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

To: Allen Furlan who wrote (3386)	2/15/2002 6:03:26 PM
From: andydaoust	Read Replies (1) \| Respond to of 5205

Allen, I've been writing covered LEAPS calls for four years with mixed success. If the stock rises there is money left on the table. If jnpr goes back to $40 then you have lost $25 potential gain. However if it drops you are protected 45% on the downside. If it is flat you make 35%apr. Also any capital gains would be long term. This is the advantage of longer expiration, more protection and lower taxes. The annualized return is great if compared with the S&P. The question is would you buy this stock without the call premium. During the last bull I watched as some of my positions had huge gains left on the table. I also covered a lot when the market was dropping 1st Q 2001, which as it turned out, I removed protection and should have just let them expire. I also initiated stock purchases without selling calls because I felt we had to be getting close to a bottom. I wish I had sold calls now. I guess for me I need to decide how much of my portfolio should be covered and put on the trade and ignore it. Also remember the reason that the premium is high is that the stock is volatile. Means more risk. The calls I sold on csco helped but did not fully protect from losses. Summary you are sad when your stock rises 1000% and you are stuck with a lousy 35%. Could you live with that Lately I’ve been selling out of the money calls 6-9 months out hoping to keep my stock and the premium. Andy D

To: Allen Furlan who wrote (3386)	2/15/2002 6:32:43 PM
From: BDR	Respond to of 5205

I have not written LEAPS. A couple of months ago I was doing buy/writes on some tech stocks with calls about 5-6 months out and 10-20% ITM (i.e.-for large premiums). If called out the return is 15-20% and the downside protection is significant. Not sure that premiums now would be as high.

To: Allen Furlan who wrote (3386)	2/15/2002 10:12:57 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

Allen, I have one small similar position that I rolled into. In May 2001, I bought RMBS at 11.80 and sold a 2001Jan12.5 call for 4.40, net cost 7.40 with a profit potential of 5.10 or 69% in about 8 months, or about 100% annualized. At the end of July I bought back the call for 1.05, raising the net cost to 8.45. At the end of August I sold a 2003JAN7.5 call for 3.40, lowering my net cost to 5.05, with a profit potential of 2.40. This was very much a defensive move. RMBS had sunk below 5 a few days before, but had run up to 8 in 3 days. I had a choice of selling the stock at a small net loss, or positioning for an potential profit if I waited for the "inevitable" market rebound. The position now is not nearly as attractive as the original, but not bad considering the stock fell nearly 60% from my initial entry. I hope to buy back the call lower than where I sold it, but I will not regret missing the chance if the market runs up on me. However, I know more now than I knew then, and if I had an account that would permit me to do so, I would instead be buying LEAPS and selling nearer term calls, even if I wanted to take a "non-trading" view. But that's a bit removed from the conventional CC topic you raised. Even if one can or wants to only buy stock rather than LEAPS, I think the longest LEAPS are too far away for writing calls even if you don't want to be trading them. For your JNPR example, you could have written 2003JAN10 for about 1.40 less than the 2004JAN10, for a net cost of 6.90 and a profit potential of 3.10 or 45% in 11 months, nearly 50% annualized. OR for .30 less premium you could have sold the 2003JAN7.5 for a net cost of 5.80, with a profit potential of 1.70, or 29% even if the stock drops a few points. That's comparable to the annualized return from the 2004JAN10, but with a higher probability of realizing the full gain and only slightly greater risk from a catastrophic downturn. We all have different perspectives and objectives on these things, and a high probability 30+% return on something that does not even have to go up should have appeal to those with a longer term outlook. For me, something in that neighborhood that matures faster and can pay off even in the face of a downturn is even better. I don't look at a lot of these, but the ones I have checked generally look better for the first LEAPS expiration beyond about 9 months. About the time the 2005JAN begin to come along, the 2004JAN may have an advantage over the 2003JAN that is worth going after. For now I would always look for some 2003JAN with almost as much gain potential as a 2004JAN and higher probability for payoff, or a significantly better (earlier) payoff for a bit more risk. Dan