43 lines
2.3 KiB
Plaintext
43 lines
2.3 KiB
Plaintext
56 Part II: Call Option Strategies
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It may seem insignificant that one has to pay an extra few cents for the stock or pos
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sibly receives a dime or 20 cents less for the call, but even a relatively small fraction
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can alter the potential returns by a surprising amount. This is especially true for in
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the-money writes, although any write will be affected. Let us use the previous 500-
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share covered writing example, again including all costs.
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As before, the results are more dramatic for the margin write than for the cash
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write. In neither case does the break-even point change by much. However, the
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potential returns are altered significantly. Notice that if one pays an extra dime for
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the stock and receives a dime less for the call - the far right-hand column in Table
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2-16 - he may greatly negate the effect of writing against a larger number of shares.
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From Table 2-16, one can see that writing against 300 shares at those prices (43 for
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the stock and 3 for the call) is approximately the same return as writing against 500
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shares if the stock costs 431/s and the option brings in 27/s.
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Table 2-16 should clearly demonstrate that entering a covered writing order at
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the market may not be a prudent thing to do, especially if one's calculations for the
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potential returns are based on last sales or on closing prices in the newspaper. In the
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next section, we discuss in depth the proper procedure for entering a covered writ
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ing order.
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TABLE 2-16.
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Effect of stock and option prices on writing returns.
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Buy Stock at 43 Buy Stock at 43.10
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Sell Call at 3 Sell Call at 3
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Return if exercised 11.2% cash 10.9% cash
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18.4% margin 17.7% margin
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Return if unchanged 7.9% cash 7.6% cash
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11 .4% margin 10.7% margin
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Break-even point 39.8 cash 39.9 cash
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40.9 margin 41.0 margin
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EXECUTION OF THE COVERED WRITE ORDER
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Buy Stock at 43. I 0
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Sell Call at 2.90
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10.6% cash
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16. 9% margin
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7.3% cash
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9.9% margin
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40.0 cash
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41.1 margin
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When establishing a covered writing position, the question often arises: Which
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should be done first - buy the stock or sell the option? The correct answer is that nei
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ther should be done first! In fact, a simultaneous transaction of buying the stock and
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selling the option is the only way of assuring that both sides of the covered write are
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established at desired price levels. |