Wednesday, April 08, 1998

Uncovering the Covered Call
The Absolute Naked Truth

by JDanoff (

On the Day before April Fool's day, I uncovered my last covered call. Last April, I got this bright idea to sell covered calls on my stocks as an income strategy. Brilliant plan!! For the past year I've been buying back calls and selling to higher strike prices. Sometimes, I've done this for more than a year out. This is beyond Foolish. Nothing feels worse than to own stocks that can't grow. I tried to pretend it was okay because if the market corrected, I had nothing to lose. When your stock is $32 above the strike price, it's easy to feel safe and secure and miserable.

So today at 3:05PM, I bit the bullet and choked as I bought back April 95's on Lucent at $32.50 a piece. I sold 100 shares at $127.50 to pay for the 3 contracts. I kept the other 200 shares which became 400 on the April 2 split. By the way I got a big $1.75 for selling these calls in January when the stock was trading at $82. While it's true that I have a gain as I bought Lucent at $79, look what I gave up.

There is a moral to this story. Never sell a covered call on a stock you like and think is going up. On the other hand, why would you own a stock you don't like. There are people who have actually bought a stock just to write a covered call. Very Wise. Buy stocks you like to make money. Have patience and then leap (no pun intended) for joy when they take off and you still own them. Today I feel relief in taking this short-term medicine because I know that tomorrow is the first day of the rest of my investing life owning all my stocks free and clear. My days as a covered-call junkie are over. I did it without the patch. No need for a 12-step program. Being on board the Lucent Express will be my reward.

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