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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: Herm who wrote (9726)	2/24/1999 2:03:00 PM
From: Maywood	Read Replies (1) \| Respond to of 14162

>I would rather own RN which pays a dividend on March 12, >1999. Annual rate of div. at current price is 7.6% return. Throw >in a few rounds of CCs and RN is an easy 25%-35% return by Dec. 1999 >with much less risk! Write calendar spreads using the RN LEAPs and >selling CCs and you can rake in 45%-55% by Dec. 1999 even without >the dividends. If you have the time, could you spell out a couple of scenarios for doing this? With that high of a dividend, you can even be guaranteed to make at least some money (assuming the dividend doesn't go down) and probably beat money market interest rates. This would be good for a very conservative investor or an investor who already has a bunch of money in stocks and/or stock funds and just wants to earn a little higher safe return on the rest of his or her savings. Here's the scenario: Buy RN at 27, write Jan01 30 CC for 4 1/4, then buy a Jan01 25 put for 5 1/8. Including the dividend for two years, so far you have: 4.10 (dividend) +4.25 (write CC) -5.125 (buy put) ------- 3.225 Best case: stock goes to 30, you get an extra 3 (30 - 27) Your 2 year return is (3.225 + 3)/27 = 23% Worst case: stock goes below 25, you lost 2 (27 - 25) Your 2 year return is (3.225 - 2)/ 27 = 4.5% So your annual return is anywhere from 2.2 - 11%. Chances are pretty good that it could beat the 4.5% money market return. What are the chances that a large cap company would lower its dividend? That would be the only risk. I noticed they are currently losing money. Can they continue to pay the dividend? Do all companies that pay dividends pay them out quarterly? Do stocks always go down by the amount of the dividend after the ex-dividend date and then slowly regain that amount, or how does that work? Of course, you would make more by not buying the put, but then you wouldn't have the downside protection and could even lose money if the stock were to move sharply lower.