34 lines
2.3 KiB
Plaintext
34 lines
2.3 KiB
Plaintext
Chapter 2: Covered Call Writing 79
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another near-term call to continue taking in short-term premiums, or perhaps write
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a long-term call at that time.
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When rolling down into the near-term call, one is attempting to return to a
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potentially profitable situation in the shortest period of time. By writing short-term
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calls one or two times, the writer will eventually be able to reduce his stock cost near
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er to 15 in the shortest time period. Once his stock cost approaches 15, he can then
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write a long-term call with striking price 15 and return again to a potentially prof
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itable situation. He will no longer be locked into a loss.
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ACTION TO TAKE IF THE STOCK RISES
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A more pleasant situation for the covered writer to encounter is the one in which the
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underlying stock rises in price after the covered writing position has been estab
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lished. There are generally several choices available if this happens. The writer may
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decide to do nothing and to let his stock be called away, thereby making the return
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that he had hoped for when he established the position. On the other hand, if the
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underlying stock rises fairly quickly and the written call comes to parity, the writer
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may either close the position early or roll the call up. Each case is discussed.
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Example: Someone establishes a covered writing position by buying a stock at 50 and
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selling a 6-month call for 6 points. His maximum profit potential is 6 points anywhere
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above 50 at expiration, and his downside break-even point is 44. Furthermore, sup
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pose that the stock experiences a substantial rally and that it climbs to a price of 60
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in a short period of time. With the stock at 60, the July 50 might be selling for 11
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points and a July 60 might sell for as much as 7 points. Thus, the writer may consid
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er buying back the call that was originally written and rolling up to the call with a
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higher striking price. Table 2-24 summarizes the situation.
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TABLE 2·24.
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Comparison of original and current prices.
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Original Position Current Prices
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Buy XYZ at 50 XYZ common 60
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Sell XYZ July 50 call at 6 XYZ July 50 11
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XYZ Jul 60 7
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If the writer were to roll-up - that is, buy back the July 50 and sell the July 60
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- he would be increasing his profit potential. If XYZ were above 60 in July and were
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called away, he would make his option credits - 6 points from the July 50 plus 7 |