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

To: arthur pritchard who wrote (111782)	3/24/1999 4:43:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

Arthur, my cost basis without calls is about $9, and in recalculating my basis just now with calls (not really fair, as I'll explain below) it actually comes out to around $4. But the calculation of return on a covered call really needs to be done on a total position basis. For example, suppose Dell is selling at $37 and you are contemplating writing a covered May $50 call, and the preimium is $2.50 (these are all made up numbers -- I have no idea what these calls are going for). You assume that your basis is reduced to $34.50 even if you had owned the stock for years. Now suppose the stock rises to $51. You assume that you liquidate the entire position so that you actually net $50. Your profit on the deal would be $15.50 on a two month investment. Suppose the price rose only to $39. Again, you assume you liquidate the entire position, so your profit would be $4.50. Now you annualize the numbers by calculating the percentage gain, adding 100%, raising the number to the 6th power (there are 6 two-month periods in a year) and subtracting 100%. The annualized gains are 826.6% (which is the maximum gain on the position) and 108.7% respectively. Notice that the maximum profit point is always at the striking price and above. So every time I write a call I create a new total position (at least intellectually). TTFN, CTC