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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: Nigel_H who wrote (9968)	3/18/1999 12:50:00 PM
From: Herm	Respond to of 14162

Good question that is worth repeating. Some brokerages allow using LEAPs as the surrogate in place of that stock. That is a MAJOR advantage when writing CCs against that LEAP otherwise known as the term "calendar spread" to the option folks. Imagine, if you can afford to buy the stock for say $80/share x 100 = $8,000, you could easily afford three LEAPs (IF the stock trades LEAPs) for same $8,000 or less. That is usually the case. Thus, you control three times the value of stock and make three times more profit. Now, you last paragraph I no sure what you mean. You can sell a CC LEAP with a stock and you can write a CC against a LEAP at certain brokerages. CCers should access to both types of accounts. It's a smart idea anyway since ocassionally the phones are tied up. Hope that helps!

To: Nigel_H who wrote (9968)	3/18/1999 2:44:00 PM
From: Herm	Read Replies (1) \| Respond to of 14162

Hey Nigel, I just got some email from Rob regarding your question. He also stated that I confused him. Well, I must have screwed up that trend of thought. I hate to do that. So, let me show you what I wrote back to Rob. I reviewed your question and checked my calculations. There is a certain amount of guess work. But, I don't think the outcomes are too different as far as I can tell. Check my logic here! It may be right in front of my face. Original statements: \|A move from $8.00 to $10.00 (25%) overhead price resistance is not \|out of the question at this point for CS. I really like the CS LEAPs \|for this stock. With a upward price move pending a WINs approach \|might go as follows: \|Buy 5 to 10 CS 10 JAN01 LEAP @3 and \|wait for a price raise of say \|$9.00 before writing the \|spread selling (CCing) 10 JUL CALLs @ 1 \|3/8+. At 1 3/8s estimated value would \|generate a \|46% rate of \|return against the LEAP surrogate (cost $3) you used for the call \|($1 3/8). \|Another $2.00 (25%) on the stock if the CC is exercised and you are called out. A cool 71% in 5 \|months time! Hummmm? I \|may just sell some BTGC CCs to raise the money to do this CS play. \|Looks interesting! ANSWER: The 2001 is a LEAP CALL with a strike price of $10 @ 3. That entry is being made with the expectation of CS moving up to $10 before petering out due to the overhead resistance. So, if you are called out of your CCs against the LEAPs at $10 you only keep $3 and exercise the LEAP to deliver the actual CS stock to your CC buyer. You net $1 3/8s premie divided by $3.00 CS LEAP investment = 46% return less commissions. So, I still believe that is accurate. The point was to WAIT for a price increase before actually writing the CCs for those LEAPs. In other words, to lower your nut! If CS does pull back before the expiration date and the CS selling price is below $10, the written CS July 10s CCs would expire worthless and then you could write another round of CCs or liquidate the appreciated CS long LEAP for say $9.50 - $9.75. After all, the CS stock price was around $8.00+ when picked up the CS LEAPs @3. Today, the CS LEAP is selling for $3.50 and the July 10s @ 1 1/2. Of course, I can't predict the exact future outcomes, but, under the conditions stated above that CS LEAP would cost more than $3 and perhaps less than $4.25, so let's say $3.75. Add to the CC premie $3.75 LEAP sold-$3 paid=$.75 profit difference to add to the 1 3/8s for a total of 2 1/8s. Now, 2 1/8 divided by $3 =70.8%. Again, we are playing "what if" as an objective strategy employing some WINs rules. Yes, if you only use the CS stock the ROI numbers are totally different. That is why I'm really turned on by the LEAPs. They are a goldmine! I'm glad you are double checking and asking to justify my calculations. Sometimes, I do get sloppy and I don't want to mislead people or make major blunders. Thanks Rob!

To: Nigel_H who wrote (9968)	3/19/1999 11:24:00 AM
From: Herm	Read Replies (4) \| Respond to of 14162

