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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: tiloup who wrote (6487)	1/18/1998 1:57:00 PM
From: Greg Higgins	Read Replies (2) \| Respond to of 14162

Norman Damiani writes: I have recently closed out my dec april 50 cc for a $5.50 gain. I am looking to repeat this experience, but I am having a hard time figuring when to get in. I appreciate any comments. You don't say whether you retained your DEC stock, but I assume you have since you wrote a dec april 50 cc. The Feb 40's are a reasonable sale right now, since DEC is at the top of a channel. I believe Herm's strategies say only write calls on strikes above your net cost, so if your cost is under 40, it's a go. If I owned the stock, I'd write the 40 call regardless of the purchase price, since how are you going to get back the cost if you wait for the stock. Since it's a no dividend stock, the odds of being assigned early are almost nil. I don't own the stock, but I will note that this looks ok (not fantastical, but ok) using my diagonal time spread strategies. Buy Jan 2000 25 call for 20 1/8 sell Feb 40 call for 2 3/8. I would estimate that with the stock in the low 40's you'll be able to get 7/8 on a roll over. At that rate, you cover the cost of the strike differential (your total time premium for the LEAPS calls) in 6 - 7 months. This assumes you get 2 3/8 for Feb, and 7/8 per month each time you roll over, and that you get some slippage because of the bid-ask spread and commissions. [E.g., if come Feb expiration the stock is over 40, say 42, you buy back the Feb 40s for 2 1/4 and sell March 40s for 3 1/8 .] The higher it goes in the money, the less you get on rollover, though. Since the value of the deep in the money call will rise faster than the near term call, however, if the stock does take a big leap upward, you should still be able to get out at a net profit by buying to close the short term call and selling to close the LEAPS position. If I were looking to leg in, I'd wait to buy the LEAPS until the stock is in the lower portion if its channel when I could get them for about 18 1/8 and then sell the next front month call when the stock returns to the upper portion of the channel. In this particular case, if I were high on DEC, I doubt that I'd wait. If the stock is around 40, by the way, then the March calls will likely be priced about 3 1/4. I wouldn't sell too far out, however; since you don't get as much $$/unit time. One penultimate note, if you were really positive the stock were due for a fall, you could write the Feb 35s and get 5 5/8. Although if you were that positive, a better strategy might be to write the Feb 40 call and buy the Feb 35 put. Finally, note that this stock has a Jan 99 LEAPS 20 call available for 21 7/8. This means you pay 1 7/8 for the privilege of selling 11 calls (Feb - Dec, I'm leaving out the last month for planning purposes) on this stock. Since the first month's write is 2 3/8s, you're actually money to the good from the very beginning.

To: tiloup who wrote (6487)	1/19/1998 2:02:00 AM
From: Douglas Webb	Read Replies (1) \| Respond to of 14162

When I entered digital computers DEC, to my surprise I noticed that had I traded as suggested by the charts I would have lost $35,000. Am I reading the chart wrong, if not what companies are not suitable to this type of trading. Apparently, DEC wasn't the right company for that trading method... Here's what happened: with the basic trading method being tested right now, all trades occur at the open the day after a new bar is formed on the TLB chart. That price can be far away from the trigger price which caused the bar to be drawn, as it was for DEC in late October using the high-sensitivity two-line break chart you were looking at. I also noticed that the two-line-break chart had lots of alternating black and white bars; this indicates that the sensitivity is too high, because you're getting new bars during a trendless market. An optimal TLB chart will not have single alternating bars, just alternating trends. Another problem with the chart you were looking at was that it only covered the past 90 sessions, which isn't really enough to give a fair test of a trading method, especially if you can't use the two-line break and have to go to a lower sensitivity setting. Check out the 260 session (1 yr) 10-line break chart for DEC. Total Gain after a full year is $11875, with the deepest loss at -$2875 in Feb. With these settings, you would have played the two major trends in DEC's price last year, and profited on both. (Although the reaction time was slow on the reversal, and lots of money was given back.) webbindustries.com I'm working on trading rules which will allow trading on the day the bar is formed, instead of the day after. This should improve the reaction time quite a bit, so less money is given back on the reversals. Doug.