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Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: DaveHunt who wrote (7969)	3/2/1998 9:43:00 PM
From: Carl Wysocki	Respond to of 64865

Dave, I assume you are asking my strategy for writing covered calls on Sun, since that's all I believe I ever mentioned here, so I'll confine my comments to that, to keep it somewhat germane to the topic. I should point out that my portfolio is way overweighted in Sun, so my covered writes can be construed as a synthetic limit sell order-- which may not be how most participants play the game. First, if you don't already own Sun, and are considering a buy/write also consider the short put scenario as well. While the positions are identical in theory, such pesky realities as bid/ask spread can sway the decision for the retail investor. My personal preference is to write calls 3-6 months out, getting a $3-5 premium, and setting the strike price 5-15% out of the money. Over the years, I've been able to buy these back at somewhere between a half and 1 1/2 bucks, but that's not guaranteed. I try to sell at what I consider to be the top of the valuation range, so that I can get the income without giving up the stock and start the process all over again. I usually project earnings out 1 year and apply my own subjective PE range to this EPS to see where the stock could be trading 1 year from now (I may try to look 6 months out, but that's dicier, IMO). Right now, I'm using a 25% growth rate in EPS, for the next 12 months, with a 22 PE (actually, I range both the growth in EPS and the PE). If my premium + strike price is towards the upper end of my price range, I feel pretty good selling a call. If not, I don't. One thing to keep in mind is that options are not priced based on fundamentals, but I use the fundamentals to determine my sell point. I generally try to write options on the apr/jul/oct/jan expiration months, but with the full intention of covering before expiration, since Sun usually announces earnings on either the Tues or Thurs before expiration, and there's always a lot of movement prior and subsequent ot the announcement. Since one of my objectives is to minimize the downside moves, while generating a cash flow in the interim, if the stock is way in the money on expiration, I'll let it get called. If not, I will consider rolling out and up. Now, a lot of this is purely a subjective feeling on my part, but I've owned Sun for almost 11 years, so I have a "gut feel" for the stock (and, not always correct). One recent trend that's developed is the six month cycle, where Sun is weaker in odd quarters than even quarters (Wall Street hates predictability that covers 2, not 1 quarter). So, based on history, you probably have a better chance of writing apr/oct calls, and not having them called away, that jan/jul (especially July, which expire after the fiscal year closes). But, this won't last forever. I probably got a bit long winded here, so I hope this helps. Carl