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 : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Tony B who wrote (7834)	7/6/1998 9:13:00 PM
From: Mike Fredericks	Read Replies (2) \| Respond to of 14162

As the one who made the post on the CPQ board that Tony B referenced, I'm also curious about what you all think. A poster on the CPQ board asked me why I bothered thinking about the spread (long the Jan '99 25 call, short the Jan '99 30 call) since if I'm bullish I should just go long the 25 call, and I noted the following: Using stock price ~$29, 25 call trading at 6 x 6 1/2, 30 call trading at 3 1/2 x 3 7/8: Cost of entering the spread: $300 + 2 commissions Cost of going long the 25 call: $650 + 1 commission Max Downside is also equal to the costs above Breakeven point on the long call: $30.50 (need 8.6% rise in CPQ) Breakeven point on the spread: $28.00 (this is 3.6% below current) Max Profit on the spread: $200, if CPQ is >= $30 (3.4% gain in CPQ) Percentage Profit: 66.7% Price needed to make a 66.7% profit on the long call: $35.80 This would require a 23% jump in CPQ's price. I commented that if CPQ goes up more than 23% in the next 6 months, then I'd still be happy since I'm long the stock. The spread has less risk than just going long the call, and even though I am capping my upside, this is CPQ we're talking, not YHOO, and it's not going to be trading at 200 in Jan '99. Downside is that I can lose it all - I'm writing a cc on another option, rather than on the underlying stock. Compare the spread to writing the 30 calls on the underlying stock I hold (basis at ~$29), I would probably get called out, and lock myself at a 15% gain over the next 6 months. But if CPQ does go down or stay flat, I pocket the $350 and have lowered my basis. If a 30% per year return is what I'm targeting, I can do that. Thoughts on the spread? Don't know if it's really on-topic here, but since someone else posted it here first, I don't feel so bad for bringing it up :-) -Mike