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

To: Andrew N. Cothran who wrote (1576)	7/21/2001 12:05:46 PM
From: FaultLine	Respond to of 5205

I put my theory to the test. If you can't lick 'em then you join them. So I sold 40 July 65 contracts (the contract with the largest open interest and nearest to the stock price) once it appeared to me that the spike pricing was nearing its end. I'm certainly looking forward to discussing this again just before next month's expiration. Really quite interesting Andrew. --ken

To: Andrew N. Cothran who wrote (1576)	7/21/2001 1:28:42 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

Andrew, It seems to me, all things being equal which they never are, to be an invariable rule that the 'powers that be' will exert every effort at their disposal (and they are many) to move a stock on expiration Friday just below that strike price which contains the largest number of open contracts. As I'm sure you are aware, you are not alone in your belief that something (if not the PTBs) tends to push stock prices near a strike price on expiration Friday. What strikes me about your comment is the focus on the strike price wtih the largest open interest. The theory of "Maximum Pain" rests on the the same basic assumption, except that it takes into consideration all open contracts at all strike prices and calculates the dollar value of those contracts as a function of closing price. You usually see it done and tabulated at the strike prices iqauto.com but the actual minimum in the dollar value can be anywhere between two strike prices. When this is the case, the tabulated values surrounding the tabulated minimum are skewed, so you can get a pretty good estimate from the table where the true dollar minimum falls. If you look at Max Pain for QCOM for July there is a fairly symmetric minimum at 60 (actual minimum slightly higher), and the open interest maximum is also at 60 (total of calls plus puts), but there is a strong peak in call open interest at 70 and put open interest at 60. The question is, can one deduce the closing price better by looking at maximum open interest of just calls, just puts, combined puts plus calls, is it the MaxPain that more often prevails, or should one be doing a MaxPain like calculation without regard to $ value by simply counting contracts that will expire worthless? I'm inclined to agree with you that the strike prices themselves tend to attract closing prices, which suggests that one should be looking near the true MaxPain point ($$ always matters) for the strike price that will maximize the number of worthless options. I did that calculation for QCOM just now and came up with 156629 for strike 60 and 151144 for strike 65. The MaxPain dollar value was only about $5M lower at 60 than at 65. So I guess that technically 60 was a "better" closing price than 65, but not be enough to overcome the recent upward momentum of the stock. It would have been interesting to see what would have happened without the Thursday rally. I'm wondering what your experience (or anyone else's) suggests about stocks that are farther away from MaxPain on expiration Friday. Is this effect strong enough to move the price past the nearest strike level in the direction of MaxPain, or is a couple of dollars all you can expect? How much does the recent stock trend matter in estimating the potential size of the move? Dan

To: Andrew N. Cothran who wrote (1576)	7/21/2001 5:00:47 PM
From: cfoe	Respond to of 5205

Andrew - I cannot claim to have thought it through with the completeness and precision you laid out. I just felt that in the current earnings and market environment, selling QCOM at $66.40 (60+X '01 eps) was a decent price, with a high prospect of being able to buy it back later at a lower price. And since it is a tax free trade, I did not have to worry about capital gains. thtd

To: Andrew N. Cothran who wrote (1576)	7/21/2001 10:35:20 PM
From: surfbaron	Read Replies (1) \| Respond to of 5205

Andrew: I'm actually thinking of another strategy. If the Q hits the 70's before earnings I might sell deep front month CC's. This in hindsight would have maximized gains over the last six months.

To: Andrew N. Cothran who wrote (1576)	7/23/2001 2:07:02 AM
From: DiB	Respond to of 5205

Andrew, I was thinking about possible exceptions, that some stocks in some months don't follow your theory, and found an example: LU in July. Closed above $7.5, with a major upward move. Apparently PTBs had different intentions with that one. May be all things weren't equal with LU, we'll find out this week (fyi it's also, like QCOM, supposed to report earnings). May be your theory works with stocks with several (at least more than one) "reachable" option prices, i.e. QCOM at $55, $60 and $65. On the other hand, LU really has only $7.5 to work with. Just thinking out loud... -DiB