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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 (6119)	12/13/1997 1:45:00 AM
From: Greg Higgins	Read Replies (1) \| Respond to of 14162

Let's try this again. Consider MWD. By no means a growth stock, it should enjoy 4-10% annual returns over the next few years. We want to see if we can improve on it a bit. Suppose we have $30,000. The stock closed this week at 56. We buy 1000 shares at 56 and write 10 Jul 60 calls. We spend $30,000 for the stock, 26,000 on margin less the 4375 we can get for writing Jul 60 calls at 4 3/8. At 7% we spend roughly 875 for interest on the margin. If the stock stays at 56, our return is 4375 - 875 = 3500. Since we invested 30,000 this is 3500/30000 = 11.6 % or 20% annualized. Our downside protection is 52ish and we start getting margin calls at 34. Between 52 and 34 we pay increased margin fees. If the stock ends up between 60 and 64, our return is decreased if we want to buy back the calls. Over 64 we're probably better off letting the stock get called away. In fact, at 60, if we're assigned, we get 7500 on our 30,000 investment for a return of 25 % or 42.8% annually. Consider, on the other hand, buying 10 Jan 00 30 LEAPS Calls for 29 1/4, and writing the Jul 60's at 4 3/8. Instead of paying margin interest, we earn interest on our $750 account balance. About $17.50. Come July, if the stock is the same, say 56, we've earned 4375 + 17 = 4392 on our 30,000 for a return of 14.6 % or 25% annualized. Note that if we're assigned, we get 60 - 30 = $30 for our calls for a total return of 4492 / 30000 = 15% or 25.6% annually. If the stock falls to 30, you'll be making margin calls on the stock position. You'll buy back your calls for 3/16 and then need to add about 3000 additional dollars for margin. On the LEAPS position, you'll also buy back your calls, but you won't need to add any money. My guess is that the LEAPS would be worth about 8-10 if there were at least 18 months left. 29 - 4 - 8 = 17. With the leaps you're out $17/share, and every dollar you earn thereafter goes to you. With the stock you're out $26 / share, and the money you earn is going toward your margin fees. Now granted, give the option 2 months to expiration and drop the stock to 30 and I'll grant you that it may be near to worthless, but by then, I'd expect to have the thing fully paid for and then some. Remember, if the stock is over 40 ( a not too bad bet), this option is worth at least $10 all the way to July 21, 2000. If it's over 50, it's worth at least 20. Note that since it's $26 ITM you're only paying $4.25 time value for 2.5 years. Is it worth the risk? Hmmmm. There's the rub. I can't decide for you and you can't decide for me.