24 lines
1.4 KiB
Plaintext
24 lines
1.4 KiB
Plaintext
Chapter 2: Covered Call Writing
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FIGURE 2-5.
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Comparison: original write vs. rolled-up position.
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+$1,200
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Rolled-Up Write
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+$600 Original Write
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54 60
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Stock Price at Expiration
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81
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ment of risk is introduced as well as the possibility of increased rewards. Generally,
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it is not advisable to roll up if at least a 10% correction in the stock price cannot be
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withstood. One's initial goals for the covered write were set when the position was
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established. If the stock advances and these goals are being met, the writer should be
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very cautious about risking that profit.
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A SERIOUS BUT ALL-TOO-COMMON MISTAKE
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When an investor is overly intent on keeping his stock from being called away (per
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haps he is writing calls against stock that he really has no intention of selling), then
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he will normally roll up and/or forward to a more distant expiration month whenev
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er the stock rises to the strike of the written call. Most of these rolls incur a debit. If
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the stock is particularly strong, or if there is a strong bull market, these rolls for deb
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its begin to weigh heavily on the psychology of the covered writer. Eventually, he
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wears down emotionally and makes a mistake. He typically takes one of two roads:
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(1) He buys back all of the calls for a (large) debit, leaving the entire stock holding
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exposed to downside movements after it has risen dramatically in price and after he |