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Registered User
Joined: 3/25/2005
Posts: 864
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QUOTE (scottnlena) I'm looking for the simplest and lowest risk aproach.
Well Scott, according to the experts, that would be Covered Call Writing.
Before I attempt to give you a brief synopsis of Covered Call Writing 101 Basics, Let me just mention one other possible attraction to Lucent(LU) a couple of years back -- Divendend Payouts For Covered Call Owners of the Underlying Stock.
So, with Lucent you could have not only made money
of out the premiums but you also could have receive dividend payments for as long as you held the underlying shares.
Covered Call Writing (The Basics)
First Rule of Basic Covered Call Writing -- Never Sell a Call unless you are willing to go through excercise, and expect to go through excercise at any time you're "In The Money".
Exercise Expectations -- Although you can be faced with the prospect of excercise at any time, it is always more likely to occur at or near the expiration date.
Generating Maximum Income -- Generally speaking, the further out the expiration date, the higher your income from Selling Calls will be because the time value factor increases the overall value of the premiums you will receive.
Covered Call Writing Risk -- Generally speaking, it hard to lose money with this strategy but it not impossible. The first way is debatable as to whether you are really losing money or not. Here are the 2 ways:
1)While The Call Is In The Money, Excercise will force you to sell at the Strike Price which will be lower than the Current Price -- You don't lose money in this situation (though some say you do) but you could have made more if you could have sold the underlying stock at the current price rather than being forced to sell it at the Excercise Strike Price.
2)While The Call Is Out of The Money, If you don't exit(Close Out) the option before it fall below your break-even point then you will have an Unrealize Loss in this situation (The loss is only Realized if you choose to sell the underlying stock when it is still under the break-even point after you or out of the option position).
Underlying Stock Price Expectations -- It doesn't matter whether the stock is rising, dropping or trading sideways in order for you to still make money in Covered Calls. But, a sideways movement comes with the most benefits.
You Get Downside Protection With This Strategy -- Writing Covered Calls Again Your Underlying Stock Ownership Lowers Your Original Purchase Cost Basis When and If The Option Gets Excercised.
Ok, Let Use An Example To Make This Clearer:
Lets say you buy 100 shares of XYZ for $50.00. Then, you Sell 1 Sept 55 Call against it that has a premium currently valued at 5.00.
Immediately, $500 will be placed in your account (1 x 5.00 x 100).
Immediately, you will receive downside protection as your purchase cost basis will be lowered from the original $50.00 purchase price to $45.00 ($50.00 - $5.00 premium). So, $45.00 is your break-even price.
So, now if the stock price drops while you are still in the option trade, you won't lose money until it drops below $45.00 per share (these, as mentioned earlier are only unrealize losses that can only occur if you choose to actually sell the stock at this point which occurs when you are released from the option trade thru expiration or having closed it out when the stock price was below this break-even point).
So, as long as the stock price remains between $45 (break-even point) and $55 (Strike Price) then you will be able to keep the entire $500 upon expiration of the option.
But, if the stock price rises to (at the money)or above $55 (in the money) then excercise is probable at any time which means you will be forced to sell your 100 shares to the option purchaser for $55.00 per share. So, if the stock continues to rise then you miss out on making more money(but you don't lose anything).
So, your net profit in the above scenario would be $1000 [100 shares * ($55 srike - $45 break-even)].
Or another way of looking at it is $500 premium plus $500 profit difference from when you originally bought the stock at $50 and was forced to sell it at $55.
Finally, if the stock price drops exactly to $45 by expiration then your net balance is $0.00 minus the commission charges (so you do lose money via the commissions in this case).
So that's Covered Call Writing 101 -- The Basics.
The Advanced Topic On This Subject show you how to avoid ever getting excercised while continue to make profits thru techniques known as Incremental Returning and "Rolling" - Rolling Foward, Rolling Up, Rolling Down.
