Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: LindyBill who wrote (2095)	8/18/2001 3:17:41 PM
From: William	Respond to of 5205

Bill - I would suggest that you don't sell very deep. The more ITM you go, the less time premium you get. In looking at Fridays closing bid prices for QCOM Sept options I see: Strike Strike+Premium 65 68 60 65.50 55 63.90 50 62.80 45 62.20 40 61.80 30 61.50 Which shows that the just ITM gives the best return. Why take 61.80 if you could get 63.90. William

To: LindyBill who wrote (2095)	8/18/2001 4:31:34 PM
From: Dan Duchardt	Read Replies (2) \| Respond to of 5205

LindyBill, et al. The Question is, how deep, and will I come out ahead of just selling off my positions if the market does tank? Some thoughts on writing DITM calls: (Been down this road before, but I think this is a better way) Hopefully all of you have seen and understand how to create a profit loss curve like this one for a CC position optionmax.com The example used in this chart is rather bullish, assuming the stock might go up $5 or 28% before expiration, and doing not much worse than losing about $1.25 to $16.50 or 7%. Now lets change a couple of things to help look at the situation of writing DITM calls. Suppose the expiration date is this coming October, and you take the price of the stock to be as of this coming Monday August 20, sixty days before expiration. Then the volatility associated with the stock is 93.4%. Now assume on Monday there is a stock with this same volatility, but priced at $30 so the call being written is DITM (I'm not saying this 17.75 stock jumps to 30. I'm creating a different example.) A stock at 30 with 93.4% volatility would have OCT22.5 fairly valued at $8.90, with $1.40 time value. The profit loss curve would look like the one in the figure linked above, except that it would slide down so that the horizontal line was at $140, and left edge (stock value $4.50) was at -$1660. In what follows I will use this shifted "end game" (value at expiration) curve as reference and compare things to it rather than absolut values. As of Monday, the value of the investment will be neutral at $30, and will approach $140 as the stock price rises. As stock price falls, the value of the investment falls, slowly at first but then approaching the sloped line. You can put points on the chart below the straight lines at the following distances: 16.5 -87; $22.5 -$346;28.5 -$166; 34.5 -$83. Other points are very close to the end game lines. Let's call this the "Monday curve." Now if you can imagine a straight line that grazes (is tangent to) the curved line at the price of 30 it will cut across the rising diagonal end game at 19.25, and cut through the horizontal line at 38.20. Compared to the end game line for various points it would be: 4.5 +$1226; 10.5 +$733; 16.5 +$230; 22.5 -$268 (worst case); 28.5 -$166; 34.5 -$63; 40.5 +$39. This line is above the Monday curve at all points except where they touch at $30. As time goes by, what starts out as the Monday curve creeps up toward the end game as the time premium of the call erodes. As of September expiration (almost 5 weeks away) the curved line will be $96 above this new sloped line we just defined at a stock price of 27.50, and that's as good as it gets during the next month. At 22.5, which is presumably where we think the stock might go since we are writing a strike 22.5 call, the curved line is $33 above this straight line, almost exactly $1 per day you let this thing evolve. At 30 it is $88 above and at 34.50 it is only $40 above. Is it worth it? If you are willing to write a DITM call that you hope will get your stock taken away from you, does it make sense to risk a severe downturn, and eliminate all potential gain from a nice rise for the sake of an extra $1 to $3 a day if this volatile stock happens to completely change character and go almost nowhere? Personally, I don't think so, but that's me. If you can think through this example and still prefer to write DITM calls, then go for it. But if that straight line I drew looks more appealing it's really easy to put yourself on it. That line represents the profit-loss curve for a small outright stock position of 17 shares. Instead of selling calls to take $890 of "premium" off the table, you instead sell 83 shares of stock at $30 and take an extra $1600, off the table, or $2490, almost three times as much, leaving only $510 at risk. That $2490 you collect for selling the stock might make you money in a better place, or at least you can keep it fully protected. Why sell 83 and not 80 or 85? It happens to be the number that makes the straight line graze the Monday curve. It does that because 83 is the delta of the ITM call you might have sold instead of selling the stock, and that's the way the math works. Other than that 83 has no magic. You could just as well sell a rounder number and still get the benefit of the reduced risk while leaving some upside potential for the big move that might come. Dan

To: LindyBill who wrote (2095)	8/18/2001 5:51:16 PM
From: PoetTrader	Read Replies (1) \| Respond to of 5205

LB...I know -- once I realized the error of my thinking I realized maybe that's what I should do too. Just dump the shares I think are dead in the water and only hold the stocks I never want to part with -- Qcom, Amgn, csco, intc, emc amat, sebl (Yikes on those last three)...I think I will wait until the Fed does his thing...only thing is, I think the market will tank regardless of what he does. If he only goes .25 everyone will be mad that he didn't go further. If he goes further everyone will think "the sky is falling."...and on CNBC investors will hear it so much they too will run out like Chicken Little and shed their shares...so I'm thinking we need some good earnings/economic news next week that picks us back up...or maybe technical investors will hit whatever support they need to see to feel comfortable going back in. Either way I think it's going to be a sea of red for some time...I'm just trying to figure out how to maximize in the meantime...All best and good luck. Let us know what you decide re: Sep CC. By the way, for those who are doing buy/writes on this thread...I've found really great premiums in qlgc and nvda...however they are not for those who sleep lightly. Any others I might be missing? PoetTrader