Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Covered Calls -- Ignore unavailable to you. Want to Upgrade?

To: tchphysics who wrote (38)	5/11/1998 6:18:00 PM
From: Bill J. Landis	Read Replies (2) \| Respond to of 86

Jeffrey A. MacQuarrie wrote on May 11 1998 5:19PM EST Didn't pick up any extra calls...but the good news is that I am very safely in the money on the calls that I wrote (Jun 12.5) and can probably sleep knowing that I have comfortably captured my intended and relatively boring 25% return. Sure, 50% would have been better....but 25% is sure better than a stick in the eye. 25% Boring!?!? If that's not annualized, then I think this bull has trampelled the brains clear out of your head!! ;). Congrats. I'm not sure if I asked this here before or not, so forgive me if I have. But what do people think of writing Covered Calls in a Roth IRA? Is anyone here doing it? I'm seriously considering making CCs the cornerstone of my investment strategy (I'm just starting out here), and it seems like getting the premies and frequent capital gains tax free would be quite a big bonus!! --Bill Landis

To: tchphysics who wrote (38)	5/11/1998 8:06:00 PM
From: tchphysics	Read Replies (1) \| Respond to of 86

I'd like to recommend an excellent book to everyone. "Options for the Stock Investor" by James B. Bittman. It has several excellent chapters on covered calls among other strategies. In it I discovered a couple of new things in calculating returns with covered calls. In the past I was calculating a return by adding premium and capital gains (income) less option commissions (net income) and dividing that by the total investment cost(cost of stock plus commission). However, after reading this book, I discovered that your investment cost should also include the effect of receiving an immediate premium (assuming you do a buy-write the same day). In other words, your investment cost is also reduced by the amount of the premium you receive and this has the effect of increasing your return. For example, if you use $5000 to buy $10,000 worth of stock on margin and sell calls on that stock for a $1000 premium. You have in effect now only committed $4000 of capital to earn that $1000. Not counting commissions (just to make the calculation easier), you might think that your return is 20% (1000/5000), but according to this book, you should calculate instead as 25% {1000/(5000-1000)}. The reasoning given is that you can immediately apply that $1000 toward your margin requirement. I've adjusted my spreadsheet to account for this method. The actual formula to use if you are buying on margin is: return if called = [{(strike price + call premium - stock purch price) * #shares } - stock purch commission - stock sale commission - option commission - margin loan interest ] / (stock purch price * 1/2 (# shares) + stock purch commission - net premium earned) Probably more than most people want to know, but I found it interesting to note in the book that our returns are higher than you might think, because you are receiving funds immediately in return for your investment.