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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: Herm who wrote (6548)	1/25/1998 1:34:00 PM
From: Greg Higgins	Respond to of 14162

Herm writes: In the spreadsheet you list a stock position of 500 shares owned. You buy 5 Calls at the lower strike price and write (sell) 10 CCs for the same stock at a higher strike price. Is it possible to write (sell) 10 CCs on 500 shares without going naked on 5 contracts. In other words, will a brokerage house allow everyone to do this without an account status to be naked? Or, are the five lower strike price options considered the collateral value against the extra five CCs? Hummm, I have never tried that myself. The calls are not naked if there is a same or lower strike long call which expires on or after the date the written calls expire. This is the technique I use and have written about on this forum. Technically, options written against options bought is called a spread, and can be entered as a single order or legged into. I have never heard of anyone who could write covered calls who could not create a spread. The primary disadvantage of a spread to a buy write is that if there are not sufficiently deep strikes, it can require several months of writes to overcome the time premium of the long calls. The primary advantage is the lower cash outlay, without the use of margin.

To: Herm who wrote (6548)	1/25/1998 2:18:00 PM
From: Douglas Webb	Read Replies (2) \| Respond to of 14162

I've updated the Recovery Spread to fix a calculation error I added another line to the chart to show the results of just writing the short calls against your stock, and discovered a calculation error which was causing those peaks near the upper strike price. I see a drawback to this strategy now. On expiration day, if the stock price is lower than the long strike, both options expire; no problem. If the stock price is in between the two strikes, the long call will get exercised automatically; you can't just sell it because that would leave you uncovered on half of the short calls. So you'll lose a bit there buying back the half of the short calls. If the price is higher than the short strike, and you leave everything alone, and you get assigned, you'll probably get charged commissions for 1) exercising the long call 2) buying the stock 3) selling the stock. I guess the best closing strategy is to always buy back at least half of the short calls, and sell the long calls, on expiration day if the stock price may end up between the two strikes. Buying back the second half of short calls would be optional, if you want to protect your stock. Doug.