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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: Dan Duchardt who wrote (10822)	5/17/1999 2:57:00 PM
From: Jonathan Thomas	Read Replies (2) \| Respond to of 14162

<<<<< I'm not sure what to make of all this, but for the moment I am long EDFY (on paper) with a NUT of 11_13/16 and long on the puts that have dropped 11/16, so I'm effectively in at 12_1/2. The day's volume is strong, so I assume the news is taking hold, but on a generally down day the stock is not moving up. I could understand the premium collapsing if the stock moved to the buyout price, but I don't understand why the calls seem to be selling at a discount to that price. What am I missing here? >>>>>> Dan, I'm not sure about the call prices dropping, but these are all June expiry's right? This is strictly my opinion, and I'd like to hear others' thoughts, but be careful about buying back and rolling forward this quickly. You bought back your calls, losing money on the trade on the VERY day that good news comes out, with more than a month left of premium left in the call price. I would not have jumped into that trade so quickly, just because of fear of losing out the long income. Remember McMillan, treat covered call writing as ONE position, not simply stock ownership, that isn't the point. It is ok if you do, but decide which you want to do in the beginning. I was under the assumption that EDFY was a CC position only. Don't change your strategy in the middle without careful consideration. You have raised your nut significantly at this point. Personally I would have waited until a lot more of the time premium dissipated on those June 12.5 calls, and bought them back on a dip (if I wouldn't just let myself get called out, and take my profit). ALSO, you didn't mention a roll forward. You are treading on thin ice by buying back those calls at a loss, then not rolling forward. This stock is unruly, and you could find it takes a big dip, leaving you in a tough spot. Your nut was around 9.5, even if called out at 12.5, you make 3 points, plus any of the put money you could have gotten back. As of now, EDFY is at 14 7/8, nut of 12.5. You have lost more than 1/2 a point, and more importantly, you lost a TON of cushion in the stock price. every bit the stock drops comes right out of your pocket now, whereas before, it could still drop almost 2 1/2 points, with no impact on your profits. With that said, if the stock takes off above 15, and stays there, you guessed right, but what almost all of us are trying to accomplish is a NON-guessing way to increase our profits. You are exposed now, and increased your upside a significant amount, but IMO, increased your risk ratio more, which isn't worth it. Ryan

To: Dan Duchardt who wrote (10822)	5/17/1999 3:20:00 PM
From: tuck	Respond to of 14162

Dan, Actually, I can believe it. I've been on the other side of a similar deal before and got reamed even though I was "right." A couple of years ago, I had bought calls in a nursing home company called Multicare. It got taken out at a low premium. The take out price was just above the strike price of the options. Presto, options valued right at my entry price even though the stock jumped a couple of points. I didn't lose badly -- I think I only lost commissions -- but jeez, you can imagine how frosted I was. The difference here was that the Multicare buy was a cash transaction, here we've got a stock swap. Thus the time premium went out of the Multicare calls instantly. Here, Edify's fortunes are tied to SONEs for several months, so the time premium is still there. A lot is gone because the volatility is likely to be reduced now, hence the steep drop in the price. I am unsure what to do here. I dumped my June 10 puts for what I could get (3/16s, which will buy a cheap bottle of champagne after commissions (dang sideshows, I'm 0-2 on those, though I slept better)), since it's now unlikely we'll ever see 10 again. That was a no brainer. The fact that there is time premium still in the June 12.5s implies that there's a slight chance we could see that level, though. However, with Intuit's support of the new company at the $51 level, that doesn't seem all that likely, either. If I had some more room for margin I'd be tempted to buy back or roll up -- but I don't. I may just have to take my 18% on June 16th and go home. I find Open Market very attractive at the current price, and it has Edify-like time premium. I think I might run the numbers on closing my Edify position now, losing some of that return but getting back with interest on the next one. So I've gotta get busy, but heh heh, did I call this one or what? OK, no more gloating, and I'm open to suggestions, since I am clearly not going to figure this out before the close. Cheers, Tuck