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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: Jonathan Thomas who wrote (10731)	5/11/1999 4:05:00 PM
From: tuck	Respond to of 14162

Ryan, That's a good thought regarding protective puts. I think it is unlikely that the stock would tank that far. Though the buyout rumor is responsible for the heady gains of the last few days, I believe some of Edify's strength is coming from the growing acceptance of its products. I don't see it dropping much further than my nut, and if it does, I can drop my nut to 7.5 in one transaction, still selling time premium. Slept fine last night, but I was mentally exhausted. Still, that's worth consideration. Methinks I will run the numbers on a couple of tanking scenarios. The PHLX deltas didn't seem entirely trustworthy on the way up, but they're all I've got to work with. It seems like the options prices are a little slow to react, but that's probably just the quote services lagging (and I mean lagging a lot more than the "20 minute delay"). I've observed that the prices eventually do reflect the stock movement, as in the case of the June 12.5s today (which were at ask of 3 7/8 while the stock was down 1, but are now at ask 3 5/8 when the stock is merely off 5/8; go figure), and that they do move more or less in accordance with their deltas. I'll be back with the figures soon. Cheers, Tuck

To: Jonathan Thomas who wrote (10731)	5/11/1999 5:23:00 PM
From: tuck	Read Replies (2) \| Respond to of 14162

Ryan, PHLX doesn't explain why their thetas are two decimal places different from everyone else', but the time decay can be ball parked since I am working with a short time horizon. Current nut $9.75 Scenario 1: Edify drops to 10 by the end of this week and holds. The spread between the June 10s and the June 12.5s should be roughly 1. So the nut goes to $8.75 on the roll down. Still looking at 12% for two months. I don't think the puts would change enough to beat the bid-ask spread here, so if I sideshow with 8 7.5s I cut my return to 7% by using them as insurance. Still, that's 4%/month with margin. Scenario 2: Speculators so disappointed about the lack of suitors the stock goes to 7.5 a week later. Roll down again. A bit closer to expiration the spread might be a bit more favorable, say 1 1/4. Nut goes to $7.5. This is close to breakeven, then. Had I bought the puts, however, they'd likely sell for ~2 1/4, giving me a 1 3/4 gain per put. With 8, that would put my nut down to $5.75, for a return of 23% for the two months or 16% per month with the margin. If the stock holds above 12.5 and I buy all eight my return drops from 28% to 23% (roughly 40% and 35% with the margin). HMMMM. Might be worth getting a few. Another idea, perhaps more consistent with my outlook, is buying two or three June 10 puts. Time to break for lunch while I look at that. Funny, my friends think I don't work. Comments, folks? Cheers, Tuck