36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
Chapter 2: Covered Call Writing 83
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write early. Of course, if the trade was done in a margin account, the writer will be
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reducing the margin interest that he had planned to pay in the position, because the
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debit will be erased earlier. In most cases, the increased commissions are very small
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and the lost dividend is not significant compared to the increase in annualized return
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that one can achieve by closing the position early. However, this is not always true,
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and one should be aware of exactly what his costs are for closing the position early.
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Obviously, getting out of a covered writing position can be as difficult as estab
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lishing it. Therefore, one should place the order to close the position with his bro
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kerage firm's option desk, to be executed as a "net" order. The same traders who facil
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itate establishing covered writing positions at net prices will also facilitate getting out
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of the positions. One would normally place the order by saying that he wanted to sell
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his stock and buy the option "at parity" or, in the example, at "25 net." Just as it is
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often necessary to be in contact with both the option and stock exchanges to estab
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lish a position, so is it necessary to maintain the same contacts to renwve a position
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at parity.
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ACTION TO TAKE AT OR NEAR EXPIRATION
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As expiration nears and the time value premium disappears from a written call, the
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covered writer may often want to roll forward, that is, buy back the currently written
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call and sell a longer-term call with the same striking price. For an in-the-money call,
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the optimum time to roll forward is generally when the time value premium has com
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pletely disappeared from the call. For an out-of-the-money call, the correct time to
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move into the more distant option series is when the return offered by the near-term
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option is less than the return offered by the longer-term call.
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The in-the-money case is quite simple to analyze. As long as there is time pre
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mium left in the call, there is little risk of assignment, and therefore the writer is
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earning time premium by remaining with the original call. However, when the option
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begins to trade at parity or a discount, there arises a significant probability of exer
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cise by arbitrageurs. It is at this time that the writer should roll the in-the-money call
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forward. For example, if XYZ were offered at 51 and the July 50 call were bid at 1,
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the writer should be rolling forward into the October 50 or January 50 call.
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The out-of-the-money case is a little more difficult to handle, but a relatively
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straightforward analysis can be applied to facilitate the writer's decision. One can
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compute the return per day remaining in the written call and compare it to the net
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return per day from the longer-term call. If the longer-term call has a higher return,
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one should roll forward. |