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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1076  
Subject: Re: LOW Covered Call ? Date: 2/14/2012 2:40 PM
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"I was assigned shares a while back at $24. Does writing April 2012 $27 calls for around $1 seem like a good idea?" - struzyna

Here we are a month later and my answer is , "No!" Don't do it. Today the shares are at $27.75 and the guy who bought your $1 call option is making great money. By April he will likely be laughing all the way to the bank. Then again, the market might fool him...and me.

This is the problem with options. You need to have a way to "see" what is most likely to happen. So, here is my secret to options. Let's see Lowes the way I look at it:

http://invest.kleinnet.com/bmw1/stats25/LOW.html

I never sell call options when a stock I own is at 25-year lows. I love to sell options on a business that is at 25-year highs. Like:

http://invest.kleinnet.com/bmw1/stats25/GR.html

The difference is in my perspective. Mr. Market is all about statistical averages. Cheap stocks of great companies tend to go up and expensive stocks of great companies tend to get cheaper...eventually. The problem with options is time. You have to know when Mr. market will come to his senses.

In general, sell covered calls when a stock is more likely to go down rather than when the statistics say the stock is a bargain. You may still be wrong, but not because your perspective was incorrect. More likely, your timing was just not right. The solution there is LEAPs. That gives you more "wiggle room" while Mr. Market figures out that you are correct and he is wrong. Mr. Market is slow to admit his failures, even though they are numerous. Learn to turn his mistakes into your personal profit.
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