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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: NateC who wrote (10285)	4/9/1999 8:27:00 PM
From: David Wright	Respond to of 14162

Roger, I ran your AOL situation into my spreadsheet, and I can't think of any reason why you wouldn't do the plan you have suggested. If you stick with the status quo, and get called out at 135, (almost a certainty), your max profit will be $4,300. If you do the plays you have suggested, and get called at 165 in May (and assume the 145 puts are worthless) you make $18,300 profit. If the stock drops all the way back to 129, you are still up $4,300 plus the put premium, which should be around $6,400, for a total of $10,700. Am I missing something here? Dave

To: NateC who wrote (10285)	4/10/1999 1:24:00 PM
From: Herm	Read Replies (2) \| Respond to of 14162

Thanks Nate for allowing us to share in your experience with this AOL situation. That is how we all learn from others. First, what the others have suggested is not wrong! All the solutions described (except just one) may result in the possible outcomes as they presented from where we are now. If the AOL situation were in my hands, here is how I would have approached it. A)You own AOL and at $129.00 sold 4 CCs for the April 135s @ 5 3/4. Comments! Personally, I don't like selling CCs only one month out! I usually go for two or more months out! You might have been able to go out three months and picked up $6.5. Yes, it's more conservative. But, 1. CCing can turn on you and you won't have time to do enough damage control or repairs to correct the situation. Viper stocks like AOL are prime examples. with a float = 681,800,000 shares and daily trading volume of around 23,600,000 shares/day recently, the turnover rate (TRO) is 28.89 Days. That's fast for such a large stock. Meaning? You have to give yourself plenty of time by going out a few months. Otherwise, you have to make quick decisions and watch the charts real close! 2. I like LARGE premies in my account when ever possible since it is working capital, reduces my margin interest, or earns me margin interest because it is same as cash in the account. 3. You have GREATER downside protection with larger CC premies so you can afford more cheap PUTs to offset drops and actually make money. The WINs approach is an entire toolshed of options. Best of all, you are using your CCer's money and not yours! Contrary to the Mr. Wade Cook school of thought, stocks don't only go up, up, and up and never down. One needs to play it more defensive when CCing fast moving stocks. From all the Cook followers I've heard from, they all lacked defensive knowledge and chart reading skills. For good reasons! You dependent are the hype of, "you need to take the next seminar" to learn that. You are not ready now! A few more lessons and you will be hot! 4. I may CCing three months out, but, that does not mean I WILL HOLD onto that CC for the three months time! I can cover at any time for less cost than collected in the CC premies. B) Here is some important math called your breakeven point or B.E.! AOL at $129.00 + $5 3/4 CC premie = $134.75 B.E. So, AOL at $134 B.E. should have been your que to immediately purchased 4 AOL long sideshow calls. Why? DAMAGE CONTROL! With AOL gapping pass $134 your breakeven on the CCs was ticking away from you. You lost control of the CC position, Nate. Using the CCer's premies to buy your sideshow CALLs would have provided the earning potential to say in the game. That is, without wasting money those sideshow calls would be worth more and you would be keeping up with the capital appreciation in AOL. Now, here is the major difference in my personal approach compared to the other suggestions to cover at a lost and roll up to another strike price: 1. By going out three months (and not only one) you would be able to buy the sideshow calls and gain capital AOL appreciation. 2. IF AOL petered out two months later you would cash out your sideshow calls at a profit and monitor the balance of the month left on the AOL CCs. Perhaps, you would need to cover those CCs at much lower cost as AOL drops in the final month of the CCs. The time decay in the CCs would be working on your side by then. And, you would still have better control of the CC position. 3. With that extra profit from the sideshow long calls your would be in a prime position to buy sideshow cheap PUTs in that final month of the CCs perhaps bringing in more money to offset covering the original CCs at a lost. It is important to note that you are in an offensive position with my approach and not just reacting after the fact. C) WHAT TO DO NOW? It looks like AOL may pull back before your CC expires. Wait and see if you can determine the nearest strike price AOL is heading towards that may be your target bail out! So, you may need to cover at a lost and then CC out three or more months. I would consider CCing LEAPs to grab big premies and recover the difference in the lost. The strike price would be high enough to collect all of your money and still allow you to cover later when AOL drops and pivots around $135.00. It's a race to either profit taking and the next earnings release date. iqc.com PS - You do have a nice profit in the stock! You could cash out and start CCing AOL LEAPs in spreads with a great deal more profit potential.