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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: tuck who wrote (10658)	5/9/1999 10:21:00 AM
From: Dan Duchardt	Read Replies (2) \| Respond to of 14162

Some thoughts on EDFY Jumping backwards some 30+ hours, a major hurdle over all the good TA discussion, we arrive at tuck's question about EDFY that started all this, followed by his recent follow up (one link back). Going back a bit further, we have his original heads up as follows Check out EDFY. I'm in this to the hilt, because the risk reward ratios are so good. As I write the stock is 10 1/2. The May 7.5 and 10s are at 3 5/8 and 2 3/8, respectively. I'm in the 7.5 s(bought the stock at 8 5/16). We're looking at 18.5% time premium for the 10s with 22% downside protection, and 6% time premium for the 7.5s with a whopping 35% downside protection. Two and a half weeks from expiration! Since I bought earlier, my position is a little different, but the current one is plenty attractive. Based on your starting point and the percentages you have stated, I figure your NUT at ~8_7/8, and that this went up by about $2 when you rolled up from the May7_1/2s to the May10s. I'm looking at the quotes and deltas on the 10s and 12_1/2s as of the close on Friday, and w/o price improvement the cost to roll up now is 2_7/8 - 1_5/8 = 1_1/4. At $13, this should change to about 3_3/4 - 2 = 1_3/4. If you roll up again you will have raised your NUT to ~10_5/8 to increase your upside potential by 3/4 (2_1/2 increase in strike - 1_3/4 it will cost you to roll up), so you will be giving up 2 points of downside protection on a stock you think will pull back in the next few days. Furthermore, you will only realize the full potential if the stock then stays above 12_1/2; if it pulls back below 12 you will have gained almost nothing, or may even lose compared to your present position. The May10s still have quite a bit of time premium (~5/8) that will erode over the next two weeks. If as you say the underlying goes up, that premium will erode more quickly. It seems to me you can still gain an additional 1/2 to 9/16 by waiting for this premium erosion before buying back the May10s and not give up any of the downside protection you now have. Meanwhile, the June series will be holding time premium fairly well. I'm looking at the June12_1/2 that you could roll up to right now for only 2_7/8 - 2_9/16 = 5/16. If EDFY goes up fast, this difference will increase, but if EDFY pulls back below 11_1/2, you can probably roll up for free. If there is no pull back, maybe you can write some June15s with no roll-up cost, lifting your upside potential very nicely. This of course has to be compared to your idea of writing the June10s after the May12_1/2s expire, but if you do that and later roll up to the June 12_1/2s and then the June15s, I think you will have shared more of your profits with the specialist biting off all the spreads than you have to. Comments? Dan