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I don't rem,ember reading this in S.. books. This is not true from a
financial perspective.
a covered call is a combination of a long position in the security and a
short position in the call. The payoff is not the same. COnsider that I
own the security. For every dollar that the security goes up I make 1
dollar. Now consider that I sell a call. I take in a fixed set of dollars
that will never change. If the price of the security goes up $5, then the
price of the call (which we are short) also goes up $5. Net profit =
$0+fixed premium. If the price of the security goes down $5, then the price
of the call goes down also(until it gets to $0). Net profit= -$5 + [$0,$5]
+fixed premium
As you can see, The only reason to have a covered call is if you think the
situation is going to be flat for a while and you're trying to collect the
premium and still hold onto your stock.
Jim
> -----Original Message-----
> From: Andy Dunn [SMTP:andy@xxxxxxxx]
> Sent: Thursday, February 04, 1999 11:42 AM
> To: omega-list@xxxxxxxxxx
> Subject: Schwager and covered calls
>
> I have a friend who is using covered calls.
>
> I am almost positive that I read in one of Schwagers books that he
> explains that a covered call is mathematically the exact same as an
> outright position but costs twice as much in comission...I think it was
> during an interview. Does anyone remember this, and which book it was in
> and maybe the page? I am trying to help out a friend with the knowledge.
>
> thanks
>
> Andy
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