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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: Cesare J Marini who wrote (10296)	4/10/1999 2:45:00 PM
From: NateC	Respond to of 14162

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. What strike price would you purchase the long calls at? How would you determine this? Herm's breakeven point..is apparently a different concept that the "nut" that we talk about. I had held the AOL a long time...but if I had purchased it at $129, and then collected a $5 3/4 premie for the CC's......my "nut" (net cost of underlying stock)would have been $123 1/4. Accordingly....if called out on my 135 April Calls. (which I could still decide to let happen)..I would have made 135-123 1/4 or 11 3/4 div by 129 (purchase price)....or 9.1% in one month....or over 109.3% annualized... Is this so bad?? Don't get me wrong. I learned a ton from Herm's post..and that will affect the way I go about this the next time around. Is this above math correct??

To: Cesare J Marini who wrote (10296)	4/10/1999 11:07:00 PM
From: NateC	Read Replies (2) \| Respond to of 14162

While watching my kids ride bikes, etc...I was commiserating about my AOL situation. Still trying to learn, etc...and hoping to do better next time. I've certainly saved Herm's message....like about 100 others. I was thinking along these lines on this trade/position. David Wright has run this through a beautiful spreadsheet BTW....which helped me think this through a bit. Still open to suggestion, and especially other ways to think about it..and BTW.....there is no question that AOL is overextended...and one of these days....!!??(EL CRASHO) Anyway, I bought AOL @129 about March 23, and sold April 135 calls taking $5.75 into my account...so nut is 129-5.75=$123.25 AOL takes off, I'm asleep at the switch...and before I do anything, I'm here with AOL at 160, and my calls would cost me $25 to buy back. Scenario A...I let it go..(prior note) I get 135-123.25=$11.75 Scenario B..just to think things through....I buy the calls back for approx $25, stock's at 160...so my nut is now $123.25 + 25= $148.25...and if I were to sell AOL right away....I'm exactly the same as Scenario A....forgetting commissions.....at 160-148.25 = $11.75 profit...in one month (since the time premium is essentially gone) so it only costs me commissions (plus risk/volatility of AOL) to buy CC's back. Scenario C...same deal...I buy April 135's back...my nut's $148.25(as in Scenario B)....and I sell the May 175's (11 1/4 X 11 3/4) at, say $11. (New Nut now is $148.25 - 11 = $137.25 If I did this...I would DEFINITELY plan on exercise being OK....at 175...because I think AOL will trash, or level off before May Expiry. but this scenario comes out to: Scenario C-1...If not exercised...say AOL stays at $160/share....I made (in one month from April to May expiry) 11/nut=11/139.25 = 8.0% for those 4 weeks. (or 11/148.25, if you'd prefer = 7.4%) Scenario C-2....If exercised, AOL closes at 175 strike price....I make 175-nut of $139.25 = $35.25. $35.25/139.25 = 25.3%....which isOK....even though it's over 2 months....X 6 is over 150% annualized. Scenario C-3....AOL crashes to, say 140 in that month.....and sometime near Expiry...I decide to close the position....let's say that it's about a week from expiry in May...My May 175's are worth .75 (would actually be less..maybe 1/8,better for me)....so I buy them back for $.75, and sell the stock at $140.....(which BTW is 12.5% lower than 160). I receive 140 - .75 = $139.25....which happens to be my nut..I'm only out commissions for my trouble. (Yes, no doubt AOL could tank more than 12.5%. The internuts are all due for a shakeout, IMHO) Scenario C-3 would obviously look a lot better if I bought some July, or further out 120 Puts at 8 (current quote) lots of ways to look at it.....just offering my thoughts....and my math up for scrutiny. (check it, there's a glass and 1/2 of Merlot involved in that math, hope it's OK!)