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

To: Dan Duchardt who wrote (3135)	12/14/2001 2:45:08 PM
From: Uncle Frank	Read Replies (2) \| Respond to of 5205

To all: Covered call repair strategies are a topic of interest to many due to the current nasdaq spike. I received the following request for help from one of our lurkers, and am reposting it, with his permission, along with my response. THE CASE: I hold 300 shares of ALLY.Cost basis is 19.17 + comission =5750.33 I sold 3 Jan20 at 1.10 =330. total cost 5420.33 (3month option) The stock is now trading at 28.96 the option at 9.40 for a total on the option of 2820. I am thinking of buying back the option,and selling the jan25 for 4.70 The problem is,with my calculations I will make 200 less by rolling up. yet it doesn't seem correct to me..Am I doing this correct or is the cost of buying back the options costing me the profit..Any information would be greatly appreciated. MY RESPONSE: I'm not the sharpest knife in the options drawer, but this is the way I'd look at it. Note: I didn't get quotes on ALLY or its derivatives and am just using your numbers. Scenario 1 (letting it ride) Cost of 300 ALLY @19.17=5751 Sale of 3 jan20 cc's @1.10=330 Adjusted cost =5751-330 =5421 Revenue if called =300X20 =6000 Net return =6000-5421 =579 or 10.7% Scenario 2 (rolling it out) Cost of 300 ALLY @19.17 =5751 Sale of 3 jan20 cc's @1.10 =330 Purchase of 3 jan20 cc's @9.40 =2820 Sale of 3 jan25 cc's @4.7 =1410 Adjusted cost =5751-330+2820-1410 =6310 Revenue if called =300X25 =7500 Net return =7500-6310 =1190 or 18.9% Note that if you roll up, your adjusted cost basis will rise from the current 18.07/share to 21.03/share. The return on the jan25s would be much better, but since it's based on the assumption that ALLY will stay above 25 at expiry, the risk level would be significantly higher. At this point, your decision must be based on your understanding of the fundamentals of ALLY, and your guess about the direction of the market. Dale will be glad to see that I used his method of computing returns for the 2 scenarios, but should not construe that as capitulation :-). All you dummies please feel free to jump in and comment. duf