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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: Douglas Webb who wrote (8327)	8/21/1998 4:49:00 PM
From: Wayners	Respond to of 14162

I realize that you understand how it all works and that you really just guessed on how much the calls would go for. You've got the right idea. I used to write a lot of covered calls just starting out. Learned the hard way that writing calls on something on a downtrend rather than a dip is a great way to lose money. The problem is once the calls are written and lets say you've been perfect and sold them right at a top and you are going to get to keep the money---and the stock just keeps on dropping and you have to decide what to do. Its no longer a dip. Buy puts with the call money is one option. Buying the calls back and dumping the stock is another. With high volatility stocks that don't trend for very long, its easy to lose money writing calls. I decided that I didn't want to take that risk anymore of being stuck in a stock that just keeps going down and down in order to pick up a few dollars over several months. Heck there's plenty of stocks out there that move a few dollars a day. Why not use the same tools that you use to buy stock on support and write calls at resistance levels to simply flip stocks. With the high volatility stocks, if you get called out, my experience is that the capital gain you missed out on far exceeds the amount of the premium. When you don't get called out, the amount of the stock's drop usually far exceeds the amount of the premium received. I know where the tops and bottoms are shortly after they occur I'd rather just buy and sell at those points and lock in profits. XIRC may go to $100 or it may go to $5. If it goes to $100, you'll get called out each month and your return will be way below the guy that just bought and held it. If XIRC goes to $5, you lost a lot of money. If XIRC just stays at $25 you'll do great. Problem is XIRC volatility is too high to just stay at $25 so you'll either be upset because you could have made more just holding it or you'll be upset because you lost a lot of money when it kept on dropping back to $7 1/2 again. Once the stock price is below your basis are you willing to continue to write calls at strike prices such that if you are called out, you are called out for a loss on the stock? If you are called out at a loss are you willing to buy back into the stock again--30 days later and at a higher price to avoid wash sale rule to continue writing calls again? I've seen a lot of stocks go from $50 to $5 over the last 3 years. And the stocks that just keep going up--you'll make more on those either buying and holding or just simply flipping them when they need to be flipped rather than in accordance with the options expiration schedule. I guess in the final analysis, what you will make writing covered calls is the amount of the premiums above whatever the long term moving average of the stock is. If your timing is really good, you can far exceed this just flipping the stock outright.