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

To: Jon Khymn who wrote (4217)	4/17/2004 11:59:23 PM
From: TimF	Read Replies (1) \| Respond to of 5205

RMBS goes back to 17 then I get "called out" Fisrt of all what's a "called out"? Id you don't know that you shouldn't be selling calls. When you sell a covered call you are selling someone the right to buy your shares at a specified price. If you sell covered calls against your position at a strike price of $15 then someone can take your shares away from you for $15 a share even if RMBS goes to 100. Since you paid more then $15 + the premium you got for selling the calls you would be forced out of our position at a net loss if RMBS recovers after you write the strike price 15 calls. If the stock price goes up after I write a call, My net position should be same, no? Maybe it will but that net position will be at a loss since you sold the calls when your whole net position was at a loss. You could buy back the calls so that you get to keep the stock and later sell it for more then $15 per share but the calls will be more expensive you will have to pay more to buy them back then you originally got for selling them. 1. So if RMBS closes at $25 on May 21, I'll be just about break even. 2. If the stock goes up (even if it goes to $100), I'll still break even, no gain. 3. If the stock goes down to $20, I'm losing $5/share (But this is instead of losing $8.50) All true but if the stock goes to $15 and then you sell covered calls it changes things. You reduce your loss by the premium you get for the calls but you also lock in a loss. Tim