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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: pride who wrote (10808)	5/16/1999 1:36:00 PM
From: Jonathan Roy	Respond to of 14162

Imagine if the stock went up after hours from a news release and you couldn't buy it until the next market open for far more than the strike price. You'd loose out big. :) ie: Say you write an uncovered call on company XYZ. Stock at $20, you write a strike of $25, for $2 say. That night they have a press release they are making a web site, heh. Stock goes up to $60 after hours, opens the next day at $70. Your call is exercised. You now have to cough up 100 shares of the stock for $25 each, but you have to pay $70 to buy them off the market to cover. A loss of $43/share, or $4300. (Including the $2 premium you made.) Uncovered call writing has unlimited risk since there is no upper bound on the price of the stock. -Jonathan

To: pride who wrote (10808)	5/16/1999 3:29:00 PM
From: Jon Tara	Respond to of 14162

The ultimate risk of uncovered call writing is the risk of the stock price rising to a price approaching infinity over-night. One assume that you do NOT have infinite cash available to buy the stock. OK, while "inifnity" is unlikely, over-night rises of, say, 50% or more are not all that rare. Let's say you've written that Jan-00 65 call on AT&T. You've set aside enough cash to buy AT&T at 75. Over-night, though, Microsoft has announced that they are buying AT&T at 100/share. You Are Screwed.

To: pride who wrote (10808)	5/16/1999 6:07:00 PM
From: Herm	Read Replies (2) \| Respond to of 14162

Hello Pride! The others have given you the best advice! DON't write CCs uncovered! That goes beyond speculation and into gambling. If you want a big bang for the buck try writing LEAPs calendar spreads which is basically equal to CCing against a LEAP surrogate for the stock. ROI of 25% and more per CC round are not uncommon. Excessive pride in the stock market can be a deadly trait you know??? Learn to respect unnecessary risk! :-)

To: pride who wrote (10808)	5/18/1999 11:23:00 AM
From: Greg Higgins	Read Replies (1) \| Respond to of 14162

Pride writes: i have questions concerning uncovered call writing. what are the risks? About $20,000 in three days if personal experience is a guide. sell an uncovered call on at&t for jan00-65 About $5 1/4 premium for 8 months with the stock currently around $60. Initial Margin is about $13. Not a bad return, but you're planning on setting aside enough money to buy the stock, hence the return is more like $5.25 / 32.50 * 12 / 8 * 100 = 25% annualized. T is much more volatile in recent times than it has been in the past. I agree with you that T seem to be both over-priced and an unlikely takeover target (unless Bill decides to take on MCI/Worldcom directly). Since you're willing to accept a 25% return, have you considered a credit spead? Sell the Jan 65 for 5 1/4 and buy the January 70 for 4 1/8. Since the spread is 5, you'll have to put up $500 margin for each option, but you're allowed to include the premium in that, hence your return will be 112.50/387.50 * 12 / 8 * 100 = 43% annualized. On the other hand, it looks to me like the same 1 1/8 is available on the Oct 65-70 call spread for an annualized return of 112.50/387.50 * 12 / 5 * 100 = 69%. Hmmmmm.

To: pride who wrote (10808)	5/18/1999 5:20:00 PM
From: James Joyce	Respond to of 14162

Major risk on uncovered calls. Read Larry MacMillan's book to see the various scenarios. For example I sold uncovered on UNPH last week at $8. The VERY NEXT DAY the stock surged 14 points and the calls more than doubled during the day causing a major paper loss. It went way past my cover point before I could blink. Subsequently, it has retreated and I am still short the calls but could have been ROASTED if the stock had continued. If you are not an experienced options trader you should not participate in naked trades as you may not have the technical tools needed or the ability to perform adequate follow up action on a timely basis. You will also need plenty of margin availability if you are not to get hit with margin calls at the worst possible moment. If you are looking at analysis tools I suggest you consider Optionvue (www.optionvue.com). Best of luck. James