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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 (10416)	4/17/1999 12:25:00 AM
From: Greg Higgins	Respond to of 14162

NateC writes : I'm having trouble understanding why the Breakeven would be $27.....you only have $12/share in the LEAP "investment".... So if CPQ goes up......your LEAP just goes up in value......I would think your BE would be whatever the stock price would be....at any point in time.......when the LEAP price is $12 again. sorry.....but if you could clarify a bit, it would be helpful You're at the shore the day before options expire. You see JAWS and are so frightened you forget you have options expiring in the money. Your broker exercises your leaps to cover your short calls. You still break even. A low risk position is one you do not have to constantly watch. You set your breakeven at the point where even if the options were exercised 20 seconds after you sell them, you can still get out of the position without a loss and without the use of additional funds or margin.

To: NateC who wrote (10416)	4/17/1999 10:06:00 AM
From: Herm	Read Replies (3) \| Respond to of 14162

QUESTION I'm trying to understand this better. If the 2001 LEAP 15Jan01 is at 12, when the stock is at 23......would there not be a rise in the LEAP price....when the stock goes to 27? ANSWER A CPQ 15JAN01 when the stock itself is at $23 the LEAP would be "in the money" by $8 worth of intrinsic value to make up the $12 premie. The rest of the LEAP option price is time value and some volatility value. Of course, if CPQ moves from $23 to $27 the intrinsic value of the LEAP will go from $8 to $12. Likewise, the time value would not change much. So, the CPQ LEAP would theb be worth somewhere around $16+. That is the beauty of the LEAPs that is you are not called out at the end of your round of CCs, you get to round another round hopefully at much higher CC premies. Perhaps, a CC strike price of $32 1/2 or $35 with CC premies @ 2 3/4 to 3 1/3. The ROI is fantastic considering it would be your second round of CC against the same CPQ LEAPs! QUESTION I know it would be a low-delta rise...but the LEAP price will go up some, right?..... ANSWER Actually, any option with such high intrinsic value would have a fairly high delta movement relative to the stock price. You are almost trading dollar for dollar in a LEAP so deep in the money. Your CC buyer would be taking the risk off your shoulders if you are positioned this CPQ example. QUESTION I'm having trouble understanding why the Breakeven would be $27.....you only have $12/share in the LEAP "investment".... So if CPQ goes up......your LEAP just goes up in value......I would think your BE would be whatever the stock price would be....at any point in time.......when the LEAP price is $12 again. ANSWER When you buy the LEAP you do so at a point in time when the chart BB and RSI indicates a pending bottom tag off the lower BB and high potental of a reversal back towards the upper BB with increasing RSI. So, you are always watching the stock. The LEAP will take care of itself. You are always looking to sell CPQ CCs at strike prices that will clear all of your cost (what you paid for the LEAP) plus above the strike price of your LEAP. In this case, $15 LEAP strike + $12 of your money = $27 in the stock price. You would need to sell a CC above the $27 B.E. to cover all of your cost and obligations. Cost is what you paid for the LEAP ($12) and obligations is the LEAP strike price ($15). Thus, in the worse case you get called out of the CCs the LEAPs will be exercised and you still get to keep more than what you paid. That's called a sure thing profit. Of course, if you waited for CPQ to rise to say $30 and then sold CCs against the $15JAN01 you would have a much larger margin of safety and larger CC premies. But, you would be exposing yourself to more downside risk holding that LEAP. Nothing to lose sleep over, I'm just saying that you might as well have the LEAP generating income while CPQ is moving sideways at this point! This is easy money until CPQ clears all of the skepics out there! Good questions Nate! You have to have all of this under the belt BEFORE you attempt to place real money on the table. The rule on this forum is you are not allowed to lose money! :-)