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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: FruJu who wrote (10421)	4/17/1999 4:20:00 AM
From: Greg Higgins	Read Replies (2) \| Respond to of 14162

Evan writes: So your general strategy is to always roll, unless you're very deep in the money. How do you define "very deep" in the money? Yes, always. I'm DITM if I'm not likely to see a strike price near the strike I'm short. It takes a fair amount of bravado to buy back a short call at 40+ and assume that the Leap is going to hold that value. Suppose you're short at 40 and the stock goes to 80. The LEAP, which I always buy DITM will go up 40+ points too, but if you buy back the 40 and don't sell the 40 3 or 6 months out you're essentially paying for the rise in value of the LEAP and if the stock falls back to 60, what protection do you have? One strategy says you roll to the deepest strike you can and only move up when you absolutely have to. In that scenario, I would buy the 40's and sell 40s which will be 2 or 3 months out, maybe getting 1/2 or 3/4 premium because they're very deep in the money. Then when that option expires you roll out 3 more months still at your strike price and when that expires you find the deepest strike you can 2 or three months out and roll to it. The good part of this strategy is that it gives the stock time to reprice to lower levels, and possibly close out the position without paying huge sums of money (say the stock returns to 40 or 45 or even 50). The bad part of this strategy is that you can get a very little premium for a long period of holding. Example. Suppose you were short the YHOO 100's this month. You'd have paid roughly 90 to buy it back. There are no May 100's the lowest may strike is 130 (ignoring those below 100) and the July 100 is bid 91 3/4 which means you're only going to get 1 3/4 to hold to July. The October 100s are only 96 1/4 which is not much for a stock as volatile as YHOO. So you close when you feel your options are limited (no pun intended). If you had been holding the Jan 60 LEAPS, you would have closed the position net credit 44. Now take the money and put it to work getting a better return. DITM short calls give you safety, but they severely restrict the return. Do you use the protective upside calls and downside put protection? No, but that doesn't mean you shouldn't. this seems to be somewhat different to Herm's strategy which is to be conservative enough that you would always allow yourself to be called out with a profit If you had six positions, and 4-5 of them were the conservative type and 1 or 2 were a more agressive monthly trading strategy I think you have quite enough to deal with and still generate a respectable return. Remember, most money managers can't match the market. You're a money manager for your own money. Overcomplicating your portfolio with a number of high maintenance positions is a good way to eventually make a costly mistake. It's good to have a portion of your trades setup to let you sleep at night.