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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 (10515)	4/24/1999 12:01:00 AM
From: Dan Duchardt	Read Replies (2) \| Respond to of 14162

Nate, I think your reply is missing the point Hectorite is making. You have explained why $3 is a reasonable estimate of the price paid to cover the $25call, but your original premium was in fact $2. If I understand the NUT concept correctly, the scenario could be cast in that terminology as follows: The underlying purchased at $22, with a $2 short $25call premium puts the NUT at $20. Covering your short at $3 raises your NUT to $23, but with the stock now valued at $27, you are $4 to the good. You now own the stock uncovered: no downside protection, unlimited upside potential. You have the choice of staying uncovered (you really think this baby is going up) at least temporarily while waiting to maximize the premium for a sell at a higher strike price, or you could cover immediately at the (assumed) $2 premium for the $30call, lowering your NUT to $21 and leaving you $6 to the good. In the latter case, you would have raised your upside potential to $30-$21 = $9, and protected yourself from any loss down to $21. I found myself in a similar situation the other day with NSOL, and I am going to post an update on that in a few minutes. What I was jarred into thinking was that you have another choice. Assume you think the stock is likely to take a breather after that quick 23% gain. You could simply close out your entire position and take the $4 profit that you made in perhaps one week, instead of waiting through those additional 3 weeks for the chance to make anywhere from a loss (or a roll down) to a gain of $9. I would argue that if you think this run is going to be followed by the "Withdraw" in the W.I.N.s view of things, you are better off closing out, thereby reducing your risk to zero, and waiting for a new entry point on the underlying. As your example suggests, the underlying is likely to move faster than the options (although I must say I'm doubtful that the 5:1 ratio of underlying increase to $25call increase used in your example is likely; I'm new at this, so I can't rule it out). So selling and buying back in after the underlying pulls back will put you in a better position than holding the underlying and shorting the call immediately. The point is, a $1 loss on the $25call you bought for protection is nothing compared to the $5 gain on the underlying. I know it's my daytrader mentality sneaking out, but taking your quick $4 (20%) profit and slipping it in your pocket cannot be a bad choice. You now have more capital for your next move, either on this same underlying stock, or a new one that looks more promising, and you have it NOW, not 3 weeks later.