's worth of QQQ and sold 1 strike OTMs (nearly ATM) and received $24K in option premium. These are now ITM so the QQQ will be called for a small profit of $1,700. But the main difference I see is the larger premium received ($28K for the QQQ vs. $14K for the stocks) and the perceived lower risk of QQQ as opposed to trading individual stocks. For income generation purposes I have found that writing ATM (or nearly so) generates more income and provides greater downside protection. I am more concerned about preventing capital losses than losing profits by having a stock run away from me. (I have a LTBH portfolio for that!) And, I have found that paper trading is indeed an excellent way to learn how your emotions can be affected by the action of your portfolio! As long as you make your portfolio "realistic"! Best of luck, and let us know how you doing. We're all learning to play this game... Adairm