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Chapter 6. Alternatives to Stock Purchase > Covered Calls for Contingent Sale

Covered Calls for Contingent Sale

Looking beyond contingent purchase, we also have to consider contingent-sale strategies. The most conservative form of contingent sale is the covered call write. When you own 100 shares and you sell a call, you invite the possibility of exercise. One strategy—writing deep in-the-money calls to create exercise intentionally—makes sense, but only if you first consider the tax implications.

For example, using the previous example of Federal Express, with the stock at 87.78, current-month calls (based on October 2004) are available for 12.70 (November 75) or 7.90 (November 80). These are virtually all intrinsic value, so if you want to create exercise, it makes little difference which one you pick. Strike prices are approximately 5 points apart, but so are option premium levels. Every point of movement in stock price will be matched point-for-point in changes in option premium, so short-term changes in the stock could create immediate profit opportunities as an alternative to exercise.


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