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Strategies & Market Trends : Advanced Option Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Chuck Molinary who wrote (31)	7/10/1998 9:11:00 AM
From: Herm	Read Replies (1) \| Respond to of 355

Hi Chuck, Thanks for your input! It's unreal what everyone can learn at those CBOE freebees. It does not matter if you are a real novice or think of yourself as a pro. They have willing trainers/traders that make you feel like you barely know anything about options. They want you to be successful in options! Everyone owes it to pocketbook $$. Here is a reply on another SI forum I would like to share with the CC folks. The idea for being able to write covered calls on the actual LEAPs came to me via Steve over a year ago. The topic surfaced again a few months ago when a reader indicated he was doing the same thing. that made me curious since not much is written about it. So, I called my brokerage firm (DLJ Direct) and I asked if I could indeed write (sell) a call on a LEAP? They told me that yes I could sell a call against a LEAP. I was blown away when I verified the process since the rate of return was unreal! Basically, in this spread your LEAP(s) covers (with a lower strike price of course) the Call(s) and if/when the calls are exercised the LEAPs are exercised automatically in order to delivered it to the new buyer's account. It is electronic transfer that does not require your attention. Otherwise, the only thing you need to watch as an investor is the expiration dates. 1. If the CC calls have reached and exceeded the strike price there is no reason for you to hold on until expiration date since your profit is fixed. Example, you sell calls six months out against the LEAPs and the strike is reached in two months later. In that case, you are better off closing the positions by closing on the calls and using the LEAP appreciation to pay for the closing. Of course, as the CC calls appreciate so will the LEAPs. The difference between to two instruments is your gain. "Cashing out" would be ideal when the price of the stock is pegged in the upper BB and the RSI is high since a pull back is forthcoming. 2. You should only CC against the LEAPs for the first half of the time value of the LEAPs. So, if you own the four JAN 45 CPQ00 which expires in the year Jan. 2000, you should unload the LEAPs around the half way point in order to avoid the time value of the LEAPs working against you. The option's Delta will drop requiring more price movement in the underlying stock compared to the LEAP's value. At that point, you may have the price of the stock (intrinsic value) plus the time value working against you and the volatility magnifies the potential erosion. Your CC work horse starts to age! :-)