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

To: William who wrote (1655)	7/29/2001 3:03:27 PM
From: RP Svoboda	Read Replies (3) \| Respond to of 5205

Thanks ARS for the response - I will go back and re-read your posts. Here is a quick synopsis of my situation and my long term strategy. I have written near term covered calls for a long time but find myself in a new situation and think that my fundamental premise is flawed. Some feedback from more experienced folks would be greatly appreciated. I have held QCOM for several years and during the run-up was margined heavily. Great for the trip up - not so hot for the way down. I received a margin call when it was trading around 110 and sold enough to ensure I received no more margin calls (thinking it was at my target valuation and therefore would not drop significantly lower.) My cost basis was extremely low so most of it was capital gains. Tax time rolled around and since the Q continued to drop I was forced to sell a much larger percentage of my holdings to cover the tax bill. This time I sold enough to cover both the 00 taxes and the Q1 01 taxes. My goal is to regain my previous position in the Q. I have been generating cash through covered calls until I have enough to buy a block at a given price. Then I write naked puts (having the cash to cover the position) until the stock is put to me. Not wanting any of my current stock called from me, I bought a block of 04 Jan 50s to write near term OTM calls against. If I get called out, I will take a portion of the cash and write puts against it until assigned and take the remaining cash and roll up a few strikes to continue to the process. My options experience is limited to covered calls, naked puts, buying calls outright, and buying bull spreads. I have never taken a diagonal (both different strike prices and different expiration dates) position before. For simplicity lets disregard commissions. While legging into a diagonal position, at first I thought that I needed to write a covered call for at least the strike plus the amount paid to purchase the long call. For example if I paid 25 to buy the 04 Jan 50s then I needed to write at least 75 to break even. However this cannot be the case because of the intrinsic value in the 04 Jan 50s. When you are using a different option to cover a call, how does the execution on the expiration date occur? Lets assume that the Q is at 63 on the Aug expiration and I have the following position. Q - 63 long 04 Jan 50 - 31 (cost basis - 25) short 01 Aug 60 - 3 (received premium - 5) Will the execution (call) be similar to the unwinding of any other spread? Will the near term short essentially be bought and the far long be essentially sold so that the profit in the position looks like the following? 31 from selling the Jan 50 (3) from buying the Aug 60 (25) from the cost of the Jan 50 5 from the premium received from the Aug 60 ----- 8 total profit This makes more sense to me since if I were to unwind the day before expiration I would receive both the intrinsic value and the time value of the 04 Jan 50s. Where I got confused was the definition of a "same day substitution" when using one option to cover another. Please help me out and verify if now I am on the right track. Thanks. Boda