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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: Vol who wrote (8120)	8/7/1998 8:50:00 AM
From: Herm	Respond to of 14162

Nice Lead in Vol! It just so happens I have some email related to LEAPs and CCing. You are right about the example given basically breaks even. I should not have assumed that person would know to wait for a price increase before writing CCs against the LEAPs. I'm trying to figure out how to give answers that assume the reader is aware of all the W.I.N. stages. Notice, I had to start using an acronym to reflect the body of knowledge on the subject. As I pointed out to the Online Investor editor, we are really doing more than just writing covered calls. We are packaging (trading) PUTs and CALLs around the bread and butter base of CCing. CCing is the most conservative approach of the W.I.N. method. All of the phases (W. I. N.) apply to covered calls. The PUTs, CALLs, LEAPs, are all sideshows to the big picture! Combined under W.I.N. they allow the investor to make money is ANY MARKET condition if applied appropriately. Here is the question that was asked. The reader wrote: >Herm, > >I have been writing covered calls against Leaps also. > >But my broker does not exercise the Leap to cover the call. > >Instead, if I am called, my broker leaves the leap contract in place >and sells the stock short in my account. It is up to me to exercise >the leap or buy more stock to cover this >short position. > >This has always bothered me. What if I was away and the January leap >expired? Now I am still short the stock. In any case it would >require more monitoring than automatic exercise. > >My broker is TD Greenline, by far the largest discount broker in >Canada. They also own Waterhouse and Jack white in the U.S. > >So I am sure they have considered this situation. > >Maybe I should open a U.S. account? >Could you please tell me which broker you deal with that >utomatically exercises your leap positions if called? Is this an >election" that you make to automatically exercise for this type of situation? > >Can you see any merit to being put short the stock versus simply >exercising the Leap? --------------------------------------------------------------- Dear Writer, My online broker is dljdirect.com originally called PC Financial Network (PCFN). Kinda crazy the difference! My broker pretty much indicated I did not have any choice in the matter. He indicated that it was the LEAP that provided the cover for the CCs in my account. DLJ Direct does not allow naked calls or put writing at all. I guess placing the exercised stock as a short is another way to handle it! Interesting. I would like to use your email (w/o using your name) as a topic. Shorting the stock in your account would generate some interest if the stock does pull back. Of course, that would not be the case if you are called out of the CC. So, if it continued to move up the shorted stock would be losing value and you would have to pay the difference between the CC strike price (ex. 45 strike) and the market price for the stock (say $50). At the same time, your LEAP would also be gaining in value and could be sold to recover the cost involved in the covering of the shorted stock. That would be a wash sale but does require more handling by you. Summary, you have more personal control but more responsibility for the transactions. The burden of the process is on you! One comment about the danger of allowing LEAPs to expire. Basically, you might be better off CCing and holding onto the LEAP for only half of the life (time value) of the LEAP. That way you avoid the ever increasing time erosion which starts to kick in about half way into the LEAP. If the market turns downward on you anytime after that point, your LEAP will lose residual value much faster and your CCs will not generate as much premies from the CCs. Dump the LEAP and pick up another one and start the process all over again! You will get more profit that way when you do dump the LEAP. Thanks for your interesting situation! Herm