36 lines
1.3 KiB
Plaintext
36 lines
1.3 KiB
Plaintext
68 Part II: Call Option Strategies
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FIGURE 2-2.
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Comparison: combined write vs. in-the-money write and out-of-the
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money write.
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Out-of-the-Money Write
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,
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.-------► ,,, Combined Write ,
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/ In-the-Money Write
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-----------➔
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Stock Price at Expiration
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Since this technique can be useful in providing diversification between protec
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tion and return, not only for an individual position but for a large part of a portfolio,
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it may be useful to see exactly how to compute the potential returns and break-even
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points. Tables 2-19 and 2-20 calculate the return if exercised and the return if
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unchanged using the prices from the previous example. Assume XYZ will pay $1 per
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share in dividends before April expiration.
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Note that the profit calculations are similar to those described in earlier sec
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tions, except that now there are two prices for stock sales since there are two options
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involved. In the "return if exercised" section, half of the stock is sold at 45 and half is
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sold at 40. The "return if unchanged" calculation is somewhat more complicated now,
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TABLE 2-19.
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Net investment-cash account.
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Buy 1,000 XYZ at 42
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Plus stock commissions
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Less options premiums:
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Sell 5 April 40's at 4
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Sell 5 April 45's at 2
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Plus total option commissions
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Net investment
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+
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$42,000
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460
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- 2,000
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1,000
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+ 140
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$39,600 |