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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: RayV who wrote (9491)	1/18/1999 12:02:00 PM
From: Herm	Respond to of 14162

Sure Ray! The following numbers came from Doug's web page. So, if you are a registered user (free) you can do your own number crunching. By the way, this feature will be discussed in the CD project after we release the PowerPoint freebie that is being debugged as we speak. webbindustries.com You own a stock and decide to write CCs. The stock is at $9 and you sell the $10.00 CCs 6 months out @ $2.625. That person's breakeven is at $10+$2.625=$12.625. If you can take action by that breakeven, you can still come out ahead. After the breakeven, it is much harder to walk away without some minor loss. But, time is still in your favor. CC Call Value vs. Stock Price Mths $9 $9.5 $10.00 $10.50 $11.00 $11.5 $12.00 $12.5 $13.00 6 2.00 2.3125 2.625 2.9375 3.3125 3.625 4.00 4.375 4.75 5 1.8125 2.0625 2.375 2.6875 3.0625 3.375 3.75 4.125 4.5 4 1.5625 1.8125 2.125 2.4375 2.75 3.125 3.5 3.875 4.25 3 1.3125 1.5625 1.8125 2.125 2.5 2.8125 3.1875 3.5625 3.9375 2 0.9375 1.1875 1.5 1.8125 2.125 2.5 2.875 3.25 3.625 1 0.5625 0.8125 1.0625 1.3125 1.6875 2.0625 2.4375 2.8125 3.25 Now, the stock moves up on good news to $11.00. You look at the charts and think the stock will top out at $12.00 according to the RSI and BB. What do you do? Cover at a lost ($3.3125-$2.625=$-.69/CC)? or simply jump into a repair strategy? Buy a lower strike price call as your sideshow at $4.375 - 2.625 = $1.75 net to you. But, you now have long calls at a 7.5 strike price. If you are called out of your CCs you can exercise the long 7.5 calls. If your stock is called out at $12.00 - $10.00 = $2.00 is what you give up in capital appreciation in the original long stock. Your long calls/stock are worth much more and the profit would be around $12.00 - $7.50 = $4.50 - $1.75 (long calls)= $2.75 if you exercised the stock and cashed out! Or, turn around and write CCs. It would seem that the $2.00 loss on the long stock and the $ .75 net gain on the long calls would make my suggested repair approach more useful to a CCer trying to maintain control of the value of the position during upward gaps. If the stock stalls at any point after you buy the long calls to be defensive you are in control and in a profitable mode. If you cover at a loss CCs you are out of control of the stock and you are at more risk! I have been burned so many times with covering at a loss that I decided to take this approach. price and the