47 lines
2.0 KiB
Plaintext
47 lines
2.0 KiB
Plaintext
Oapter 2: Covered Call Writing
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TABLE 2-4.
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Return if exercised-cash account.
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Stock sale proceeds (500 shares at 45)
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Less stock sale commissions
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Plus dividends earned until expiration
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Less net investment
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Net profit if exercised
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Return if exercised $2,290 = 11 2o/c
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$20,380 .
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0
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TABLE 2-5.
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Return if unchanged-cash account.
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Unchanged stock value (500 shares at 43)
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Plus dividends
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Less net investment
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Profit if unchanged
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Return if unchanged $1,620 = 7.9'¼
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$20,380 °
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+
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$22,500
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330
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500
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- 20,380
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$ 2,290
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$21,500
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+ 500
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- 20,380
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$ 1,620
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49
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return if unchanged - also called the static return and sometimes incorrectly referred
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to as the "expected return." Again, one first calculates the profit and then calculates
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the return by dividing the profit by the net investment. An important point should be
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made here: There is no stock sale commission included in Table 2-5. This is the most
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common way of calculating the return if unchanged; it is done this way because in a
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majority of cases, one would continue to hold the stock if it were unchanged and
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would write another call option against the same stock. Recall again, though, that if
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the written call is in-the-rrwney, the return if unchanged is the same as the return if
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exercised. Stock sale commissions must therefore be included in that case.
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Once the necessary returns have been computed and the writer has a feeling for
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how much money he could make in the covered write, he next computes the exact
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downside break-even point to determine what kind of downside protection the writ
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ten call provides (Table 2-6). The total return concept of covered writing necessitates
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viewing both potential income and downside protection as important criteria for
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selecting a writing position. If the stock were held to expiration and the $500 in div
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idends received, the writer would break even at a price of 39.8. Again, a stock sale
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commission is not generally included in the break-even point computation, because |