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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 (6528)	1/24/1998 4:55:00 AM
From: Greg Higgins	Read Replies (1) \| Respond to of 14162

I want to take this opportunity to explore both a difference between my spread strategies and a standard buy-write cc and some simple position maintenance strategies. I also want to thank Tony D. and Herm for their heads-up on the CREAF earnings report, I was distracted by other events elsewhere and not paying as close attention as I should have been. As I mentioned earlier on this thread, I got in on the Feb buy-write of CREAF buying at 17 3/4 and selling the 17.5 calls for 2 5/8. This was two weeks ago. Last week, I looked at my technical indicators and decided that the stock was neutral, and I bought Jul 15 calls for 6 1/8. Selling my CREAF shares a few days later for 18 1/4. Of course, now my charts are giving me much more bullish indicators, particularly the volume based indicators. If I had stayed with the buy-write I had initiated, I wouldn't have cared, because my profit potential had been defined by the parameters of the buy-write. But, I wanted to free up some cash, (which it turns out I freed up by other trades a few days later), so I bought Jul 15s. Notice that by doing this, I assumed the position of a person who no longer is willing to be assigned (Since 2 1/2 + 2 5/8 < 6 1/8). Replacing the stock with the options means I have to work harder to ensure the position remains tenable. Today I practised a little bit of account maintenance to ensure that a really strong earnings report doesn't over jeopardize the position and that it doesn't turn what was a nice play into a grind from hell. First, I closed half the position down at a loss of 5/16. I bought back half the calls. I have not sold the Jun 15's which covered them, however since these are now showing a 3/4 profit. Since I had previously sold the stock for 1/2 profit, I also went out and bought Mar 22.5 calls. I considered both the Feb and March 20 and 22.5 calls, I chose the Mar for a little extra development time, and the 22.5 for a little cheaper in price. If CREAF really does explode, the 22.5 should participate in that nicely. Not to the extent of the 20s, but still OK. To compensate for the price differential, I bought twice as many as the positions I closed out. There are two things which made this possible: One was the large premium offered by the Feb 17.5. The other is that fact that I moved quickly, before the damage was done. I wrote 17.5 calls, by the time the stock hit 19.25 I'd taken corrective action. Now, on reflection, it probably was a mistake to swap out the stock for long calls in the first place. But nobody's perfect. The important part is not letting the position get away from you without a plan. If the stock turns slightly down or stays at 20, the profits from the feb position plus the stock sell will cover the loss plus the cost of the Mar 22's and I'll still have 5 months to make up the differential with more buy writes. If the stock marches upward, with luck the 22.5s will provide me with a profit, the profit on 1/2 position of Jul 15s grows faster than the loss on the 1/2 position of covered calls and I still have time decay working for me, and I can look to write higher 22.5 calls. If the stock explodes, say 24 or 25, I can write calls against both my july and march positions. I'm still vulnerable to a severe downturn in the stock, but that's the same risk I assumed when I first took the stock position.