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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: Jennie who wrote (7640)	8/12/1998 8:54:00 PM
From: Sergio H	Read Replies (3) \| Respond to of 29382

Jennie, I don't think that you've been properly welcomed to the thread. Bienvenida Amiga. I was concerned that this thread was getting a little boring. We haven't been adding new stocks in a few weeks due to the market conditions and because the type of stocks we like to play have not been in favor. Small caps with good fundamentals and solid growth historically outperform the large caps. A lot of good stocks to pick from right now. We might even get around to a new Amigo pick one of these days. I just posted on the APCO thread about covered call writing. I've been telling Joanie to try it out for the last year or so. Since most options expire worthless, why not sell them ? From Ian's www.bizfn.com: A PRIMER by Eric J. Aafedt, CoveredCall.Com, Founder According to a recent USA Today article/, last year options traded on the four U.S. options exchanges hit a record 273 million contracts. This is an increase of over 37% from the prior year. What's going on? Simply put, a bull market. And the small guy wants a piece of it. Option investor want-to-bes are now shelling out upwards of $3,500 to attend investment seminars which are geared significantly towards option trading. Participants, after being shown the possibility of enormous gains by the purchase of a few hundred dollars worth of options, may leave the seminar believing that options are a sure way to financial freedom. These new option players have high hopes of using the inherent leverage in an option contract to propel their investment return into the stratosphere. While some of the investment strategies at these seminars may be farfetched, certain of the strategies do have sound underlying characteristics. One such sound strategy is referred to as "covered call" writing. Covered call writing was once reserved for the fund manager to add safety and income to his basket of stocks. Now, however, with the "education" of options sweeping the country, the number of covered call writers and option buyers has increased dramatically. Covered call writing is nothing more than the selling of an option contract to give the buying party the right to purchase shares of a stock you already own at pre-determined price ("strike price"). The Chicago Board Options Exchange (C.B.O.E.) in its public materials refers to covered call writing as "a more conservative strategy than outright stock ownership because the investor's downside risk is slightly offset by the premium he receives for selling the call." In a typical covered call transaction, an investor might buy 100 shares of stock in company ABC for $23 and at the same time write (or sell) a call option which gives the buyer of the call option the right to buy the ABC stock from a call writer at $25 at any time prior to the option expiring. Generally, the time frame of the option will be 1 or 2 months. The buyer must pay the covered call writer a "premium" for the right to purchase the option. In our example, we'll use a premium of $1.75. From the covered call writer's perspective, he now has 100 shares of ABC stock at a reduced cost of $21.25. The trade-off is that the covered call writer will not realize any dramatic upside price movement in the shares of ABC. That is, to the extent ABC increases above $25 at expiration of the option, the covered call writer has limited his total gain possibility to $3.75 per share over the 1 or 2 month term of the option (a 16% non-annualized return). In the event the ABC is trading at a price below the $25 strike price at the time the option expires, then the covered call writer can write another call option and further reduce his cost in the stock. Sound like easy money? Those in the know provide this cautionary advice: As with any stock investing strategy, research the company before you buy a share of stock. Ultimately, the degree of success you have writing covered calls will depend significantly on the performance of the stock selected. -------------- / USA TODAY, Money Section, Cover Story, April 9, 1998. -------------- Check out CoveredCall.Com at coveredcall.com. CoveredCall.Com was founded by a covered call writer for covered call writers.