To: Douglas Webb who wrote (8321 ) 8/21/1998 1:21:00 PM From: Wayners Read Replies (1) | Respond to
I think covered calls are best for stocks on a strong uptrend where you aren't real good at getting short term calls of less than a month or two right with any regularity. Sell as much time value as you can. Never write in the money. Only at the money or Out of the money. In your example, you buy a stock for $20 and let it rise to $30. You then write a $20 call. If you sold the stock instead, you would earn a $10 profit, as you said. But, if you write the call, you'll get the $10 intrinsic value, and probably $2 or more time value, which drops your net cost to $8. If the stock price drops back to $20, you'll buy the call back for around $1.50, which will bring your net cost back up to $9.50, which is a somewhat more profitable position than your approach. intrepid.com . They have Robert's Online Option Pricer (free site). Anyways, back to the example, I wish you could really get $2 or more time value when a stock is at $30 and you are selling the $20 call two months out. For your run of the mill average volatility stock, a good historic volatility is about 50% per annum. Using the Black Scholes Model, you get an option price of $10 1/16, so you only get 1/16 in time value--and that's before you have to pay the spread and commissions. Okay, maybe you are messing with something with higher volatility. A stock with 100% historical volatility--about as high as you are ever going to see for a $30 stock--in fact I've never seen a stock over $12 with a historical volatility that high. But even with 100% historical volatility the option is still only worth $10 13/16--so only $13/16 in time value (again before the spread and commissions). I'd still rather just sell the stock because as soon as the stock drops more than $13/16, you could have made more by just selling the stock and buying back in at a lower price like $28.
