This week, Options Forum revisits the continuing

saga of covered call writing and the best ways to pick the options positions that will be the most profitable. These issues are becoming key, especially with the market becoming less of a runaway freight train. Pricing and timing, which had become almost irrelevant as the stocks moved consistently upward, now have to be mulled over.

In these complicated times, just shoot your questions to, and be sure to include your full name.

Bull Spreads with LEAPS

I would like to establish some bull spreads using leaps -- for example, buying Philip Morris (MO) - Get Report January 2001 calls at the 40 strike price and selling the January 2001 60 calls. My question is: If I'm right and Philip Morris goes to 60, not in two years, but in only one year, how can I profit? If I have to unwind the position and buy back the January 2001 strike 60, I have to pay a lot due to the time value. But I'm concerned that if I wait until maturity, maybe Philip Morris will go back down due to same bad news. Any suggestions? -- Candido Galimberti


Good idea, but there may be a better way to execute it.

First, let's define a bull spread. That is when you buy a call option at a low strike price and sell a call option at a higher strike price. A bull spread on XYZ, if the stock was at 64, would include buying an April 65 call and selling an April 70 call.

Now, in your case, if you're dead set on using options, buy the LEAPS call on Philip Morris to stake out the long position. But on the short side, instead of selling a further out-of-the-money LEAPS, sell short-term options.

What you should do at this point is sit tight until expiration (March 19), then buy the 40 LEAPS and sell shorter-term calls against it, maybe the July options.

In this scenario, if you are forced to buy back these options, you won't be paying much -- or any -- time value, depending on when you pull the trigger. Money manager Dave Schultz, who frequently uses this strategy, compares it to a buy/write, with the long LEAPS position substituting for the underlying stock.

If you were to do a buy/write, you would sell a call against a purchase of the actual shares. You would be expending more capital than if you used a LEAPS option.

Here are some numbers. To get exposure to 1,000 shares of Philip Morris, you could dole out $39,000 for the actual stock or slightly more than $7,300 to buy 10 January 2001 calls at the 40 strike price, at least according to market prices the day after we received your letter.

Unfortunately, you're not going to take in much moolah selling Philip Morris calls struck at 60, no matter what their expiration cycle is. If you sell the June 60 calls, you'd take in about 1/8 (or $12.50) for each contract you sold. You wouldn't want to sell more than you could cover with stock, so let's say you'd buy 10 of those as well. You'd grab only $125. If you sold a lower strike price, let's say the 55s, the premium would be 9/16 ($56.25) per contract. Selling 10 contracts would bring you only $562.50.

As to your original idea, you could sell the January 2001 calls struck at 60 and take in 2 1/4 ($225) a contract, or $2,250 on 10. But that higher price comes with a cost to you -- that is, the worry that the additional time will wreak havoc on your strategy.

If that's the case, then simply don't sell the LEAPS. Accept the lighter premium on the standard options and spare yourself the sleepless nights.

Buying or Selling

I am a participant in

Investment Challenge. Each participant was given a "fictional" $500,000 to play the stock market. I initially purchased 3,350 shares of eBay (EBAY) - Get Report for 155 a share. I just read your transcript with Jacki Fromme about options education. There are still many things that I don't understand. I was looking at the CBOE's list of options for eBay, and there is listed a March 165 contract with the code (.QXBCM) that is priced at 97 3/4. If I understand your article correctly, I can purchase this option and get paid $97.75 per share. If eBay hits 165, then I have to sell it for $165. But either way, I get to keep the $97.75 I got up front when I purchased. Do I understand this correctly or am I way off base here? Also, I understand that the "CM" at the end means it expires in March at $165, but I don't understand what the "QXB" stands for. Can you help me understand just what it is that I am looking at? -- Bill Deitsch


First off, if someone gave me a fictional 500 Gs to play with, I'd find myself a nice fictional Caribbean paradise populated only by fictional supermodels. Just don't tell the nonfictional Mrs. Colarusso.

OK, OK, back to options. You're making the same mistake every beginner makes: You're confusing buying an option with selling an option.

Your confusion is understandable. In most other parts of the world, you can't sell something unless you already own it. Not so in options. The 97 3/4 you collect comes when you sell (or write) that eBay 165 option. You can sell both puts and calls.

Writing a call usually indicated neutrality on a stock because the ideal scenario is that the stock doesn't reach the option's strike price and the option you sold expires worthless. That means you keep the premium and don't have to give up the shares of eBay.

If your calls do get assigned, meaning that a buyer exercises the option and you have to fulfill the obligation to sell your shares, you keep the 97 3/4, but it's not per share. An option's premium is charged per contract, and each contract is worth 100 shares of the underlying stock. That's where you get the wonderful leverage of options.

