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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: Jonathan Thomas who wrote (6613)	1/29/1998 10:16:00 AM
From: Douglas Webb	Read Replies (1) \| Respond to of 14162

This may be a dumb question, but can you explain how the transactions will work in this deal. Since I am covered, but short on the 29 calls, what options do I have before expiration, and on expiration. ie....what do you do to close this position? Assuming you'll be allowed to open this position at all in your IRA... You would probably want to talk to a broker both to open and close the position. To open it, you want to tell him you're opening a spread with these two options, for a net debit of $5000 or so. You're not really interested in the actual prices you get for the options, just the overall price. This is better than trying to open the position using an automated system, because you can't buy the calls until you have the money from writing calls, and you can write the calls until you've bought the long calls to cover. Your broker can take care of this for you. Once the position is open, you would probably close it the same way; through your broker. You would have to buy back the calls you wrote (at their current ask price) and sell the calls you bought (at their current bid price.) Again, you have to sell the long calls to get the cash you need to buy the short calls, but you can't sell the long calls first because that would leave the short ones uncovered. So you have to do both at the same time, through your broker. There's another catch here. Look at these prices: C Jul 5: Bid $1.1875, Ask $1.375 C Jul 7.5: Bid $0.625, Ask $0.8125 When you open the position, you buy the Jul 5 at the ask, and sell the Jul 7.5 at the bid for a net cost of $0.75 per share, or $75 per contract. (This doesn't include the contracts which cover the stock you already own.) If you closed the position immediately, you would sell the Jul 5 at the bid, and buy the Jul 7.5 at the ask, for a net credit of $56.25 per contract, which means that you've lost $18.75 per contract to the bid/ask spread. This loss means that in the near term you probably won't be able to close the position for a profit, unless the stock makes a large move upwards. As time passes, the time value of the calls you wrote will decay somewhat faster than the calls you bought (because they're further out of the money) and this makes the spread more profitable. You won't really notice this until the last couple of weeks, though. Other things can affect the profitability too, like volatility changes, or bid/ask spread changes. These aren't really predictable, so you'll just have to keep an eye on the position, and if you see that you can close for an acceptable percentage of your maximum gain, go ahead and do it. Put the profit in your pocket and open a new spread with different options. Doug.