37 lines
2.6 KiB
Plaintext
37 lines
2.6 KiB
Plaintext
84 Part II: Call Option Strategies
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Example: An investor previously entered a covered writing situation in which he
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wrote five January 30 calls against 500 XYZ common. The following prices exist cur
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rently, l month before expiration:
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XYZ common, 29¼;
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January 30 call,¼; and
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April 30 call, 2¼.
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The writer can only make ¼ a point more of time premium on this covered write for
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the time remaining until expiration. It is possible that his money could be put to bet
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ter use by rolling forward to the April 30 call. Commissions for rolling forward must
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be subtracted from the April 30's premium to present a true comparison.
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By remaining in the January 30, the writer could make, at most, $250 for the 30
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days remaining until January expiration. This is a return of $8.33 per day. The com
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missions for rolling forward would be approximately $100, including both the buy
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back and the new sale. Since the current time premium in the April 30 call is $250
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per option, this would mean that the writer would stand to make 5 times $250 less
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the $100 in commissions during the 120-day period until April expiration; $1,150
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divided by 120 days is $9.58 per day. Thus, the per-day return is higher from the April
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30 than from the January 30, after commissions are included. The writer should roll
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forward to the April 30 at this time.
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Rolling forward, since it involves a positive cash flow ( that is, it is a credit trans
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action) simultaneously increases the writer's maximum profit potential and lowers the
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break-even point. In the example above, the credit for rolling forward is 2 points, so
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the break-even point will be lowered by 2 points and the maximum profit potential
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is also increased by the 2-point credit.
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A simple calculator can provide one with the return-per-day calculation neces
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sary to make the decision concerning rolling forward. The preceding analysis is only
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directly applicable to rolling forward at the same striking price. Rolling-up or rolling
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down decisions at expiration, since they involve different striking prices, cannot be
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based solely on the differential returns in time premium values offered by the options
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in question.
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In the earlier discussion concerning rolling up, it was mentioned that at or near
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expiration, one may have no choice but to write the next higher striking price if he
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wants to retain his stock. This does not necessarily involve a debit transaction, how
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ever. If the stock is volatile enough, one might even be able to roll up for even money
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or a slight credit at expiration. Should this occur, it would be a desirable situation and
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should always be taken advantage of. |