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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: Joseph Francis Torti who wrote (7728)	6/22/1998 4:57:00 PM
From: Douglas Webb	Read Replies (3) \| Respond to of 14162

Can you cover call a stock that is trading higher then the strike price? Sure, you can write a call against your stock at any strike price you're willing to sell the stock for. Remember, the premium of a call option is split into two parts, the intrinsic value and the time value. When a call option is in-the-money, the intrinsic value is the amount that it's in-the-money. The time value is the rest of the premium. For an at-the-money or out-of-the-money call, the intrinsic value is 0, and the time value is the entire premium. For example, if the stock is at $93, and the $85 call has a premium of $9, the call is in-the-money by $7. Therefore, the intrinsic value is $7, and the time value is $2. When you write a call, you're selling the time value. If the call you write has intrinsic value, that just covers the loss you'll have because you're selling at the strike price, which is lower than the current market price. By the time the option expires, the time value will have gone to zero (since the option is expiring) but the intrinsic value could have gone either way, depending on how the stock's price changed. Sometimes this works in your favor, sometimes it doesn't. The best you can do when writing an in-the-money call is be sure that you're happy with selling the stock at the call's strike price. If you're happy with that, then you don't have to worry about the stock going up any further. If you're lucky, it'll drop just below the strike price and you won't get called, but you shouldn't depend on that. Doug.