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GameStop Corp. Message Board

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  • lionelman17 lionelman17 Jan 17, 2008 3:50 PM Flag

    For those 'who can accept' the potential for a 19% return...

    Some of us have been discussing how selling covered calls is a conservative approach to making a few bucks. There have been questions as to whether its a guarantee. Well, here is an actual example of how it can backfire (temporarily).
    On 12/27 I bought TRN at 28.10. The next day I sold January 30's for 60 cents and I get a small dividend. Right now the stock is $22.24. So, I guess I've got it "for a while".

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    • But you're still better off (by .60) than if you had just bought the stock and not sold the calls. The difference in "my" example is that it sold "in the money leap" calls that provided more downside protection (approx 28% protection).

      If you had sold Jan $25's you'd have a much lower basis (close to $24.10). Going further towards my original example (where I used leaps): "If" leaps were available you'd probably have a basis "around" $21 (25% downside protection from original purchase price). The potential gain is reduced by selling in the money options but that's the trade off for getting the downside protection. Leaps aren't available for trn but the point is still valid.


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