Writing Covered Calls With LEAPS

[DallasSteve]

I saw a new infomercial this weekend about writing covered calls or LEAPS to generate returns with low risk. This morning (after learning what a LEAP is) I was looking at options prices for possible strategies and I'm trying to understand the real risks involved with using LEAPS instead of holding the underlying stock (so this question is probably very simplistic).

This morning the prices on Calls for QQQ at $45 are approximately:

Jan 09 - $8.13
Jul 07 - $2.94

If I buy a Jan 09 LEAP at $8.13 can I keep writing a one-month call and receive about $2.94 each month until Jan 09? This assumes that if the Jan 09 LEAP gets exercised I will receive enough to buy another LEAP and repeat the cycle each month. What am I missing here? This generates about 40% return per month at little risk, so it can't be correct or we would all be retired and living off this "sure thing".

Thanks

Steve

 

[Rhody Trader]

The idea of writing a covered call or LEAP is that you own the underlying and write the option against your position. For example, as I write this Google is trading at about $513. I could write an August 600 Call and receive about $2. If GOOG goes above $600, the stock gets called away, and I make $89 total ($2 for the option and $87 for the price gain), but would miss out on any further gain. If the market stays below $600, I pocket the $2 and get to keep my stock. The downside is that if the price falls, the $2 I make on the option will cushion the blow somewhat.