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

To: Dr. Id who wrote (1638)	7/26/2001 11:03:03 PM
From: alanrs	Respond to of 5205

I'm going to call your complicated example the Excedrine Strategy It's really not that complicated. Find a situation where you can buy a call and sell the next 2 higher strike prices for more than what the first call cost you. This leaves you cash positive with the highest strike hanging out there. I prefer to have it be a covered call, but it could be naked if one were so inclined. Punch the numbers into an option analyzer program and I think you might be startled by what it spits out in the risk/reward world. ARS

To: Dr. Id who wrote (1638)	7/27/2001 6:59:26 PM
From: Dan Duchardt	Respond to of 5205

Dr. Id, It might help to see the "complicated strategy" as two strategies. When someone does a buy-write CC they pay a debit equal to the price of the underlying, less the premium collected. There is a similar strategy that is a call debit spread (a bullish strategy) where one buys a call at one strike and sells a call at a higher strike. If the stock closes below the lower strike, the full investment is lost. If it closes above the higher strike, the maximum gain is the difference in strikes less the debit paid to open the position. In effect what ARS has done with CREE is to write a call against his underlying, and to invest most of the premium he received in a bullish call spread. The net result is that there is very little, if any downside protection, but increased profit potential if the stock rises. More can be said about risk and reward if anyone wants to hear it. Dan