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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: Caroline who wrote (7573)	6/10/1998 11:55:00 AM
From: Douglas Webb	Read Replies (1) \| Respond to of 14162

Looks like a wash, I need help seeing the upside. Recovery Spread Position Own 500 shares of IFMX Buy 5 x Jan99 $5 Call for $3 3/8 Write 10 x Jan99 $7.5 Call for $1 11/16 Analysis The Buy and Write are a wash, before commissions. That means your maximum risk is just the commissions, since you haven't put up any additional money to open the position, and you already owned the 500 shares of IFMX which are covering half the calls you just wrote. At expiration, IFMX could be below $5, between $5 and $7.5, or over $7.5 Below $5 Both the long and short options expire worthless. You still own IFMX, but you've lost the commissions you paid to open the spread. Between $5 and $7.5 The short options expire worthless. You still own the IFMX shares, and you also own the long calls which have some intrinsic value. You can exercise them to buy more IFMX at $5, or you can sell the calls for (IFMX price - $5). Your gain on the spread is 500 x (IFMX price - $5) either way. Over $7.5 All the calls are in the money; the long calls have more intrinsic value than the short calls, because they're further in the money. You can sell the long calls and use the proceeds to buy back the short calls. For example, if IFMX is at $9, the long calls will be worth $4, and the short calls will be worth $1.50. After closing both you'll be left with 500 x $4 - 1000 x $1.50, or $500. You'll also own $4500 worth of IFMX stock. You can also let yourself be assigned on the short calls. In that case, half will be covered by your long options: 500 x ($7.5 - $5) = $1250. The other half will be covered by your stock: 500 x ($7.5 - netcost). If your netcost was $6, the profit the first way is $500 + ($4500-$3000) = $2000. The profit the second way is $1250 + $750 = $2000. Either way gives you the same overall profit, but the commissions are different, and if your netcost is higher than the short call strike, you'll end up with a paper loss in one case and a realized loss in the other. Doug.