Maybe BigBlock Would Care To Share Some Light On The Finer Points Of Advanced Covered Call Writing.
You might also want to Google "Covered Calls" and click on the Options Strategies:Covered Call
link.
Later,
memorable
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Registered User
Joined: 3/25/2005
Posts: 864
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[quote=memorableproducts
Underlying Stock Price Expectations -- It doesn't matter whether the stock is rising, dropping or trading sideways in order for you to still make money in Covered Calls. But, a sideways movement comes with the most benefits.[/quote]
I forgot to mention why a sideways movement is advantageous.
The reason is: not only do you get to keep the premiums paid but you still will own the underlying stock because it is more likely that you won't get excercised in a situation such as this.
Also, in the above example, the premium paid for a Sept 55 Call was 5.00 but had that been an Oct 55 or Nov 55 Call then perhap the premium would have been as much 6.00 or 7.00 which would illustrate how you can make more premium money with a longer expiration date because time value increases the premium's value.
mp,
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Registered User
Joined: 3/25/2005
Posts: 864
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Also, forgot to point out that getting excercised is not really a bad thing because you still make money. But, you will no longer own the underlying stock and you could have made more money if you had not been forced to sell the underlying stock at the strike price instead of selling it at the, possibly, ever-increasing current stock price.
mp,
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Registered User
Joined: 4/18/2005
Posts: 4,090
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Thanks for these i havent read them all yet. I spent 8 hours fiddling with Roxio software for my camcorder/dvd burner to try to get some home videos of the little one ready to send to Russia with grandma.
I'm only now going through my scan and naturally the market had to bounce big today so my scann is packed tonight! I couldn't have been last night when I had nothing better to do.
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Registered User
Joined: 10/7/2004
Posts: 2,126
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Sorry I haven't been around much lately - I am currently at the lake, and haven't checked much on the markets or else related to it.
All I have done as of late is work a little finalizing Oasis Daytrading which was launched today. Other than that just relaxing and having fun with the kids.
What was the question exactly??
good luck
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Registered User
Joined: 3/25/2005
Posts: 864
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QUOTE (BigBlock) Sorry I haven't been around much lately - I am currently at the lake, and haven't checked much on the markets or else related to it.
All I have done as of late is work a little finalizing Oasis Daytrading which was launched today. Other than that just relaxing and having fun with the kids.
What was the question exactly??
good luck
You mentioned in the past that you knew a few things about options. So, I was wondering if you were familiar with any covered call strategies that would enable the particpant to not be forced to relinquish his underlying shares thru either excercise or an unexpected decline in stock price
so they could still be in a position to continue writing covered calls against it.
If this is not part of your repetoir, please disregard.
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Registered User
Joined: 10/7/2004
Posts: 2,126
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Hey Memora - Sure. Sorry on the delay, and I will try to be brief here as I am just returning from our vacation, and I am kind of short in time with getting settled again and all of that.
Covered calls although presented as a safe and profitable technique to make income - I am not a great fan of it. Why? well you can really get burn in a steep decline as you must buy the option back before you unload you equity and in those cirscustances time is at a premium and things can get ugly rather quickly. So you have two draw backs you limit your profits to the return adquired by selling the call, and you can get burn if the equity drops fast.
What can you do to further protect your equity? It is call a collar - basically you buy a put option on the equity with the profits from selling the call, althought that will cut into your profits.
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Registered User
Joined: 11/16/2015
Posts: 105
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I'm trying to put a post on the website in Chrome. And it's not working is anyone else, having any problems trying to post. I use Firefox browser that work. I use Internet Explorer work. And also I used Internet edge. That works. But the only thing that doesn't work is Chrome by the way.
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Worden Trainer
Joined: 10/7/2004
Posts: 65,138
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I use Chrome most of the time I am using the forums and I post quite a bit. I don't usually have any problems. What sort of issues are you experiencing? What steps do you do and what happens as a result?
-Bruce
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