Several questions about covered calls over the weekend and how we play them. (June 4, 2001)

  One of the things we like to do is pick stocks that are rolling in a range and then buy them when they turn up off the bottom of the range and sell the calls (or the stock if we want to) at the top of the range when and if the stock starts to turn back down. If it continues to run higher out of its range, why sell? If it does hit the top of that range and start down, we will go ahead and sell the calls.

It might still breakout, but our play was to ride it up to the top of the range and sell calls if it turned back down again. Do we want to chance riding it back down and having to wait for it to make the move once again? No, because we want to be able to play that move AS WELL. We like to ride them up, sell the calls when it peaks, then let it fall to the bottom of the range again. When we see it hit bottom and start back up, if there is enough time in the expiration period, we can then look at buying the call we sold back and letting the stock run back up with the goal of selling the call again should it turn back down. If there is not much time left in the expiration and we don't think the stock will make it back up to the top of the range before expiration and we just want to stand pat, we will let the stock move up and get called out. If we want to play it again even if we have to go to the next expiration period, however, (let's say there are great option premiums on this stock), we may just go ahead and buy it back anyway and then let it run up and sell the next month call if there is just a week or so left in the current expiration period.This way we can play one stock up and down without having to find new plays every month. As long as the pattern holds we are in good shape.

We also like to sell calls on our long term holdings in our IRA's and cash accounts, stocks that we do not want to lose. We sell when high and buy back when low, thus keeping our stock and getting hard cash into the accounts that we can use to buy more stock or use for living expenses (in our cash accounts). We use technical analysis to tell us when the time is right to sell and then we look for support as the time to buy back. With a large stock position you can make literally thousands per month without having to get too much movement in the option you sell and then buy back.

We also like longer term covereds on stable stocks to generate 25% or better returns over 5 months or so. We also like to use LEAPS to leverage our cash and not have to deal with margin problems.


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