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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: R. Gordon who wrote (6034)	12/6/1997 3:27:00 PM
From: Greg Higgins	Respond to of 14162

R. Gordon writes: I like what you say, but if you had bought vvus at 40 in October (I didn't) and sold calls only to find it quickly slid to 22, it could be painful, especially with a lot of margin. First off, observe that there are only 4 days in 1997 when the market was open and you would have been happy owning the stock at 40 [2/19, 10/6, 10/7 and 10/10]. I'm thinking that maybe you could have gotten $5 for a far out call. The number of days you would have been happy increases to 23. By my way of thinking, that would not have been a choice I would have made. But, since you asked, let's consider VVUS now. The stock closed Friday at 22 3/8. So it costs me $12 cash to get it. The June 25 calls are selling for 4 1/8. So, if I get exercised, my annualized return is roughly ( 4 + 2 ) / 12 * 12 / 6 == 100%. My down side protection is 18 1/4. There were roughly 14 days so far this year when you would have been unhappy that you bought at that price. Is it worth it? I can't decide for you. I'm not sure I'd equate owning one of the largest banks in the world with owning a small biotech company whose sole business is generated by erectile dysfunctions. However, if I was a person who believed that this company was worth owning for the next few years, now is when I'd take the flyer. My broker is wierd and won't let us sell naked puts (which is just a covered call in disguise), but, if I liked the stock, I'd really like the Jun 22.5 puts. If I really really liked the stock and want to get something like 3000 shares for the future? Sell puts 10 Jun 22.5, 10 Jun 20's and 10 Jun 17.5. If you sell calls at 22, the stock could suddenly jump to 30 and either lock in a loss or force you to average up. If you averge up, it could slide sharply again. But it's not locking in a loss. This is not like an index call. You surrender the stock. Your sole loss is the loss of opportunity. If the stock jumps to 30, the increase in value in the stock generally offsets the decrease in value of the option. That's OK. I would never buy back the option, unless I intended to immediately resell for a higher strike price and later date (more money)and then only because I didn't want it to get called away (which sometimes will happen if I have an offsetting short in the same stock -- experimental). If I get an early exercise because of the sharp rise in the stock, oh well. I've just increased my annualized ROI (but not my actual $). Buying protective puts are great if the stock is trading high - but when it is low, they are very expensive. I don't buy the puts. If the stock isn't good enough at buy - 1st premium, I don't buy it. The way I look at it, if I hit a Oct 1987 situation and the stock drops, all stocks dropped. Buy back the call and sell a new one. Obviously, if I no longer like a stock, I should sell in the money calls and try to get exercised. (Or sell the stock.)

To: R. Gordon who wrote (6034)	12/6/1997 8:57:00 PM
From: saket chadda	Respond to of 14162

Richard, The choice, you refer to is between buying a stock and not selling CC and buying a stock and selling the CC. As in your argument, if one had bought VVUS at 40, and not sold the CC, the loss would be greater than selling the CC. The trick is in maximizing your profits and minimizing your losses. This is the basic principle of poker. CC is great if you don't expect the stock to shoot up. Personally, I am not excellent in picking stocks which shoot up more then 10-20% in a month. If I were, I probably would not be here at this time. If you do expect the stock to shoot up like crazy within the next month, then by all means don't sell the covered call. In fact load up on naked calls. CC allow for a reasonable profit month after month. I have used CC to finance buying calls and puts. Hence, the money that I make in covered calls is primarily used up in purchasing calls of maybe a different security or the same security with different terms. Best of luck Saket