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

To: rydad who wrote (3279)	1/17/2002 5:50:43 PM
From: Dan Duchardt	Respond to of 5205

rydad, I assume that exercising the LEAP means selling it back. No, it is not the same thing. Exercising the LEAPS calls, as with any other call options, means instructing your broker to initiate a purchase of the shares controlled by the LEAPS at the strike price. As you have figured out, that is a bad deal for you. Selling the LEAPS and buying stock to replace the shares you had called away is almost always a better choice. With a proper combination of LEAPS and near-term strikes, you can assure that you will be able to close out the positions with some gain if you are at risk of being called out. If you wait to be called out and the stock takes a dive, or if the stock pulls back while you hold the positions you could lose. Dan

To: rydad who wrote (3279)	1/17/2002 8:02:22 PM
From: BDR	Read Replies (2) \| Respond to of 5205

I am responding to points in several different posts. "Where can I find out what the delta is between each stock and its leap?" finance.lycos.com Enter a stock symbol and click on the "Greeks" choice to get Delta and all his Hellenic friends. You want the Delta of your long position to be greater than the Delta for the short position (as it should always be when you are long LEAPS and short calls) in order to protect yourself against a rapid rise in the stock. Should that happen the value of the LEAPS will increase faster than the value of the calls. You can then exit the position at a profit though that may not be what you set out to do when you entered the position. "If Juniper closed at or above $17.5 at Feb expiration, then my Leap would be sold for $ X. If Juniper closed below $17.5 at Feb expiration, then I keep my Leap." The LEAPS call doesn't expire until Jan '03 in your example so you don't have to do anything with the LEAPS at the time of February expiration. Or at the Jan '03 expiration for that matter. You bought the LEAPS so therefore you control it, unlike when you sell or write an option. The option writer, in return for the premium, gives up control to the option buyer. " Now here i am speculating: If I bought a AMAT LEAP (Call?) Jan 45 (2003) at $7.90 then sold a call for Feb 45 for $1.20. If at Feb expiration, AMAT is at $45+ I will get called. Then I can exercise my call and buy AMAT at $45 which will then get called and sold. Does this sound right? Can someone please set me straight if I am incorrect. When I think about it, something is weird... I have already paid $7.90 for the LEAP and now I must pay $45 for the stock, so getting exercised costs me $7.9 + $45 = $52.9. But then I am selling it for $45 as it gets called away, right?" As you have figured out, it usually doesn't make sense, if the short call is exercised, to provide the stock through the exercise of the LEAPS call and the reason for that is the significant time value still in the LEAPS that you could retrieve by selling it and which you would forego if you got the stock by exercising the LEAPS. If it looks like your short call is going to be exercised (you are going to have to sell stock that you don't have) you are better off avoiding the situation altogether. You can do that by paying attention close to expiration and 1) buy the call back 2) buy the call back and sell another further out either at the same strike price (rolling out) or at a higher strike (rolling up and out). You should be able to do the former and sometimes the latter for a net credit. 3) Close the position altogether by buying back the call and selling the LEAPS "With time the Leap will lose value due to the time component of the option deteriorating. (right?) Since the Leap only cost me $6 if I continue to be able to write monthly (ATM) calls for about $1.50 my cost basis would be $0 in about 4 months. (right?) I realize that this strategy is much like the basic CC strategy with stocks but I was a little confused since one is dealing with the value of the Leap rather than the actual price of the stock itself. Now, basically if the cost basis of the Leap becomes $0 in about 4 months then the remaining 8 months until the Jan 03 leap expires would be pure profit. Is this also correct?" What you do with the LEAPS depends on what your plan is. The time value of the LEAPS erodes slowly when expiration is far off and accelerates as expiration approaches. If you feel strongly that the stock will rise you might want to hold on until expiration. But if you are just using LEAPS as a "place holder" for the equity so that you can write calls you probably don't want to hold the LEAPS all that long. I own '04 LEAPS now and plan to hold them until this summer when the '05s become available. I would then sell the '04s and replace them with the '05s. That is more conservative but you could buy the '03s now and replace them with the '04s this summer. Remember that, generally speaking, you want to own options that depreciate slowly and sell options that depreciate quickly. That mean buying ITM and further out and selling OTM and near term.