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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (74363)	11/1/2007 8:49:17 AM
From: JDN	Respond to of 77400

If I understand your post you may have it wrong. Selling a covered call just means you POTENTIALLY sold your stock for the call price PLUS the option price. Its not considered particularly dangerous cause you own the underlying stock. The reason he says he wants to be a bear till the option date expires is I guess he doesnt want to lose his stock. I've sold covered calls now and again and I'm retired and a careful investor. Good way to make some money off your portfolio when the market is relatively stagnant. jdn

To: RetiredNow who wrote (74363)	11/1/2007 9:22:10 AM
From: Elroy	Read Replies (1) \| Respond to of 77400

You sold a covered call, which means you sold someone the option to purchase Cisco at some price. It's covered, which means you own the underlying stock. If the stock price goes up, they will call you on that option, Up to here you're OK..... which means you have to either buy the stock to sell it to them at the call price or you have to give up your stock to sell them at the call price. Sort of. If I don't want to "get called" and lose my underlying, the easiest thing to do would be to buy back the call that I sold before expiration day. In this case I would lose profits if the call at that time cost me more than the $1.18 I sold it for. However, since I also own the stock, I would make the equivalent amount of money on CSCO appreciation. So if CSCO is $35 on Nov 16th, I can buy back the call for probably $2.50, losing $1.38 on the option trade, but I've enjoyed $2.50 per share appreciation of my underlying CSCO stock since I sold the call when CSCO was $32.50, and it is now $35. So I lost some profits, but still made money on the underlying + option ownership. Either way, you lose money if the stock price goes up, unless the buyer of the covered call you sold fails to exercise their option before the expiration date. Hmmmm, the only thing I can lose from the option trade is greater profits. Follow this: I own CSCO stock. If CSCO goes up, that's good. If CSCO goes down that's bad. That part is easy. I sold a 13 day November 16th $32.50 call. So lets just look at what can happen on November 16th to keep it easy. Three scenarios 1- Good sale - CSCO share price is less than $32.50. The option doesn't get exercised, and I keep the $1.18. Selling the option was a good idea. I get the $1.18 and lose nothing. CSCO went down which is too bad, but selling the covered call reduced the pain since I keep the $1.18. 2- Good sale - CSCO share price is between $32.51 and $33.68. The option will get exercised, I will sell my CSCO stock to the option holder for $32.50 each, and I keep the $1.18 I recieved for selling the call. Selling the option was a good thing as I receive $33.68 per share ($32.50 + the call price) for my CSCO stock, which is now worth somewhere between $32.51 and $33.68. 3- Bad sale - CSCO price is above $33.68. The option will get exercised, I will sell my CSCO stock to the option holder for $32.50 each, and I keep the $1.18 I recieved for selling the call. Selling the option was a bad thing as I receive $33.68 per share ($32.50 + the call price) for my CSCO stock, which is worth more than $33.68. I made less than I would have had I not sold the call. Of the three options, none LOSE money, only #3 loses some potential profit since I sell for $33.68 a stock that is on No ov 16th worth more than $33.68. Since my cost for CSCO is ~$25, and if the option gets exercised (CSCO is above $32.50 on Nov 16th) I'll essentially be selling CSCO for $33.68, I made money, I just may make less than if I hadn't sold the call. The only way for me to really lose money on this covered call sale and CSCO ownership is if on November 16th CSCO is ~$23, and I now have $23 + $1.18 for stock that I paid $25 for. We hope that doesn't happen! But thanks for your concern :-)