30 lines
2.1 KiB
Plaintext
30 lines
2.1 KiB
Plaintext
percent IV, and the May has a 23 percent IV. March is the cheapest option
|
||
by IV standards. This is not necessarily a favorable quality for a short
|
||
candidate. Bill must weigh his assessment of all relevant information and
|
||
then decide which trade is best. With this type of a strategy, the benefits of
|
||
the higher theta can outweigh the disadvantages of selling the lower IV. In
|
||
this case, Bill may actually like selling the lower IV. He may infer that the
|
||
market believes Harley-Davidson will be less volatile during this period.
|
||
So far, Bill has been focusing his efforts on the 70 strike calls. If he trades
|
||
the March 70 covered call, he will have a net delta of 0.588 per contract.
|
||
That’s the negative 0.412 delta from shorting the call plus the 1.00 delta of
|
||
the stock. His indifference point if the trade is held until expiration is
|
||
$70.85. The indifference point is the point at which Bill would be
|
||
indifferent as to whether he held only the stock or the covered call. This is
|
||
figured by adding the strike price of $70 to the 0.85 premium. This is the
|
||
effective sale price of the stock if the call is assigned. If Bill wants more
|
||
potential for upside profit, he could sell a higher strike. He would have to
|
||
sell the April or May 75, since the March 75s are a zero bid. This would
|
||
give him a higher indifference point, and the upside profits would
|
||
materialize quickly if HOG moved higher, since the covered-call deltas
|
||
would be higher with the 75 calls. The April 75 covered-call net delta is
|
||
0.796 per contract (the stock delta of 1.00 minus the 0.204 delta of the call).
|
||
The May 75 covered-call delta is 0.751.
|
||
But Bill is neutral to only slightly bullish. In this case, he’d rather have
|
||
the higher premium—high theta is more desirable than high delta in this
|
||
situation. Bill buys 1,000 shares of Harley-Davidson at $69 and sells 10
|
||
Harley-Davidson March 70 calls at 0.85.
|
||
Bill also needs to plan his exit. To exit, he must study two things: an at-
|
||
expiration diagram and his greeks. Exhibit 5.8 shows the P&(L) at
|
||
expiration of the Harley-Davidson March 70 covered call. Exhibit 5.9
|
||
shows the greeks. |