46 lines
2.2 KiB
Plaintext
46 lines
2.2 KiB
Plaintext
54 Part II: Call Option Strategies
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than computing the interest charge as the debit times the interest rate multiplied by
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the time to expiration, one should technically use:
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Margin interest charges = Debit [(l + r/ -1]
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where r is the interest rate per month and t the number of months to expiration. (It
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would be incorrect to use days to expiration, since brokerage firms compute interest
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monthly, not daily.)
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In Example 2 of the preceding section, the debit was $10,910, the time was 6
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months, and the annual interest rate was 10%. Using this more complex formula, the
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margin interest charges would be $557, as opposed to the $545 charge computed
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with the simpler formula. Thus, the difference is usually small, in terms of percent
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age, and it is therefore comrrwn practice to use the simpler method.
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SIZE OF THE POSITION
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So far it has been assumed that the writer was purchasing 500 shares of XYZ and sell
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ing 5 calls. This requires a relatively considerable investment for one position for the
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individual investor. However, one should be aware that buying too few shares for cov
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ered writing purposes can lower returns considerably.
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Example: If an investor were to buy 100 shares of XYZ at 43 and sell l July 45 call
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for 3, his return if exercised would drop from the 11.2% return (cash) that was com
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puted earlier to a return of9.9% in a cash account. Table 2-13 verifies this statement.
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Since commissions are less, on a per-share basis, when one buys more stock and
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sells more calls, the returns will naturally be higher with a 500- or 1,000-share posi
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tion than with a 100- or 200-share position. This difference can be rather dramatic, as
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Tables 2-14 and 2-15 point out. Several interesting and worthwhile conclusions can be
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drawn from these tables. The first and most obvious conclusion is that the rrwre shares
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TABLE 2-13.
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Cash investment vs. return.
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Net Investment-Cash ( l 00 shares)
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Stock cost $4,300
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Plus commissions + 85
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Less option premium 300
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Plus option commissions + 25
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Net investment $4,110
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Return If Exercised-Cash ( l 00 shares)
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Stock sale price
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Stock commissions
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Plus dividend
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Less net investment
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Net profit if exercised
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$4,500
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85
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+ 100
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- 4 110
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$ 405
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Return if exercised = $4 05 = 9. 9%
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$4,110 |