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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: Amit Raj who wrote (10866)	5/21/1999 4:23:00 PM
From: Jon Tara	Respond to of 14162

"is there any strategy left which I can use to minimize my losses." Yes. In the future, don't sink a lot of money in calls just before earnings are released. :)

To: Amit Raj who wrote (10866)	5/21/1999 5:31:00 PM
From: Herm	Read Replies (4) \| Respond to of 14162

Amit Wrote: I bought June45 calls for Dell at $3 a couple of days before the earning with the hope of higher price after the good earning report. After the earning was out the stock has started moving south and the June45 calls are currently at 3/8 or 1/2. Although I have lost a lot, is there any strategy left which I can use to minimize my losses. Any suggestion from Herm, Dave or any body else will be highly appreciated. iqc.com Hi Amit, Thanks for your question, Amit. Don't take my comments personally. I want to answer your question so we all can learn something from your situation. We've all made the same mistakes at some point in our investment history. I want you to look at the chart above of DELL. First, earnings release dates are usually dangerous events that can trigger reactions. So, it is wise to C.Y.A. as in make sure you Cover Your Assets! The slightest shortfall in earnings and technology stocks are hammered downward. A spread would have been better. You needed some PUTs. Market expectations are built into the stock price as earnings approaches. Hence, you paid too much for your long calls to begin with. That is why we CCers on this forum love to sell them. The majority of the call buyers never score and they expire worthless and we get to keep the premiums. It sure makes us happy! :-) From a technical TA standpoint, I would like to point out how you could of avoided this excessive risk you are faced with if DELL does not make more than $48.00 ($45 strike + $3.00=$48.00 CALL B.E.) In looking at the DELL chart we see several peaks and tags of the upper BB at the $45.00 level. For DELL to break upwards and break that overhead resistance it would have taken a major news event and/or blowout earnings report to get all those buyers out of out of the way. Why? Sellers are just waiting to break even so they dump DELL stock at the next opportunity. The current up down zig zag is perfect for CCing and stripping premies over and over again. Of course, you need to catch DELL as it tags the lower BB with low RSI & crossover in the stocastics as the WINs approach suggest. The Stocastics has been clearly giving off up and down cycles while the RSI, OBV, and volume has been flat for the most part. The serious money is not expecting DELL to take off any time soon! DELL has such a huge growth rate to live up to and the P/E is sky high. That only means the I would have been more defensive in my entry into DELL. Perhaps, buying the LEAPs first and selling a few rounds of CCs while I wait it out! NASDAQ: (DELL : $37 5/16) $103,878 million Market Cap at May 21, 1999 Ranks 174th in the Fortune 500 on Revenue & 156th on Profit. Employs 10,350. Trades at a 66% Premium PE Multiple of 51.1 X, vs. the 30.9 X average multiple at which the Computers SubIndustry is priced. At this point, you are rolling the dice that DELL will reverse in time. I see the lower BB starting to head downward forming a divergence compared to the upper BB. What does that mean? TIMBER. I would say there is more downside risk than upside potential for now. You will most likely expire out of the money on the 45sJune. In summary, all investors should have a game plan (what if's) if the trade does not work out! Anything less than that is gambling and not careful speculation or investing. It's a crap shoot. You need to stack the card more in your favor next time! Check out our WINs tutorial.http://webbindustries.com/coveredcalls/Wins1.ppt Cut your loses as soon as you can and move on Amit.

To: Amit Raj who wrote (10866)	5/22/1999 1:29:00 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

Although I have lost a lot, is there any strategy left which I can use to minimize my losses. Depending on your tolerance for loss, you could use the well known, though far from universally recommended approach of averaging down your position. At a price of 9/16 (current) on the ask, you could double your position leaving your basis at 1_25/32, or you could just leave your current position open with some expectation of at least a partial recovery. Then of course you could hit the 7/16 bid, accept your loss and move on with what you have left, or take a more aggressive position buying some June 40s that will more closely follow DELLS price movement. Without recommending what YOU should do, I can tell you that if it were me I'd at least leave the position open and risk losing it all because I see far more upside potential from here than additional loss. I'm sure you have read Herm's reply noting the indicators that suggested your initial entry lacked support, but if you look at the charts today things are looking a lot brighter. Dell took a hit for failing to beat estimates, but is the magnitude of the pull back justified, or is DELL now in an oversold condition? It's now sitting on the lower BB, on balance volume is in the region of recent upturns, RSI is not quite as low as it might go, but yesterday DELL bounced off its 200 day moving average, with strong volume, and was pretty steady compared to the Nasdaq 100 index. In deciding where to go from here, you need to ask yourself what you would do now if you were not already in the June45s, because that's what the rest of the people out there who follow DELL and have some cash are doing. If they decide it's a buy at these levels, it will come back. Could DELL run to near $45, pulling the June45s along faster than the time premium will decay? I don't see anything to rule out that possibility. The upper BB is at about 46 and will creep higher if DELL rises. Every top in the last few months has been at 45 or above, and the last several uptrends have lasted between 5 and 10 days, so there is plenty of time for a recovery. The "bad" news is out and the reaction has followed, so is there much downside potential? Was the bounce off the 200 day moving average the real bottom, or is there a bit more to go? Weigh all of that against what you think is going to happen in the market generally and in the computer sector over the next several days, and good luck. Herm, One of your posts looking at DELL now that it has pulled back would be appreciated. Dan