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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: David Wright who wrote (10832)	5/18/1999 2:10:00 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

EDFY- probably for the last time I stopped out of EDFY at 14 7/8 this morning. I just didn't like the way it was acting. When it couldn't hold the rise above 15, I no longer saw enough potential in any of the alternatives for keeping an open position. The June12_1/2s did not have enough premium. The June15s did not give enough downside protection, and I think we are all agreed that holding the stock at this point is an iffy proposition. Here's a summary of my trades: Buy EDFY @ 10 on 4/27 Sell May10 calls @ 1 9/16 on 4/27 (NUT = 8_7/16) Buy May10 calls @ 3 1/4 on 5/10 (EDFY at 12_5/16) Sell June12_1/2 @ 2_7/8 on 5/10 (NUT = 8_13/16) Buy June10 puts @ 3/4 on 5/14 (I am holding on to these in case of a breakdown) Buy June 12_1/2 @ 3 on 5/17 (EDFY at 14_7/8; NUT = 11_13/16) Sell EDFY @ 14_7/8 (+3_1/16) on 5/18, but anticipating a loss on the puts, not more than 3/4 I do not consider this daytrading, although I have in fact daytraded options and will probably do it some more (The SCH June105s were mighty sweet yesterday and today, but that's a bit off topic). While it is true that all of this happened in only a few weeks, we are talking about a stock that appreciated 50% in value in that short time. The trades I made were an attempt to apply the same principles used for slower, steadier movers to this high flyer. I think it is fair to say that I was actually a bit conservative, except for jumping in initially more because of the high premium than extensive FA and TA of the underlying stock. The roll-up from May10s to June12_1/2s was late relative to the break-even point, and I rolled to a strike price nearly ATM instead of risking maximizing the upside. Then I let the second break-even point go by without doing anything because of the extra risk of fooling with such a volatile stock, and left myself in a locked-in position until yesterday when the premiums broke down. Why mess with options instead of just scalping, or playing the news? Because selling covered calls provides a cushion against loss that you can never have with stock ownership, and it is less work than pure momentum trading. I am experimenting with this approach as a way to participate in the wilder side of the market, giving up some upside potential for the sake of reducing risk. Obviously it has worked out well in this one case; I gave up almost 2 points of gain by trading the calls, but I was never at serious risk of losing much in the process. I'm sure that if I had just owned the stock, I would have exited sooner, and probably lost out on some of the gain I made. Maybe it's just me, but there is something comforting about being in a position where the question is closer to "Am I going to make a small profit or a big profit?" than to the question "Am I going to make a profit or take a loss?" Dan