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

To: Uncle Frank who wrote (3645)	4/12/2002 2:57:36 PM
From: Uncle Frank	Read Replies (2) \| Respond to of 5205

Mostly uncovered now, and waiting for the next rally :-). Nancy and I closed out our April40 qcom's for a dime yesterday. We wrote the calls at the beginning of March for premiums ranging from 1.40 to 2.40. The only ccs we have left are ntap april20s. duf

To: Uncle Frank who wrote (3645)	4/12/2002 5:30:09 PM
From: FaultLine	Read Replies (1) \| Respond to of 5205

Many of us write against very long term core holdings, and don't concern ourselves overly with short term price fluctuations. We regard cc's as a method of generating income without disturbing our positions, and measure the efficacy of our approach purely in terms of net retained premiums Yeah! --fl@iwishi'dsaidthat.com EDIT: See revised Header...

To: Uncle Frank who wrote (3645)	4/12/2002 11:53:37 PM
From: Dan Duchardt	Read Replies (3) \| Respond to of 5205

duf, and everyone, We regard cc's as a method of generating income without disturbing our positions, and measure the efficacy of our approach purely in terms of net retained premiums. As a result of repeat cc sales, some of our stocks have adjusted cost bases of zero or less. I am interested in far more things than I have time to do, so I never get around to some of them. One of the things I have been thinking about lately is a comparison of a CC strategy against core holdings that many here follow, and a strategy of buying puts instead, or a combination of the two. I know we have sort of been down this road before, but I have the impression that in many cases the holding times of short calls is not all that long. People are frequently buying back their short calls at a profit long before expiration, hoping the stock will go back up so they can write calls again. Many times the buy back price is so low that it is pointless to hold the short call any longer, which, as Allen has noted, means your core stock has taken a substantial dip. The obvious advantage of selling a call over buying a put is that with the short call you collect time premium, and with the long put you pay for time premium. However, if you are not holding the short call for very long, you are really not absorbing much time premium anyway. What most seem to be doing is absorbing profits pretty much based on underlying price movement, not so much on time decay. To the extent that is true, buying a longer term put is superior to selling a covered call because the rate of change of put price with underlying increases as the underlying retreats, and if you are not holding it very long anyway, time decay is not a big issue. I have been doing very little CC writing, but I have a recent example of my own. I bought some SMH and sold APR45 calls at an average price of 1.85 on 4/9. I bought them back at .80 on 4/10, the very next day. Why? Well how much lower will I be able to buy them for, unless SMH really tanks on me. Thinking the worst may not yet have come I sold MAY42.5 the next day (4/11) for 3.20, effectively capping my exit price on SMH at 42.5 + 1.05 (profit on the APR45) + 3.20 = 46.75, barely more than I paid for the shares. If SMH drops from here, I'll buy back again, and if I am lucky I will get the SMH uncovered in a few days and then it will run up again. But all this is happening in such a short time that time decay has been irrelevant. I have simply been playing the price fluctuations. Now suppose that instead of selling the APR45 calls I had bought the MAY45 put. It would have cost around 2.35, and I could now sell it for about 3.10 with a little luck. I would not be concerned about the market dumping. In fact since this is the thing generating income for me I'd be happy to see SMH down another 5 points before it bounces. I would not be too concerned about SMH running back up to 50 or even higher before May expiration. I could sell some of SMH, or a partial lot of ITM calls if I needed to raise cash. My concern would be that SMH bounces at these levels, and then gets range bound between 44 and 47 so I never get to take a profit and the time value bleeds away. Not too likely in this market. The middle of the road approach would be to sell half the usual number of calls, and buy that many puts. I think it was you who noted once before, that's about like going short, but it's only half the number of shares, and you are not selling your core stock. I think it would be interesting if somebody here who is committed to the CC against core holdings strategy, and interested in the possibilities of put buying would just make note of a potential put buy (at least one month out) whenever they sell their calls. And then when they buy back calls (because they are getting cheap/expensive), note the price they could have sold the puts for, and if the stock keeps falling note the even better price they could sell the puts for and see how the two compare over several months. My hunch is the way this market has been bouncing around that put buying would work out pretty well. Just thinking out loud really.. FWIW. Dan