T2W Trading Community

In this article the author gives an example of how to put together all the information learnt in the past articles Covered Calls - Part 1 and Covered Calls - Part 2.

It's time to put it all together – all the stuff you've learned to this point. We're going to go through the process of selecting a position – without adult supervision. We're going to make believe we have an opinion about the direction the market is going. What is this opinion based on? It came via a fortune cookie from last night's Chinese carryout. First it gave you next Saturday night's lottery numbers. Then, it told you that EBAY was going up eight points in the next month.

Wow! What a tip! However, you look at a chart of EBAY and see that it's trading near its 52-week low – about $26. But who are you to argue with a fortune cookie? Plus, some bald guy in a 3-piece suit on CNBC said something about EBAY possibly making a bottom at this level. Gee, how much proof do you need? Let's take some of your hard earned money and put it to work. It's time to roll the dice.

Look at the above chart of EBAY. There are a few resistance levels to recognize. The 20-day moving average (red line) is at about $27.80. Then, the 50-day moving average (green line) and a consolidation are right above the $30 level. Finally, there is another consolidation at the $34 level. Those are the obstacles EBAY faces on the way up.
Three (or more) resistance levels aren't enough to dissuade us from the trade – seeing as how our sources are so credible. Hey, it's almost a sure thing. Let's look at an option chain and see how we're going to play this move.

With EBAY at $25.93, let's look at the August $25 call. It would cost $2.40. As you learned before, the option price consists of two components – intrinsic value and time value. Since EBAY is trading at $25.93, and is in-the-money, that means that the intrinsic value is $.93 and the remaining $1.47 is time value.