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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: Terry Maynard who wrote (6503)	1/19/1998 11:17:00 AM
From: Greg Higgins	Read Replies (1) \| Respond to of 14162

Terry Maynard writes: I try to be a value investor buying out-of-favor stocks and being prepared to wait 3 to 5 years for them to become fully valued. Aha! An important piece of information! If I were a value investor, I would believe that the stocks I purchased are already at or near their lows. Hence I might consider using less than deep in the money calls to implement a strategy. For example, suppose we considered Oracle Corp to be undervalued. (I don't know any under-valued stock off the top of my head, I chose Oracle because it's down a lot). The Jan 2000 20 Call is 6 1/8. It's all time value, because the call is just out of the money. On the other hand, if this were a truely undervalued stock, which should be really worth say $30, then the "true value" of this call, by my value based reckoning is $10. The Feb 20 call is selling for 1 1/8, the March 20 call is 1 3/4. By selling a call every 2 months, I pay for this call in about a year, and I would still have the better part of a year to go before time decay started kicking in seriously. I would believe I had little down side risk, and I've put out of pocket about 60% of what I would have to spend if I had bought the stock on margin. Thus, the solution changes as the understanding or perspective of the investor changes. Could you buy the "deep" in the money $15 calls? Yes. Would you perceive value the the additional 2 3/8 you had to spend? I don't know. If it were the difference between buying a 20 call and a 40 call, I would think not if you were firm in your belief that the stock was close to a bottom. On a side note, I'm not convinced that writing covered calls against a deeply distressed stock "poised" for a rebound is a good strategy. This is why I haven't joined in the VVUS buy-write. I jumped in on CREAF because I think the Asian connection should hold the stock down temporarily.