38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
60 Part II: Call Option Strategies
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is somewhat misleading, however, since the more volatile stocks will always offer a
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large percentage of downside protection (their premiums are higher). The difficulty
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arises in trying to decide if 10% protection on a volatile stock is better than or worse
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than, say, 6% protection on a less volatile stock. There are mathematical ways to
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quantify this, but because of the relatively advanced nature of the computations
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involved, they are not discussed until later in the text, in Chapter 28 on mathemati
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cal applications.
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Rather than go into involved mathematical calculations, many covered writers
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use the percentage of downside protection and will only consider writes that offer a
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certain minimum level of protection, say 10%. Although this is not exact, it does
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strive to ensure that one has minimal downside protection in a covered write, as well
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as an acceptable return. A standard figure that is often used is the 10% level of pro
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tection. Alternatively, one may also require that the write be a certain percent in-the
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money, say 5%. This is just another way of arriving at the same concept.
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THE IMPORTANCE OF STRATEGY
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In a conservative option writing strategy, one should be looking for minimum returns
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if unchanged of 1 % per month, with downside protection of at least 10%, as general
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guidelines. Employing such criteria automatically forces one to write in-the-money
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options in line with the total return concept. The overall position constructed by
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using such guidelines as these will be a relatively conservative position - regardless
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of the volatility of the underlying stock - since the levels of protection will be large
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but a reasonable return can still be attained. There is a danger, however, in using
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fixed guidelines, because market conditions change. In the early days of listed
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options, premiums were so large that virtually every at- or in-the-money covered
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write satisfied the foregoing criteria. However, now one should work with a ranked
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list of covered writing positions, or perhaps two lists. A daily computer ranking of
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either or both of the following categories would help establish the most attractive
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types of conservative covered writes. One list would rank, by annualized return, the
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writes that afford, as a minimum, the desired downside protection level, say 10%.
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The other list would rank, by percentage downside protection, all the writes that
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meet at least the minimum acceptable return if unchanged, say 12%. If premium lev
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els shrink and the lists become quite small on a daily basis, one might consider
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expanding the criteria to view more potential situations. On the other hand, if pre
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miums expand dramatically, one might consider using more restrictive criteria, to
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reduce the number of potential writing candidates.
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A different group of covered writers may favor a more aggressive strategy of out
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of-the-money writes. There is some mathematical basis to believe, in the long rnn, that |