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: holland who wrote (3285)	1/18/2002 1:08:58 PM
From: rydad	Read Replies (1) \| Respond to of 5205

Could you expand upon your suggestion to "not let the sold call be exercised, you should buy it back" I don't understand the purpose of buying it back in this case. As the stock keeps rising, when do I stop buying back? Is this because as the stock goes up, my leap goes up also? So when my leap is sold, the gain is enough to offset the stock gains? Please explain. Thanks

To: holland who wrote (3285)	1/18/2002 6:02:51 PM
From: Dan Duchardt	Respond to of 5205

holland, Example stock at $35. Buy a $25 leap and sell a $40 Call. This is one of those things that is "relative", and one really has to look at the specific stock and its volatility to make the bast choice.. $10 is about as far ITM as I think you should go on a $35 stock. For a $35 stock with a volatility of 75%, a 2003JAN25 long call and FEB40 short call the maximum theoretical gain in the first month (if the stock closes at 40) is $507. If you drop the strike on the LEAPS to 20, the maximum gain only goes up to $548, but it costs almost $300 more to open the position. My point is only that one should not get carried away trying to minimize the time premium for the LEAPS, especially in an environment where a substantial pull back is relatively likely. If the stock does retreat into the 20s, rolling the LEAPS down to 20 or lower might be attractive since the price difference between the original LEAPS and the new one will then be compressed. Dan