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Chicago Bridge & Iron Company N.V. Message Board

  • dolcefarniente2001 dolcefarniente2001 Dec 23, 2007 2:52 PM Flag

    In a predicament.Please help..

    Some months past I wrote Jan $35 covered calls on my shares of CBI bringing my cost basis to about $32.85 per share.As my luck would have it this is the only stock in my portfolio that has soared! Now I'm faced with the proposition of either buying the options back at ± $21.20 or sweating it out hoping that my shares won't be called. What to do. I've never been in a predicament like this before.As something of an ignoramus I'd appreciate some kind soul out there to give me a bit of advice.
    Thanks, Di

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    • What was the premium on the options you wrote? What's the cost basis on the equity position?

    • if you dont buy them back they are history!

    • Relax dolce farniente, you're not in any predicament. You are still going to have a (slight)profit here, you just missed out on the bigger profit of simply holding the CBI long position.

      If you don't buy back the call you sold, your CBI stock will be taken away from you at $35. So factoring in the 6.20 from the call you sold, you end up positive a net 2.15/share. If you buy back the call which you said could be done at 25.30, you lost $19.10/share on the round trip on the call but you keep your CBI stock. If you were to sell the CBI stock at the current 61.25/share at the time you bought back the call, you'd be down net 19.10/share on the call transactions and up (61.25 - 39) 22.25 on the stock position, so you'd be up 3.15 all told, exclusive of trading fees and capital gains ramifications. Either way, you will come out of the call situation with a small profit. The painful part is knowing the profit you missed out on. Sorry about that.

      A long time ago I used to sell out of the money covered calls on a small Intel position. I used to get $1.50 - $2 per share on selling a call two - three months out at a strike price ~$5 above what the stock price was at at the time I sold the call. It worked for me twice, I'd pocket the $1.50 - $2 and the stock price wouldn't go above the strike price so I kept the shares. The third time, the shares went up over $40. Because I had sold the calls, I made only $5 of that, plus my 1.50 - $2. So for me I learned a lesson. You can probably make good money selling covered calls, but realize that you're capping your potential profits. Maybe limit it to times of down markets, and after a spike in the share price of the stock has occurred. Good luck.

    • One tactic you may want to consider is to buy your calls back and sell new calls in the future at a higher strike price.

      You may have to stay "in the money" with your new strike to get an even cash flow but if timed correctly, it can be profitable.

    • Why would you short CBI?!

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