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

To: rydad who wrote (1963)	8/13/2001 3:05:09 PM
From: Andrew N. Cothran	Respond to of 5205

Only one indicator, rydad. I look at the current price of the stock relative to the open interest in the option. If the open interest on the closest strike appears to be increasing significantly (in this case the QCOM August 65's) and, if the stock price of QCOM over the course of several trading days seems to stick fairly close to the strike price (say from 63.00 to 67) with no apparent reason for the price to spike or trend upwards from that range, then I watch the action in the option. If the volume increases as the stock price rises above the strike price, I presume that distribution is taking place rather than short covering. I then wait for an opportunity to short the call (I only use covered calls) with the intent of making only a few quick bucks on the deal. But a few bucks for a few days is not bad pay for the effort expended. My theory is that if distribution is taking place, it is by those 'big boys' who own the stock and are looking for a few points to put in the bank (mutual funds, insurance companies, etc.) Since they want to keep the money (the call premium that they have collected for a few days to expiration) they will then, along with the MM's, manipulate the stock so that its price will remain slightly below or right at the strike price at expiration. They then bank the call premium and retain the stock. My approach is to try to find them (the big boys) while they are at work and join them for a few quick dollars of pleasure. Most of the time it works. Sometimes it doesn't. But when it doesn't it is due to some unforeseen event near expiration--say a Greenspan hail Mary the day before expiration as occurred last April. That intrusion caused a rally that found the short options holders caught on the wrong side of the trade. Then one faces the need to either buy the call back at a loss or permit the stock to be called. In retrospect, last April, one would have come out ahead if he had allowed the stock to be called rather than rush to cover. Not long thereafter, he could then have bought the stock back at a much cheaper price and pocked the difference along with his call premium. PS: At the moment, it looks as if my sale of August 65's at $2.00 was a mistake. But on the other hand, maybe not. I have seen this kind of action before. It will be interesting to watch the price of the stock and the option for the next four days. If I am wrong, then goodbye a few thousand shares that I bought at a much lower price than 65. If I am right, I keep the money and the stock. If I am wrong, I will look for an opportunity to buy the stock back, depending on circumstances.