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

To: Thomas Tam who wrote (2077)	8/17/2001 9:50:53 AM
From: Andrew N. Cothran	Respond to of 5205

For a true test of your ability to time your sales and repurchases of covered calls, and also as a means of increasing your income and, perhaps, increasing the number of shares you own in a particular issue, consider the following: Say you sold QCOM August 65's a few weeks ago at 5.00. You intended to hold the position through expiration today, hoping that the stock would stay at 65 or lower so that you could keep all of your premium. Then, along came yesterday and QCOM tanked in the early hour. You felt pretty good about your earlier sale. However, you didn't expect to see the stock tank and go so low so fast. It actually declined to 60.5. The option traded as low as 10 cents. You should have known that the stock would rally from these early lows going into the close. Knowing this, you could have covered your earlier covered call sale (say at 50 cents) and waited. Or your could have DOUBLED your repurchase. That is, you could have covered your short position and then gone long the same number of contracts. If you were right in assessing the daily trading cycle, then you would have made $4.50 on your short position and would have been long the contract, doubling your money at the close when the option closed at $1.00. Or you could have covered your short position in the August 65s and then gone long at the same time in, say, the September 65s at about 2.80-3.00. If you had gone long the September 65s, you would probably still be long, waiting for the next upward movement in the stock to sell your long position and then go short again by doubling the sale. Admittedly, this technique takes a keen awareness of the daily cycle of trading in a particular issue, together with an appreciation for the maximum pain/maximum pleasure syndrome. You want to cover your short position at the point of maximum pain (on the part of buyers as you detect it) and then go long. Conversely, you want to sell your longs and sell short and at the opposite point, the point of maximum confidence, (again on the part of the buyers and again as you detect it.) This strategy really takes a fine feeling for what you are trading and a belly full of plain old fashioned guts. But when it works, it works beautifully. And when it doesn't you are a candidate for the maximum pain wing in the infirmary.