Maksims Covered Call Options Forum

[maksim]

Sure,

Covered Call, lets say xyz.

You can buy the shares for $3, and write dec 08 $3 strike for
$.30.

If company goes bust, the most you can lose is $2.70. You lose the shares, but keep the premium.

Instead of putting more into shares, I bought an equivalent number of shares via a proxy, Jan 2010 $2.50 options.

When you write calls, for it to be covered, it simply means, if your calls get called, you can produce the shares. So you can write calls and still be covered if. 1. you own the shares outright. 2. have the shares somwhere else. 3. hold company stock options. or 4. Stock options.

So my proxy for the shares is the Jan 2010 calls. If the calls I write get called, and I am assigned, I can use my 2010 calls to exercise, and deliver the shares.

Same scenario. If XYZ dec calls sell for $.30, Jan 2010 calls sell for $1. I can write the calls against them. If company goes bust, most I lose is $1 I paid for premium for my 2010 options, minus the $.30 I receive for the dec 08 premium.

Only caveat, is unlike underlying stock, the longer term calls I have, will expire in the future.

The whole basis is that that take 2 options, same strike, only difference is months, the rate of decay for the time premium is much greater in the options nearer expieration, as opposed to longer term options.

The very same reason why alot of people are getting screwed on out of the money SKF options people bought that are out of the money.