CPR Part Three

Again, the CPR as presented by Hooper and Zalewski in their book, Covered Calls and Leaps, is used when the stock price is depressed and in a new cycle, but the cycle depth is too shallow to apply the TSS technique.

Example:

1. John owns 100 shares of FMD at a cost of $32.58.
2. He buys one $25 Jan 06 call at $4.00
3. He sells 2 $30 Jan 06 calls at $1.50.

The Net Debit of a CPR

Net debit = Price of a long call - (2 x Price of the Short Call)

$4.00 - ( 2 x $1.50) = - $1.00

$1.00 is the net debit.

$1.00 is the maximum loss to the investor.

Just to recap ...

The Cardiopulmonary Resuscitation Technique is used to:

1. Dramatically expedite the closing of a new covered call position where the stock price has suffered an immediate decline after entering the transaction. The CPR provides this ability as in many cases, it allows the investor to lower the strike price of the short call in the near month, yet continue to maintain a positive called return.
2. To generate income and reduce the cost basis in a deeply depressed position. The CPR can effectively be applied where an under performing stock is now in an upward cycle but the cycle's depth is too shallow to effectively use the TSS for income.

Construction:

1. An investor holds a long position - 100 shares of stock.
2. The investor buys one near month (or two month out) call.
3. The investor sells two near month (or two month out) calls with a higher strike price than the call in number 2.