37 lines
1.6 KiB
Plaintext
37 lines
1.6 KiB
Plaintext
Mixing Exposure • 243
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ignore the fact that most people simply want to generate a bit of extra in-
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come out of the holdings they already have and so are psychologically re-
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sistant to both selling ATM (because this makes it more likely for their
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shares to be called away) and selling at a time when the stock price sud-
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denly drop (because they want to reap the benefit of the shares recovering).
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Although I understand these sentiments, it is important to realize
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that options are financial instruments and not magical ones. It would be
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nice if we could simply find an investment tool that we could bolt onto
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our present stock holdings that would increase the dividend a nice amount
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but that wouldn’t put us at risk of having to deliver our beloved stocks to a
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complete stranger; unfortunately, this is not the case for options.
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For example, let’s say that you own stock in a company that is paying out
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a very nice dividend yield of 5 percent at present prices. This is a mature firm
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that has tons of cash flow but few opportunities for growth, so management
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has made the welcome choice to return cash to shareholders. The stock is trad-
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ing at $50 per share, but because the dividend is attractive to you, you are loathe
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to part with the stock. As such, you would prefer to write the covered call at a
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$55 or even a $60 strike price. A quick look at the BSM cone tells us why you
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should not be expecting a big boost in yield from selling the covered calls:
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80
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Sold call
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range of
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exposure
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70
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60
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50
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40
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30
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20
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5/18/2012 5/20/2013 249 499 749 999
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Cash Flows R Us, Inc. (CASH)
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Date/Day Count
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Stock Price
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GREEN
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LIGHT GREENGRAY
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LIGHT REDRED |