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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 (10474)	4/24/1999 12:17:00 PM
From: Herm	Read Replies (3) \| Respond to of 14162

Hi Nate! I just want to add another dimension to your comment when you wrote: I'm trying to get used to this thread's tendency to CC out 2 or more months....but I keep thinking of the value of compounding...and I like to CC every month I can. For sure, on many occasions I have indicated more than 2 months out in my CC examples. For me, it's still the preferred approach that matches my particular trading style. Here are my reasons which are not to say the only way. I placed them in order of priority. I would like you to explain why you feel more (monthly) is better from a profit and account management perspective. 1. Larger CC premies at one time! By CCing out 2+ or more months per round you take into your account larger premies. The larger the premies the more "working capital" of other people's money you have to work with. Yes, I often use that CC money for other trading opportunities in my portfolio. 2. Much more downside protection! Often in today's stock market climate, bad news can come from nowhere and your stock can take a dive into the abyss faster than you can double-click on your mouse. Call me conservative. I have learned that lesson first hand and I will not over expose myself ever again. The larger the CC premies, the more downside protection! My brain and judgement in a crisis does not freeze up from fear when the stock takes a dive. I know I have some time before I have to take some action. Until then, the CC premie is my hedge until it reaches my original capital. 3. More capital to buy defensive sideshows Larger CC premies affords me opportunities to buy cheap PUTs as extra insurance which can turn an otherwise total wipeout into a winner. I no longer care which way a stock is trading. Just as long as I am CCing and bringing new fresh dollars in CC premies I'm making a profit. Those PUTs and the income allow me to often average down by giving me income to buy more stock to repeat the CCing WINs process. 4. Large CC premies offset margin interest! If you have any stocks in your portfolio that are on margin, you reduce more of your margin interest because the CCer's premies become same as cash. Therefore, you INCREASE your % of equity vs. liabilities. I call this "portfolio management." It allows you to be more responsive to opportunities if and when you do need that extra margin for rounding off an uneven lot to 100. This is a very conservative use of margin. 5. Less trading commissions! Obviously, the more you CC the more commissions you are going to incur in the process. Smaller CC premies means you pay a much higher percentage of the trade in commission. At DLJ Direct, it's a $35 downstroke mininum and $1.50 additional per contract. So, if I trade 10 contracts it will cost me $50 to open and perhaps $50 to close. Let's look a the math for ten CC contracts for IFMX right now which closed at $8 1/16s last. In this example we could collect for the IFMX 10May CCs @ 1/4 vs. IFMX 10Aug. CCs @ 1 3/16s. 1. .25 (May10s) x 10 contracts = $250.00 - $50 commis.= $200 net. So, $50/$250 = 20% of the premie! 2. 1.1875 (Aug10s) x 10 contracts = $1,187.50 - $50 commis. = $1,137.50 net . So, $50/$1,137.50 = 4.40% of the premie. Now, you don't know what the the future will bring for IFMX! I'm motivated by an expression I remind myself: "a bird in the hand, is worth two in the bush." I know some of you will say, "yeah, but you lock yourself up for four months until August. Well, $1,135.50/4 = $284.375 per month which is higher than that $200 net in example #1 above. And, I sure sleep alot better at night with four months worth of time on my side and $1.19 worth of downside protection! 6. Less trading transactions! Unless you don't work a full-time job and you don't have a family, trading every month or more is time intensive and some people simply don't have the unemotional discipline to think straight when it comes to money. Further, I would say it would require a much better understanding of technical indicators and charting to time those trades. To say you will CC every month is not possible unless you have a great deal of skill in anticipating which way and how far the stock will move. 7. Who said I'm going to wait until expiration! With my longer CC time span of four months in the above example. I can position myself with IFMX long sideshows calls or cover early if the time is right. I don't always have to wait the full amount of time on the CC expiration. That is my choice. I am always in control of the situation. I think I covered all of my reasons for longer CC time spans. And, I'm more convinced after writing this that I can still outperform short month to month CCing under normal stock market conditions by using all of my WINs tools. It is one thing to mathematically write things on paper and compound them out annually. It is another thing to actual do what the numbers indicated only to find that they don't add up! If any of you have some new thoughts on the subject, PLEASE give us the details so we can learn from it. I can't see how CCing every month is going to increase your profits, reduce risk, lower margin interest, and provide peace of mind like I tried to illustrate above. Good conversation Nate!!!! Always question what you read! :-)