Writing a covered call with a spread.

Discussion in 'Options' started by noob_trad3r, Jun 2, 2009.

  1. I am a little more bullish on GE + with earnings next month a surprise could lurk and they could go up.



    I bought GE at 6.88 (7500 shares)

    I bought a while ago ago leap puts for 7.50 (they expire in jan 2010

    I dont want to give up the upside but It would be nice to keep collecting "Dividends" since GE cut the dividend to 10 cents.

    I figure it should be no problem to write 75 calls for a strike 14 that expire in june for 81 cents

    then buy 75 calls for a strike 15 that expire in june for 41 cents.

    then I get to keep 40 cent "dividend"

    If ge stays between 14 and 15 I lose the GE stock but I did not give up a big upside.

    Right now my principal at least is protected with the put. But I dont like to just have stock sitting around not working or earning its keep so I figure if I can keep milking this GE cow I would be happy.

    GE has been kind of sideways.
     
  2. I wouldnt call this a dividend, I would call it the credit from a 1 pt verticle spread. But, it doesnt sound like a terrible play. Question for you, why only 1 point wide on the call spread?

    Thanks
    mark s
    www.option911.com
     
  3. You thought out the position and your adjustment (adding the spread) gave you some add'l premium in return for partially capping the upside. If that's acceptable to you then all is good.

    The only thing that I would disagree with is buying LEAPs for hedging the downside. IMHO, medium term options are more suitable since they cost less and will do as good a job of protecting as the LEAP. Due to a lower cost, they'll lose less if the long shares cooperate and head up a decent amount as GE has done/

    I'm also not too keen on your belief that at this point, the LEAPS protect you. 6.3 pts is a lot of money to give up to the downside should the bottom fall out.

    Since you're bullish, I would lean more toward short tem unbalanced collars so that you could have more upside and a more reasonable floor. You might not get the premium income stream but if your stock pickability is good, you'll do a lot better in the long run.