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

To: Mathemagician who wrote (1665)	7/29/2001 6:26:50 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

dM, In a tax-free account where one's only objective is to collect CC premiums, is it not a good strategy to pick a very volatile stock (that you fundamentally are OK with) and write DITM calls? This severely mitigates downside risk and you still get a pretty good time premium because of the high volatility. The key is the pretty good time premium. Since the farther ITM you go, the less time premium you collect, locking yourself into very little upside potential for the sake of a little time premium becomes less attractive than a strategy of owning a reduced size position in the underlying. Over the course of a few days from the time you establish the position, 30 shares of stock has a better risk-reward curve than 100 shares of the stock against a delta .70 call (net CC delta .30). Anyone who can do well timing entry and exit on the DITM calls can do better timing entry and exit on an appropriately smaller underlying position, and at lower transaction cost. If you hold till expiration, there is a window around the strike price where the the short call works out better, but for big moves in either direction away from the strike, a reduced long stock position is better. The size of the window of course gets bigger the more time premium you can get. If you can predict the closing price, and sell the strike to match it, selling the calls is always better. Dan