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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: NateC who wrote (10894)	5/23/1999 2:56:00 PM
From: Jon Tara	Read Replies (1) \| Respond to of 14162

Question about CCs on LEAPS: Sorry if this is too basic a quesetion. :) If you own a LEAP, will most (all?) brokers consider a sale of a shorter-expiration call to be "covered"? Or is it technically a spread transaction, and you are just using the term "covered" here for convenience? Is this true ONLY with LEAPS, or would any sale of a shorter-expiration call against ownership of a longer-expiration call be considered covered? But - wait - how would this ever be considered covered? Sure, you have the right to acquire to stock, because you hold the LEAP. But you would have to put up additional money to acquire the stock. So you are NOT truely covered. This HAS to be a spread transaction, which will have a margin requirement, plus will require an account approved for spread transaction. Right?

To: NateC who wrote (10894)	5/23/1999 4:04:00 PM
From: David Wright	Read Replies (1) \| Respond to of 14162

Roger, You wrote: "So LEAPS allow you to basically own the stock, CC it....and they may cost less than half the stock price...so they're cheaper than buying the stock on margin." I disagree with this for a margin account. A LEAP is not viewed by the broker as security against which to loan you more money on margin. This impacts your equity position, and reduces your overall buying power. Dreyfus will loan you money against the value of the stock up to 1/2 the CC strike price. It will not loan you money against a LEAP, because it is an option. You can borrow the money against your securities to buy the LEAP, as Jon pointed out, but once you buy the LEAP, it sits there (assuming the stock price stays the same) as a steadily-declining-in-value lump, until it expires, or you sell it. From a margin account perspective, I might as well buy the stock. At least, when it's underlying value goes up, it doesn't have the "greeks" holding its actual selling price down like with the LEAP.