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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: bill mccarthy who wrote (8486)	9/8/1998 8:20:00 AM
From: Herm	Respond to of 14162

Yes, Bill! Cheap means out of the money strike prices. As you know, the closer that option strike price to the current stock price the higher the premie. In the case of CPQ, that newsletter did say to buy JAN 40s PUTs which would be deep in the money at this point. But, I don't know what the strike price was back when the buy recommendation was made. My point of view is that I would prefer to buy 10 of a lower strike price than say 5 at a higher strike price. Yes, the further out of the money the more option price movement needed to grab a profit. Although, I have found that with twice as many options it takes very little price movement to score a profit. In other words, the risk/reward is attractive. Example, my SMOD PUTs transaction recently cost me 7/16s for the 12 1/2 strike price. The next strike price up was the OCT 15 @ 13/16s. Now, I only wanted to spend a certain amount of money because I wanted to short three different stocks at the time. SMOD was over $20 at that time I purchased SMOD and as of this past Friday it closed at $16 13/16s. Here is the math of what those PUTs would generate if I sold on Friday: OCT 12 1/2s @ 3/4 ask and OCT 15s @ 1 1/4s ask. Now, 10 x 3/4 (12 1/2 strike) = $750 profit ($437.50 net cost) vs. 5 x 1.25 - $625.00 ($406.25 net cost). The other factor is the commission cost are higher per contract with only 5 contracts vs. 10 contracts. Also, if I have to liquidate the position I can do so with a slightly higher cash out!