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A former member
Post #: 1
Step 1 - Calculate Our Cost Basis: To enter this position we are purchasing shares of Rockwood Hldgs Inc (ROC) . We need to buy the shares in groups of 100 and the minimum number we can purchase is 100 shares. The current cost of the stock is $21.51/share. Our cost basis is lowered to $20.96/share because we are receiving premium for selling the covered calls. If we choose to trade using margin, we can allocate up to half of the cost of this trade to margin. As a general rule, we do not exceed 50% margin on our most aggressive covered call trades.

Step 2 - Determine Our Stop Loss: As a basic guideline, we do not wish to lose more than 20% on any covered call trade. For this trade we plan to exit this position with limited losses should the stock move against us. In the event that Rockwood Hldgs Inc (ROC) shares trade below $17.82/share we will buy back our call and sell our stock. As long as we are able to exit the trade above the stock price of $17.82 we should limit our losses to 17.17%.

Step 3 - Place The Order: We are placing a buy/write order with our broker to buy the number of shares we decided to purchase in step 1, and to write covered calls for the appropriate number of contracts. The order is a limit order and may not get filled if the stock moves quickly.

Step 4 - Verify Our Entry: We will check our brokerage account today or after the market has closed tonight to confirm that our order has been filled.
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