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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: Greg Higgins who wrote (6468)	1/16/1998 7:19:00 PM
From: Herm	Read Replies (2) \| Respond to of 14162

Greg, You did very well covering expiration and being exercised. I would just add the early exercise due to a discount situation. CCers can usually expect early exercise when the call is trading at or below parity. A parity or "discount" situation in advance of expiration may mean that an early exercise is forthcoming. That can even happen if the discount if slight! Example, BigBang is bid at $50/share and CYA April 40 Call option is offered at @ discount of 9.75. The Call is actually worth 10 points easy. So, that is an easy 1/4 point hit for the market makers multiplied by a few thousand shares. The arbitrageur (market makers) can take advantage of this situation because they pay only a minimal commission. The mechanics is as follows: 1. Buy the CYA January 40 Calls @ 9.75. 2. Exercise the CYA Calls to buy BigBang stock @ $40/share. 3. Sell short BigBang stock @ $50. Math: Stock sale $50 Exercised @$40 ----- $10 - 9.75 (premie for calls) = .25 profit! And, you get called out of your stock! Greg said it best! Know when to fold them, and know when to hold them! If you want to keep your stock, keep an eye on the parity and expiration dates!!!! Thanks Greg!