OK Nigel! Our fellow lurker Rob was back to point out something I said which was not accurate. I welcome email like that! I would be the first to tell you I learn something everyday and I continue to welcome new knowledge and points of view from anyone willing taking the time to share it. We are so fortunate on this forum to have very sharp, detailed individuals that make contributions by acting as contributing members of a massive think tank for the benefit of others that don't have the time or not quite experienced yet. You never know who is going to take this forum subject and run with it. We all seek the same thing! An honest common sense profit in the stock market. Rob Wrote! \|Herm, \| \|After thinking some more last night concerning your \|response, I came up with some more questions. \| \|You wrote back: \| \|"The 2001 is a LEAP CALL with a strike price of $10 @3. That entry \|is being made with the expectation of CS moving up to \|$10 before petering out due to the overhead resistance. So, if \|you are called out of your CCs against the LEAPs at $10 you only \|keep $3 and exercise the LEAP to deliver the actual CS stock to \|your CC buyer. You net $1 3/8s premie divided by $3.00 CS LEAP \|investment = 46% return less commissions. So, I still believe that \|is accurate. The point was to WAIT for a price increase before \|actually writing the CCs for those LEAPs. In other words, to lower \|your nut!" This is where I am having a problem still! If you are called out of your July 10 calls, how does your LEAP get executed to fulfill that obligation? You stated above that you keep your $3 and exercise the LEAP. If you keep the $3, you cannot exercise the LEAP since you just sold it - you paid the $3 premium so that you could exercise the LEAP. In your scenario, you account for the return of your $3 of your Leap where I don't necessarily believe that is the case. Therefore, you paid $3 to make $1 3/8. My (Herm) Response Hummm? I have to think about what I'm trying to say. You paid $3 for the LEAP. Now, being called out of a CC against the LEAP is handled differently by brokerages. Some, will automatically exercise the LEAP and pay the CCer the strike price without your input. Others, will put a notice in your email or phone call you to advise you of the call and request delivery of the stock. So, you would give directions to liquidate the LEAP by exercising and handling over the stock. Ask them how they handle it before you begin such trading Rob. You are right about me saying "keep the 3" which is not accurate. I have it stuck in my answer. If you are called out at the $10 strike for the CCs and the LEAP is exercised to deliver the stock to your CCer. Yes, with commissions you would be in the red. 1 3/8s is the only true profit and that will be eroded by commissions and $3- $1.375=-$1 5/8s in the hole. So, the longer one waits for a price increase in the LEAP (example $10+$3) before completing the spread with the CC, the better the profit potential. Going up several strike prices above your nut ($10+$3 in this example) would yield a profit if you are called out. As you wrote, you saw with JPM how fast that LEAP could increase PROVIDED you use the BB and RSI to make your entry. You right! I said it wrong again. It is a fairly abstract conversation that not many folks could explain. You have a very good grasp of the situation Rob. That why, I need folks like you to put our heads together and nail this down to some understandable language to avoid costly mistakes. Rob Replied: \|From my recollection of previous posts (long ago), \|this is the reason why you must write the call for \|the strike price equal to your leap strike price plus \|the premium paid for the Leap-- to insure you receive \|your premium (the price you paid for the Leap) back. \|Does this make sense? If you look at another way, if \|you sell the LEAP outright (and participate in the \|increase of the LEAP) to satisfy your obligation, you \|are no longer covered in relation to the call you sold. \| \|You continued: \| \|"If CS does pull back before the expiration date and \|the CS selling \|price is below $10, the written CS July 10s CCs would \|expire \|worthless and then you could write another round of \|CCs or liquidate \|the appreciated CS long LEAP for say $9.50 - $9.75. \|After all, the \|CS stock price was around $8.00+ when picked up the \|CS LEAPs @3. \|Today, the CS LEAP is selling for $3.50 and the July \|10s @ 1 1/2. \|Of course, I can't predict the exact future outcomes, \|but, under the \|conditions stated above that CS LEAP would cost more \|than $3 and \|perhaps less than $4.25, so let's say $3.75. Add to \|the CC premie \|$3.75 LEAP sold-$3 paid=$.75 profit difference to add \|to the 1 3/8s \|for a total of 2 1/8s. Now, 2 1/8 divided by $3 \|=70.8%. Again, we \|are playing "what if" as an objective strategy \|employing some WINs rules." Rob States \|This analysis I agree with, since you are not called \|out, so you keep the $1 3/8 plus any increase in the \|value of your LEAP. You participate in that Leap \|increase since you are not obligated to use it to \|fulfill your covered call. \| \|In summary, I contend that if you get called out you \|have a negative return and if you do not, you have \|the possibility of a 70% return. \| \|Sorry for this discussion, but since I am planning on \|using this strategy, I want to make sure I understand \|it fully. Herm's Final Point Hey, I'm glad you questioned what I said! I was wrong on that part and it needed to be correct. I will now say as a rule that you need to write a CC at a strike which equals net cost of LEAP plus + LEAP strike price for the first round of CCs. Rob's Final Comments \|Also, regarding my last email to you, JPM 2001 Leaps \|were selling for around $24 at that time, and today \|they are selling for $38 - not quite the double I had \|indicated, but a healthy return none the less for \|less than a month time period! LEAP SUMMARY: When writing CCs against LEAPs 1. The CC strike price must be at least the LEAP's strike price + the cost of the LEAP! Example LEAP Strike $10 + $3 = $13.00 CC strike or more! 2. Use WINs BB and RSI to make a safe entry for an upward moving LEAP price potential. The lower the TRO the sooner you will be able to write CCs against the LEAPs. 3. Write CCs that are a few months out (say three or more). 4. Watch the time decay on the LEAPs and try not to hold onto the LEAP when it reaches the 50% remaining time point. Reason? The time value of the LEAP will start working against you and it will eat some of the ROI. You are better off to cash out the LEAP and buy a new one!