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

To: rydad who wrote (1994)	8/14/2001 10:31:38 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

rydad, If a GE strikes your fancy as a relatively safe vehicle, you might want to consider an "almost CC" strategy of buying a very long term (LEAPS) DITM call and selling near term ATM to next strike OTM. For example, (not necessarily the optimum choice) you can buy a GE 2004JAN20 call for 23.30. With GE at 41.85, that's only 1.45 in time premium, for over two years of time. You could sell a SEP42.5 for 1.50, or maybe a DEC45 for 2.00. There is a very realistic chance that by January 2004, you will have gotten back your entire investment of 23.30, plus, and be sitting with a call that is worth more than it is now, maybe twice as much, or even three times. Meanwhile, the 18.55 you did not spend on GE can be put someplace very safe. Suppose GE drops 50% over the next year or so. You will still have something worth nearly half what it is worth now, plus some accumulated income. You are down maybe 10 to 12, which including the 18.55 you put away is still around 27 to 29. Not pleasant, but not a devastating loss, and by then you can roll the long LEAPS out farther and keep writing those near term calls. It is safer than ordinary CC writing, and allows you to capture all the same near term premium a stock owner enjoys. I am not a fan of writing DITM calls to reduce risk on stock you think is going down. It gives you a small advantage if you can match the strike price to the future closing price of the stock, but between writing and expiration time a smaller uncovered stock position has a superior risk reward profile, and affords far superior downside protection if the stock falls below that strike. DITM removes virtually all your upside potential. The tiny time premium you collect from DITM is often not worth taking. An if you are writing against long term stock holdings in a taxable account, DITM calls have tax implications that most CC writers are trying to avoid. It's a longer topic than this paragraph, but as you look into DITM you will want to understand these issues. Dan EDIT: Grub!!