Online Trading Academy Lessons from the Pros 06/30/06: Were You Paying Attention? Let's Find Out

Were You Paying Attention? Let's Find Out

By Mike Parnos, Online Trading Academy's Options Therapist
June 30, 2006

I've been going on and on about covered calls for quite a while. Let's see how much of the material you've retained. Take the following quiz and it will give you a good idea on how much you've absorbed and how close you are to being ready to test your skills in the option market.

1. To trade a covered call, your feeling about the stock should be: a) bullish; b) neutral to bullish; c) neutral; d) neutral to bearish; e) bearish

2. You can only sell covered calls against stock that you own. True or False?

3. You are allowed to sell covered calls in your IRA or 401K accounts. True or False?

4. I want to sell a call that is: a) in the money; b) out of the money; c) at the money.

5. If XYZ stock cost me $18.50 and I sold the $20 call for $1.00, my cost basis for the stock is: a) $17.50; b) $18.50; c) $19.50; d) none of the above

6. My potential profit per share for the covered call position (see example in question five) is: a) $2.50; b) $1.00; c) $1.50; d) $2.00

7. If XYZ were to go down, the breakeven point for the covered call position would be: a) $18.50; b) $18.00; c) $16.50; d) $17.50; e) none of the above.

8. If XYZ, at expiration, is $19.25, my profit per share in the covered call position would be: a) $1.75; b) $1.65; c) $1.85; d)1 $1.95

9. If XYZ, at expiration, closes at $19.75, the short $20 call would: a) be exercised; b) expire worthless; c) be rolled into the $20 call for the next month.

10. The risk graph for a covered call is the same as for a: a) bear call spread; b) naked call; c) bull put spread; d) naked put.

11. If XYZ, at expiration, closes at $22.15, my shares will be called away from me at: a) $19.50; b) $22.15; c) $20.00; d) $21.00

12) My potential maximum return on the above covered call position is: a) 14.5%; b) 13.5%; c) 12.5%; d) 12%

13. If XYZ, at expiration, closes at $19.25, I can: a) sell my stock; b) buy more stock; c) sell a call for the next month; d) buy a put; e) all of the above

14. If XYZ, at expiration, closes at $15.25, your loss on the entire covered call position for that month was: a) $2.25; b) $4.50; c) $3.25; d) $2.50; e) none of the above

15. With a "Buy-Write" order, you: a) buy the stock and buy a call; b) short the stock and sell a call; c) buy the stock and sell the call; d) sell the stock and sell the call.

16. With a "Buy-Write" order, the stock and option orders are placed: a) first the stock, then the option; b) first the option, then the stock; c) simultaneously; d) all of the above

17. I'm going to run out now and start selling covered calls because I think I know what I'm doing; True or False?

18. If I lose money, I'm going to blame: a) my broker; b) the stock; c) options; d) my dog; e) anyone else I can think of except myself

Missed Any Columns?

Hey, this is good stuff – especially if you're serious about learning options. The Pulitzer people won't likely be knocking at my door soon, but I've taught a lot of people how to conservatively and consistently make money – and they're still making money to this day. I hope you'll become one of them.

So, if you missed any of my previous columns, click on the following link and, hopefully, they will magically appear. www.tradingacademy.com/newsletters.htm.

Who Is This Guy? --

Mike Parnos has "been there and done that" – plenty! Known as "Online Trading Academy's Options Therapist," Mike has been trading, consulting and teaching option strategies for over 12 years. Both individually, and through his writings, Mike specializes in teaching conservative and non-directional option strategies while providing therapeutic guidance to thousands of individuals, brokers and institutional traders. Over the years, he has learned from his mistakes, and the mistakes of others, and he's here to share his wisdom with you. "Trading is as much psychological as it is skill," says Mike. "Keep an open mind. You never know what might find its way in there."

Answers To Above Quiz:

1) b, 2) False - you can also sell calls that are covered by other options (LEAPS) etc, 3) True – and many other strategies as well IF you have a decent broker, 4) b – to give stock room to appreciate in value, 5) a - $18.50 minus $1.00, 6) a - $1.50 + $1.00, 7) d - $18.50 minus $1.00, 8) a - $.75 plus $1.00, 9) b, 10) d, 11) c, 12) b - $2.50 divided by $18.50, 13) e, 14) a - $17.50 - $15.25, 15) c, 16) c, 17) You tell me, 18) It's up to you

Disclaimer: Mike Parnos is an options instructor and mentor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.