37 lines
2.1 KiB
Plaintext
37 lines
2.1 KiB
Plaintext
44 Part II: Call Option Strategies.
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In general, out-of-the-money covered writes offer higher potential rewards but
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have less risk protection than do in-the-money covered writes. One can establish an
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aggressive or defensive covered writing position, depending on how far the call
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option is in- or out-of-the-money when the write is established. In-the-money writes
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are more defensive covered writing positions.
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Some examples may help to illustrate how one covered write can be consider
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ably more conservative, from a strategy viewpoint, than another.
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Example: XYZ common stock is selling at 45 and two options are being considered
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for writing: an XYZ July 40 selling for 8, and an XYZ July 50 selling for 1. Table 2-2
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depicts the profitability of utilizing the July 40 or the July 50 for the covered writing.
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The in-the-money covered write of the July 40 affords 8 points, or nearly 18% pro
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tection down to a price of 37 (the break-even point) at expiration. The out-of-the
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money covered write of the July 50 offers only 1 point of downside protection at expi
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ration. Hence, the in-the-rrwney covered write offers greater downside protection
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than does the out-of-the-rrwney covered write. This statement is true in general - not
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merely for this example.
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In the balance of the financial world, it is normally true that investment posi
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tions offering less risk also have lower reward potential. The covered writing exam
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ple just given is no exception. The in-the-money covered write of the July 40 has a
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maximum potential profit of $300 at any point above 40 at the time of expiration.
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However, the out-of-the-money covered write of the July 50 has a maximum poten
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tial profit of $600 at any point above 50 at expiration. The maximum potential profit
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of an out-of-the-rrwney covered write is generally greater than that of an in-the
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rrwney write.
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TABLE 2-2.
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Profit or loss of the July 40 and July 50 calls.
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In-the-Money Write Out-of-the-Money Write
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of July 40 of July SO
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Stock of Total Stock at Total
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Expiration Profit Expiration Profit
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35 -$200 35 -$900
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37 0 40 - 400
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40 + 300 44 0
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45 + 300 45 + 100
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50 + 300 50 + 600
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60 + 300 60 + 600 |