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Author: BoiseKen Big red star, 1000 posts Old School Fool Ticker Guide CAPS All Star Mission Olympia 2 SN Explorer 1 Mission Team Member Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1410  
Subject: ditm call + covered call question Date: 2/20/2010 5:02 PM
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Help me understand why this is a bad idea.

I am interested in writing covered calls to gain additional income. The primary risks with Covered Calls are:

A) Price drops and you are stuck with stock worth less than call income

B) Sudden Price rise and you upside income is capped

So, why not control 100 shares of a stock with a Deep In the Money call. I could control 100 shares for half the price of buying 100 shares outright. Then write my covered call against those 100 shares.

The advantage as I see it is: A) lower price to control 100 shares; B) price rise to the upside is more (magnified by the call option). The price drop will also be magnified, but in terms of real dollars, the loss would be similar or the same.

What are the disadvantages?? Obviously you wouldn’t want this strategy against a dividend paying stock, but otherwise, is this wise?

Thanks for any help, boiseken
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