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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: Roy Travis who wrote (10406)	4/16/1999 9:51:00 PM
From: Greg Higgins	Read Replies (5) \| Respond to of 14162

Roy Travis writes I think this is a great question, an so far nobody has addressed it. I think this same question was raised about a couple of months ago, and nobody answered it then either. So what's the best strategy when you have a short call that's in danger of being exercised and it's covered by a long LEAP that still has lots of time value? I have addressed this question several times. I usually give the same answer. What you do depends on how you view the market. Never give your broker the opportunity to decide what is going to happen. Example: Today I had several series of short options expiring with no chance of being exercised -- they were $5 and $10 OTM. Nonetheless, I watched the market open and I watched the market close from my PC making sure the options didn't suddenly spike on me. (In theory I should have spent the 1/16 to buy back, and I might still come to regret my decision not to do so, but the stocks did end up $4 and $7 OTM so I skipped the buyback.) If my short options are in or near to being in the money, I don't usually wait until Options Friday to make my decision. Sometime during options expiration week I will place an order to roll for some net credit. Typically this is because I expect to repeat the process over and over again. Usually I put the order in on Tuesday and if nothing happens by Thursday I will modify the order or take the market spread. You almost always roll. Sometimes you buy back and sell. You might buy back and sell if, for example, your short position is suddenly $40 ITM. This happened to me when Citicorp got bought. I was making a good return trading on my long CCI LEAPS which I had bought very cheap and which I added to whenever the stock traded lower. I was short the May 140's and long the '00 110s when the stock went from 138 to 180 overnight. The 140's went to 49 (a week or so from expiration) the LEAPS went to 79 or so. The stock settled in about 170 and I closed the position net credit 38. The extra 8 was the time value on the leaps - the volatility on the short position. ( My cost on the position was about 16 by then ). I have a really interesting example which I will tell you all about some day, but not right now since I'm still working it. Once the position stabilizes and I start working it as a true CC, I'll write it up and analyse the trade decisions. One interesting decision I'm facing early next week is whether to sell the ATM call for my latest LEAPS which are now net nut ATM +5, or whether to sell the next strike higher which is nearly risk free, but which brings a lower return. I was selling 60 calls the past three months, but the stock has closed at 55 3/4. I can sell the May 55 for 2 3/4 and the May 60 for 13/16 and the Jul 60 for 2 1/16. I need to wait for Monday to see what the Jun 60 will bring. I'm guessing 1 1/2. I'm leaning towards selling the May 60's even though the return is lower just because the risk is lower. The stock is just above it's 200 day moving average, a good time to buy more. I suspect it will jump back up shortly. Speaking of Nut, how I calculate it: Cost to buy LEAPS 11,638 FEB Series 238 686 MAR Series 388 811 APR Series 961 ----------- --------- 12,264 2,458 Simple Return 20% Annualized 80% Market Value LEAPS 9,400 ( Current Bid) ----------- ---------- 12,264 11,858 Actual Return -3% This is a mark to market approach. Note that the stock in question went from 60 to 55, a loss of about 8.5%, and the Leaps went from a 29 ask to a 23 1/2 bid a loss of nearly 20%. If you had bought the stock on margin you would have paid 12,000 +fees so, all in all, the LEAPS diagonal spread was the best was the best way to play this stock the past 3 months. [ ..... An interesting game, Professor Falken, the only winning move is ... not to play. How about a nice game of chess? .....]

To: Roy Travis who wrote (10406)	4/16/1999 10:14:00 PM
From: Tom K.	Respond to of 14162

...So what's the best strategy... First of all, stay in control and don't let the broker decide. You have to decide what to do. Second, in the example the cost to open was $4 (6 LEAP - 2 short CALL). The value at close is $9 (10 LEAP - 1 short CALL). If you put in 4 and take out 9 in one month, that's a 125% increase which is annualized at 1500%. The question is what is the best strategy?.... close the position, put the money in an envelope and mail it to me for safekeeping. Anything less then that is simply greed. Tom

To: Roy Travis who wrote (10406)	4/17/1999 12:28:00 AM
From: NateC	Respond to of 14162

It seems to me the best thing to do in these situations is to >buy back the CALL, and roll out to a higher strike price, until my >NUT is eventually reduced down to 0. >What are people's strategies for this? I think this is a great question, an so far nobody has addressed it. I think this same question was raised about a couple of months ago, and nobody answered it then either. So what's the best strategy when you have a short call that's in danger of being exercised and it's covered by a long LEAP that still has lots of time value? It seems to me the best thing to do in these situations is to >buy back the CALL, and roll out to a higher strike price, until my >NUT is eventually reduced down to 0. >What are people's strategies for this? I think this is a great question, an so far nobody has addressed it. I think this same question was raised about a couple of months ago, and nobody answered it then either. So what's the best strategy when you have a short call that's in danger of being exercised and it's covered by a long LEAP that still has lots of time value? Roy....you are seeing this like I am. If I own something like CPQ stock which is at 23...and I paid $12 for Jan 2001 LEAPS15...., with CPQ beginning a recovery...I want those LEAPS to go up and up...I'd do most anything to avoid exercise...so, as you say....I buy back, and roll out, time after time