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

To: ScamSeeker who wrote (36)	7/13/1998 9:26:00 AM
From: Herm	Respond to of 355

Hi Richard, Hey, you have your brain working overtime on the possibilities. There are a few minor factors in your statements I would like to point out! 1. If the stock doesn't reach 37.5 in 2.5 months, then the profit will be 112.50 or 7.7% for 2.5 months or about 37% anualized. Yes and no! If you allowed the CCs to expire then the rate of return (unmargined, 15% margined @ 50%) would be as you indicated. Except, if a stock is going sideways and the CC premie I'm holding depreciates down to 75% to 85% of the original value ($112.5- $85 = $27 to $15) I would serious look to cover and start another round of CCs at a few month out rather than holding the CCs for the remaining time. Reason? I can make more money starting another round of CCs. Afterall, another 1 1/4 in the pocket is more than say 1/4 point of the remaining premie. Also, as the stock increases in value the premies are LARGER. Although, the percentages are about the same depending on the volatility. So, CC premies of 7% of $37 = $2.59, 7% of $40 = $2.80, 7% of $45 = $3.15. Can you see that the true rate of return annually is impossible to pinpoint but my experience leads me to believe that a rate of 40% to 60% (unmargined) can be achieved depending how aggressive you wish to be and how well you can read charts. Good enough for me! :-) 2. If the stock decides to tank on you. Then your maximum protection assumming that you can continue to write CC for 1.12 points every 2.5 months would be approx $26 for the stock. You can see how the answer to the previous question gives you more downside protection. In short, the more premie $ from you call buyer's you are holding the more working capital you have to protect yourself. I like to grab the premies and buy a load of cheap PUTs to counter price drops in the stock. That is, if I'm long on the stock and I want to ride out the downturn. As a stock is dropping and I cover the CCs I will write (anticipating further price drop) at or in the money a few months out in order to grab large premies. The call buyers are eating the price erosion. Now, keep in mind that stocks you and I just invest in seem to tank the very next day! :-) Just kidding! At the same time, I buy the PUTs (as a sideshow) as leverage to actually make money in the price decline using the call buyer's premies to pay for it. The RSI and BB indicators give you a fairly good feel for the timing of the events. The longer you own the stock the better you will become in knowing the characteristics in the trading patterns. 3. Do you think it would be advisable to also buy a Jan00 25 put to hedge your position? Well Richard, as long as I don't have to pay for it out of my pocket and it can be paid for by the CC premies it is a possibility. But, it will cost more and the whole idea is to buy CHEAP and load up and make a good return. For example, pay 1/4 to 1/2 for the PUTs and have them appreciate to 7/8s to 1 1/4s. Of course, the larger your contracts per CC the more PUTs your would need to leverage. Summary, CC premies can provide you the working capital to hedge and leverage to exploit price reversals. This allows the investor to be proactive and profitable at the same time. It's also fun!