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

To: garnett50 who wrote (1387)	7/10/2001 11:36:19 AM
From: Dan Duchardt	Respond to of 5205

garnett50, 1.) why are options listed at CBOE usually 2.50 to 5.00 apart? Is there a way to sell a call at an in-between strike price? The strike prices available are an industry standard, starting at 5.00 with 2.50 increments up to 25.00 or 30.00 and 5.00 thereafter. You will often see 2.50 increments above 30, but that is usually the result of a stock split which results in all strike prices being reduced in proportion to the split ratio. Less common are prices that do not fit the 2.50 pattern resulting from less common split ratios like 3:2; in this case all the original strikes are multiplied by 2/3, rounded off to nearest 1/8 (decimal pricing may have changed the round off- not sure). You can simulate other strikes to some degree by using a mix of the strikes available. For example, instead of selling 10 strike 50 or 10 strike 55, you could sell 5 of each, or any other mix to approximate increments of 0.50. Of course it is not exactly the same as selling one in-between strike, but it's close. At expiration time, you might get called out of part of the underlying instead of all or nothing. Commissions may discourage you from doing this, depending on the sizes you trade and which broker you use. Question though is this: why not have a GE, or IBM, or At&T as your underlying? is it too boring to own those, or is it the lack of volatility which reduces the premium and chases folks toward hi-tech issues? There is no reason not to use dinosaur stocks for options trading. The premiums are lower because of the reduced volatility, but the stability of the stocks makes the whole thing a bit less hectic. It's just a matter of personal preference. Dan

To: garnett50 who wrote (1387)	7/10/2001 11:36:44 AM
From: FaultLine	Read Replies (1) \| Respond to of 5205

Good morning garnett50, Welcome aboard and thanks for the compliments. As time permits, try reading the first several hundred posts -- the ones from April and May -- those dealt with everyone's burning issues. Now for your questions: 1.) why are options listed at CBOE usually 2.50 to 5.00 apart? Is there a way to sell a call at an in-between strike price? Listed option exchanges have standardized the terms of options contracts: type (put/call), underlying stock name, expiration date, and strike (or striking) price. The strike prices are generally 5 points apart for stocks under $50 per share, 10 points apart up to $200 per share, and 20 points above $200. These rules have some play, many more volatile stocks will have 5 point steps even above $50 and many lower-priced or volatile issues will have 2.5 point increments. To my knowledge there is no mechanism for selling/buying at any price not listed although stock option trading programs will normalize the strike prices between stocks to force the same internals by calculating synthetic strike prices for the sake of uniformity in comparison. 2.) most of the stocks discussed here are tech stocks, particularly QCOM, (which is very puzzling since most people I know lost their shirts on it last year.....)Question though is this: why not have a GE, or IBM, or At&T as your underlying? is it too boring to own those, or is it the lack of volatility which reduces the premium and chases folks toward hi-tech issues? Good question. For the past two years I've generally been interested in what we call the Gorilla and King-type stocks. Uncle Frank and I were discussing how the increasing number of covered call discussions on the G&K boards (i.e. NTAP, SEBL, QCOM, CREE, CSCO, and several others) seemed "off topic" to many posters on these threads. As these stocks have bumped along in various trading ranges for the past several quarters, many of the LTB&H stockholders have become interested in using their (often substantial) positions to generate monthly income by writing covered calls. UF suggested that a tech-stock thread catering to this group of discussants would serve a useful function, a prediction which has proven to be well founded. Thus you can see why the discussions have gravitated toward these particular companies. Well, I've outlined the background -- now perhaps someone else would like to make comments about the some of the specific reasons we do or do not hold/discuss particular stocks. Again, welcome, and I hope you bookmark us for your daily consideration. Cheers, --ken/dfl

To: garnett50 who wrote (1387)	7/10/2001 11:37:44 AM
From: Stock Farmer	Respond to of 5205

Hi Garnett50 - two useful questions. Listed options are sold at strike prices. They are what they are and you can't sell in between. I suppose if you were a sophisticated player you could take your options private... but CBOE sets the strike prices for listed options. The interval between strikes depends on the price of the underlying and the volatility. I bet BRK would have strike prices separated by several hundred dollars. As to why the folks here use tech stocks, well, it's what they had in their baskets of stocks. The concept of "covered call" implies an underlying. One could go out and get one, or one could use what one has. When sitting on a pile of trashed tech and unwilling to sell, one thing people can do is write calls on their holdings. Certainly is less boring than watching portfolio value flounder and flatline itself. Also brings in some cash. But you are perfectly right any underlying will do. There's another great CC thread which started a set of examples based on ROST (Ross Stores). Decidedly non-tech. I suggest the first few thousand posts there were very much worthwhile. Subject 12574 Ok, not any underlying. When writing covered calls one should be neutral or mildly bullish about the underlying. It should be volatile enough that premiums after commission are worth the bother and can generate a reasonable return. It should be something you understand well and is a legitimate store of value at current price. The choice of underlying for a CC strategy is more difficult than for straight investment. Often the best CC underlying is not the best investment strategy and vice versa. John.

To: garnett50 who wrote (1387)	7/10/2001 6:40:36 PM
From: Uncle Frank	Read Replies (1) \| Respond to of 5205

>> just read the last few hundred posts here.... Don't cut corners. There's only 1300 posts on this thread; why not read them all? From the results, it's clear you came to the right place to ask your questions. I was about to respond, but checked the earlier replies first. Dan, Faultless, and John's responses covered the issues so well there was nothing to add, and they each added extra insights to boot. I hope you keep asking questions, since I will learn a lot by reading the answers you get <gg>. It's interesting to note that the 3 of them responded within 1 minute of each other. What's up with that??? duf