As for the QXB symbol on eBay options, it doesn't mean much, except that because the stock moved so much so quickly, the permutations of symbols using something closer to its stock symbol were exhausted before the March options were listed.

Good luck in the Investment Challenge!

Tender Mercy

I had shares of Computer Management Sciences (CMSX) and sold covered calls (the March 20s) against them. Then, along comes a tender offer at 28.00 expiring March 9. (Note: I gave up and bought back the calls and sold the shares at a net profit.) So what happens to my covered calls, which became deeply in the money? I called two brokers plus Brown's reorganization department, and they couldn't answer my question. Obviously if I tender my shares, the option becomes uncovered. So, what would have happened if I had not tendered the stock? Would it still trade? What about the calls? I understand that they would be "adjusted," but to what? Is there any way to know? -- Bernie Riegel


When all else fails, just ask us.

Since we didn't know, we took it up with

Options Institute

chieftain John Power. He typically knows everything.

Here's his response:

The specifics of what happens to the stock and what happens to the options in each takeover, tender, combination, stock split, reorganization, merger or other change usually will be unique. Having said that, what happens to the options will follow exactly the terms of the announced deal in the stock.

The Stock

Every company cuts its own deals for mergers or splits or business changes to suit its own needs. What happens to the shares will be decided by the terms of the deal. Many times, the exact terms of the deal will not be spelled out completely and legally until days (sometimes hours) before the date of the deal "closing." Obviously, if you own shares of one of the companies in the deal at the record date of the deal, you will be entitled to whatever the terms of the deal are for the shareholders. Conversely, if you are short the shares (sold, not yet bought back) at the record date, you can be obligated to provide whatever the deal terms provide for owners of those shares. Most times, the new entity will have shares outstanding, which will trade. In a few isolated cases, the shares cease trading, leaving the options reflecting those shares, or their successor shares, still trading. Weird but true.

The Options

Any options listed at the time of the deal will continue to trade until their expiration date, even if that date is later than the date of the deal. So, even after the "deal" is done, the options will continue to trade until their expiration. Many times, a new series of options that is unencumbered by the obligations of the deal will be listed at the same time. Bottom line, any option which is in existence at the record date will have its contract terms changed to reflect the same terms as the deal in the stock. Example: XYZ company will be taken over by ABC company. Deal gives each XYZ shareholder at the record date 1.5 shares of ABC for every one share of XYZ. Result: After the record date, the old XYZ call options (already in existence) will no longer give the owner the right to buy 100 shares of XYZ at the strike price. They will now entitle the owner to buy 150 shares of ABC at a strike price. (Note: The strike price and number of shares can all change depending on the terms of the deal.) Someone who is short the call option could be obligated to deliver all the stuff now underlying this "adjusted" option. Owners of puts would have the right to sell all that stuff underlying the adjusted contract, and short-put positions could be assigned and wind up obligated to buy the stuff underlying the adjusted contract. The "adjusted" options would get a new option symbol code to reflect the change, but trading would continue until the option's expiration date. Problem: The exact, legal specifics of how the options will change will be announced in a research circular by each exchange on which the options are listed. If only one exchange lists the option, you must wait for that exchange to release the specifics of the changes. Some exchanges are better than others at getting the information out, but all exchanges are at the mercy of the "deal" companies to get their information. Terms of the deal can affect strike price, number of shares or types of product underlying the option contract (sometimes cash or securities are part of the deal). Lastly, the affected exchanges will normally list a "new" set of options on the "new" company if they don't already exist. So a new options user would, in our example, have the choice of using the "old" adjusted (150 shares) options or the "new" unadjusted option, which would probably reflect 100 shares of the "new" entity. Option strike price codes would be different also. The old options would continue to trade under their new symbols until their original expiration. In most cases, the "old" adjusted options will see a dramatic decrease in activity and liquidity after the changes. If you are involved in options that might be adjusted, it is usually smart to get out of them, if you can, before the deal is closed.

Symbol Hunting

Is there a place in cyberspace that one can quickly enter a symbol of an option and get full information about that option, including the name of the company? When I go to the CBOE, I get only limited information and cannot get the name of the company . The only spot I have found so far is E*Trade, (EGRP) but it takes several steps and info is still limited. -- Barry Fluster


You may be going to the wrong part of the CBOE site. I use it all the time and quickly get to the entire string of options on a stock (including bid/ask, last price, net change, volume and open interest) just by tapping in the stock symbol. Try

this page, and let us know if that gives you what you're looking for.