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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: Gary E who wrote (9665)	2/20/1999 1:31:00 AM
From: NateC	Read Replies (1) \| Respond to of 14162

HG...I'm no Herm...but I'll take a stab at this say you like CHRZ....and you think it's bottomed..and you'd want to own it. Let's say you buy 500 shares at its closing price today 13 3/8.....so you spend $6,687.50....and let's say you're conservative....and so no margin. You then Sell a Covered Call The March 15, It's 15/16 X 1 1/8....last trade went at $1 today....So you sell 4 contracts at $1.....and $400 goes into your account...(minus a commission..of, let's say...$30)....$370 goes into your acct. If the stock doesn't move for a month....you just made $370/$6,687.50 or 5.5% in 30 days...or about 63% annualized. If you're lucky, and CHRZ goes up...and your call gets exercised at 15...you add on another 1 5/8 divided by 13 3/8 profit...or an additional 12% (in a month)......and your return REALLY goes up

To: Gary E who wrote (9665)	2/20/1999 1:11:00 PM
From: tuck	Read Replies (1) \| Respond to of 14162

H G, Yes, you've got to buy the stock. And you're right, it's a loss. It's less of a loss than just holding the stock without CCing. You need a longer time frame. You want to pick a somewhat volatile stock so that the premiums are high. At the same time the company should be solid enough to stay in business for a while, i.e., fundamentally attractive. In your example, the stock has gone down and your paper loss on the stock is bigger than the cash you've gained by CCing. But if you hold the stock and ride it back up, still CCing for safety's sake, you harvest the time premium of the written options as the stock itself returns to your original purchase price. Granted, as the stock rises you have to buy back your written calls and then write a fresh set at the next strike price, increasing your commissions versus the "let 'em expire worthless" scenario you experienced when the stock was dropping. But if the stock has gone down for six months and then returned to the level at which you bought in another six months, you've harvested a years worth of premiums -- something like 5% per month after commissions. Annualize that, and hey, you've done pretty well. The hoped for scenario is that every time you buy and write, the stock pops up immediately, and your calls are exercised. In that case, you can make 20% in a few weeks. Unfortunately, most of us can't do that on a regular basis. So the proper way to look at CCing is as a long-term strategic plan which should allow you to make 70% per year in the long haul, without having to predict the direction of the stock, except that, in a few years, it will be somewhere near your entry price. Think of the stock as a vehicle for harvesting time premium. That, to me, is the real beauty of this strategy. It requires some long term fundamental analysis that you would probably consider investing. And some attention at expiration dates. And that's about all. Some of the more technically inclined try to time things, holding the stock for some periods without writing the calls, buying a few puts and calls as "sidewhows," etc. This is riskier, more of a trader's approach. But you can definitely increase your returns if you're good at it. Try reading about covered writes in Larry McMillan's Options as a Strategic Investment. It's a little technical, but he covers all the bases. Good Luck, Tuck

To: Gary E who wrote (9665)	2/21/1999 5:28:00 PM
From: Herm	Read Replies (3) \| Respond to of 14162

Hi HG! The other two responses in addition to mine (as the time of this writing) illustrate accurately the various was to benefit from CCing. No examples I use advocate going naked! And, I would only suggest the use of margin for rounding off shares to obtain an even lot. So, if you CC and get enough premies for an additional 66 shares, then use margin to obtain the balance of 100 shares. The more contracts per CC round the lower the commission bite and the higher the rate of return. Now, I will say this about a declining stock price and CCing. Without CCing under those conditions an investor would lose money quickly. By ccing, a person can sell deep in the money CCs and offset a major portion of the decreasing capital. In other words, CCing does offer a form of a hedge against losses. Buying PUTs while CCing could offer even more protection and perhaps a profit while the stock is dropping. I hope that provides you with enough examples! Thanks for your question HG!