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Motley Fool Pro / Pro: Catch-Up Trades


Subject:  buy/write to catch up? Date:  1/30/2014  11:30 AM
Author:  thefist Number:  550 of 830

I've missed a few reccs over the years due to life's many interrupts. When I finally get to catching up, I find that the stock has run away a bit. ORLY is one example for me.

What about initiating these positions as covered calls with a buy/write?

My reasoning goes like this:
- you want, or wanted, the position anyhow
- valuation is higher than you want
- if the stock gets called away, you accept that along with the income, as a highly valued stock being sold.
- depending up on strikes chosen, you can reduce cost basis in the shares.
- choose higher strikes to nip away at cost basis, or lower strikes nearer fair value to possibly make more income, rolling calls when necessary

There are certainly risks here if the stock tanks 20% and you only collected 4% premium, but that would be a similar story if it was a long in you portfolio anyhow. Choosing a strike 10-15% below current price could provide some cushion there.

Any comments? Anyone done this?

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