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

To: Dominick who wrote (3238)	1/12/2002 1:56:21 AM
From: Uncle Frank	Read Replies (1) \| Respond to of 5205

>> On 01/07/02 I felt HAL was positioned to move up so I entered a buy/write trade at $11.14. I wasn't aware that you had that kind of faith in HAL. Based on your post, " Gambling: Bought HAL @ $11.14, sold Feb 10 calls @ $2.10." I presumed you had chosen it simply because of the generous premiums it commanded. >> With the uncertainty of HAL's precarious position due to pending asbestos suits, it's nearly 10 point drop on 12/7/01, rapidly falling price and my refusal to take a loss, I had to make a quick decision. But the story about Halliburton's problems surfaced long before you bought them on 1/7. A quick check of the news archives on Yahoo Finance yielded the following Reuters article dated January 3: Halliburton Shares Hit New Lows By Andrew Kelly HOUSTON (Reuters) - Halliburton Co. (NYSE:HAL - news) shares fell to their lowest level in almost 10 years on Thursday as investors continued to fret about the oilfield service and engineering giant's mounting asbestos liabilities. The shares closed down $1.36, or 11.08 percent, at $10.91, making Dallas-based Halliburton the fourth biggest loser in percentage terms on the New York Stock Exchange. At one point the shares touched an intraday low of $10.87, their lowest level since April 1992. Analysts said there was no obvious reason for the sudden fall in Halliburton's stock price other than continuing concerns about asbestos liabilities following a recent series of damages awards against the company totaling more than $150 million. ``We continue to tell people that this is an unquantifiable liability and in our opinion the asbestos litigation caps any potential upside. It is better to invest your dollars elsewhere within the oilfield service universe,'' said Howard Weil Labouisse analyst William Sanchez. <snip> >> Had I bought the option and sold the stock at that time my loss would have been -$100, ( $10 loss per contract times 10 contracts) commissions included.... I had to make a quick decision. Taking your "simple solution" and waiting until the close, as you did with your calculation, sure as hell wasn't one of them. My calculations were based on a single contract, Dominick. On 10 contracts, the loss at the close would have been -$60, which is for practical purposes the same as the $100 loss you would have incurred if you had sold instead of entering into the collar. Considering that you made a $11,140 gamble on a shakey stock, that's a pretty good result. >> The FEB 10 puts looked relatively cheap @ $0.80 and would give me a break-even to a small profit if HAL collapsed. Actually, once you bought the put it doesn't matter what the stock does. If it closes above $10 at expiry, the call will be exercised, the put will expire worthless, and you will net 10+2.10-.80-11.14=.16/share, or $160. If it closes at 10, both the call and the put will expire worthless and you will be left with 1,000 shares of HAL that has declined in value by 10,000-11,140=-1,140 and 2.10-.80=1.3/share, or $1,300, a gain of $160. And if the stock closes at less than 10, you will be able to put it for 10,000 for a $1,140 loss offset by 2.10-.80/share, or $1,300, a gain of $160. No matter what happens, you've locked in a gain of $160 minus commissions in return for keeping your $11,140 of capital tied up until February 16. >> I seriously doubt that the steps I performed were too advanced for this thread. No, but it sure is a pain working through all those scenarios <lol>. Roth defines the appropriate environment for writing calls as when you have mildly bullish expectations for the underlying equity. As far as I'm concerned, the flaw in your approach was covering HAL when it was clearly in trouble. I don't see where buying the put was materially superior to resigning the position. jmho, uf