Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: JRI who wrote (109260)	3/12/1999 3:12:00 PM
From: freeus	Read Replies (2) \| Respond to of 176387

To all options interested folk: Yesterday I sold my first put. 5 contracts of DELL year 2001. Why would someone pay me $17 a share to promise to buy his/her DELL at 50 in Jan 2001??? If you thought DELL would still be only 50 in 2001 why would you want to own it? I dont understand. But the money will help me buy another 100 shares of AOL so I'm happy. "How to get more out of profitable covered calls" IBD Tuesday March 9, 1999. by Richard N. Croft I dont think I'll proofread so forgive spelling errors. Successful call writing always leaves you a little bit envious. Sure, you get a decent return with some downside protection. But that comes at the cost of giving up some big gains. Take Dell Computer, for instance. In January 1998, Dell was trading at 21 3/4 (taking into account two stock splits last year). If you bought the stock at that price and sold a January 1999 22 1/2 call at 4/3/4 per share, your return if called away would be 32.3% That turned out to be better than the S&P's 500's return- and with less risk. By midyear, with Dell trading in the high 60's, there wasn't much chance of losing your initial investment. On Oct. 8, the bear market's bottom, Dell never dropped lower than 40. The Dell covered write was never in trouble because the covered writer had agreed to sell at 22 1/2 per share.(?isnt this wrong?F) Still, a trade that looked pretty good on paper might have left many investors questioning the merits of covered-call writing. When the dust settled, Dell was called away in January 1999 at 22 1/2 per share.At the time, Dell was trading near 83. Thats a risk when selling covered calls. You end up losing the best performing stocks in your portfolio- and many times at half their value when the options are exercised. But there are follow-up strategies that can enhance returns on profitable covered calls. One of the most common is the bull-put spread. A bull-put spread requires the sale of a put with a higher strike price and the purchase of a put with a lower strike price. The position is established with a net credit and does require margin.However, if the original covered write was paid for in full, its unlikely you will need to invest additional capital. Let's consider an example. Suppose you bought Cisco Systems at 65 last fall and sold an April 70 call at 5. On 100 shares the total cost for this trade is $6000. ($6500 for the stock purchase less $500 in option premium.) In this case you have agreed to sell lCisco at 70 in April, which if called away would return 16.6%. Of course the stock closed last week near 100 per share, some 30 poiknts above the strike price of the short call. However, if you buy back the call you risk being whipsawed-that is you buy the call back and the stock tanks shortly thereafter. Moreover, you give up a substantial percentage of your potential return from the original covered call. To cose out the covered write, you have to buy the call option (at the current offered price) and sell the stock (at the bid price) which would shave 2% to 4% from the overall return in this position. In most cases, you are better off letting the stock be called away in April. More on the next post. Freeus