37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Cl,apter 2: Covered Call Writing 57
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If one "legs" into the position - that is, buys the stock first and then attempts to
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sell the option, or vice versa - he is subjecting himself to a risk.
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Example: An investor wants to buy XYZ at 43 and sell the July 45 call at 3. Ifhe first
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sells the option at 3 and then tries to buy the stock, he may find that he has to pay
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more than 43 for the stock. On the other hand, if he tries to buy the stock first and
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then sell the option, he may find that the option price has moved down. In either case
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the writer will be accepting a lower return on his covered write. Table 2-16 demon
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strated how one's returns might be affected ifhe has to give up an eighth by "legging"
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into the position.
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ESTABLISHING A NET POSITION
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What the covered writer really wants to do is ensure that his net price is obtained. If
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he wants to buy stock at 43 and sell an option at 3, he is attempting to establish the
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position at 40 net. He normally would not mind paying 43.10 for the stock if he can
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sell the call at 3.10, thereby still obtaining 40 net.
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A "net" covered writing order must be placed with a brokerage firm because it
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is essential for the person actually executing the order to have full access to both the
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stock exchange and the option exchange. This is also referred to as a contingent
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order. Most major brokerage firms offer this service to their clients, although some
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place a minimum number of shares on the order. That is, one must write against at
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least 500 or 1,000 shares in order to avail himself of the service. There are, however,
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brokerage firms that will take net orders even for 100-share covered writes. Since the
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chances of giving away a dime are relatively great if one attempts to execute his own
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order by placing separate orders on two exchanges - stock and option - he should
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avail himself of the broker's service. Moreover, if his orders are for a small number of
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shares, he should deal with a broker who will take net orders for small positions.
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The reader must understand that there is no guarantee that a net order will be
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filled. The net order is always a "not held" order, meaning that the customer is not
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guaranteed an execution even if it appears that the order could be filled at prevailing
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market bids and offers. Of course, the broker will attempt to fill the order if it can
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reasonably be accomplished, since that is his livelihood. However, if the net order is
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slightly away from current market prices, the broker may have to "leg" into the posi
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tion to fill the order. The risk in this is the broker's responsibility, not the customer's.
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Therefore, the broker may elect not to take the risk and to report "nothing done" -
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the order is not filled.
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If one buys stock at 43 and sells the call at 3, is the return really the same as buy
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ing the stock at 43.10 and selling the call at 3.10? The answer is, yes, the returns are |