41 lines
1.8 KiB
Plaintext
41 lines
1.8 KiB
Plaintext
Chapter 2: Covered Call Writing
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Return if exercised - margin
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Downside break-even point cash
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Downside break-even point - margin
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XYZ
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7.9%
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46.3
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47.6
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63
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AAA
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16.2%
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44.9
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46.1
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Seeing these calculations, the XYZ stockholder may feel that it is not advisable to
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write against his stock, or he may even be tempted to sell XYZ and buy AAA in order
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to establish a covered write. Either of these actions could be a mistake.
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First, he should compute what his returns would be, at current prices, from
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writing against the XYZ he already owns. Since the stock is already held, no stock buy
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commissions would be involved. This would reduce the net investment shown below
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by the stock purchase commissions, or $345, giving a total net investment (cash) of
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$23,077. In theory, the stockholder does not really make an investment per se; after
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all, he already owns the stock. However, for the purposes of computing returns, an
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investment figure is necessary. This reduction in the net investment will increase his
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profit by the same amount - $345 - thus, bringing the profit up to $1,828.
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Consequently, the return if exercised (cash) wpuld be 7.9% on XYZ stock already
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held. On margin, the return would increase to 11.3% after eliminating purchase com
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missions. This return, assumed to be for a 6-month period, is well in excess of 1 % per
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TABLE 2-17.
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Summary of covered writing returns, XYZ and AAA.
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XYZ AAA
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Buy 500 shares at 50 $25,000 $25,000
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Plus stock commissions + 345 + 345
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Less option premiums received - 2,000 - 3,000
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Plus option sale commissions + 77 + 91
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Net investment-cash $23,422 $22,436
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Sell 500 shares at 50 $25,000 $25,000
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Less stock sale commissions 345 345
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Dividend received + 250 0
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Less net investment - 23,422 - 22,436
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Net profit $ 1,483 $ 2,219
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Return if exercised-cash 6.3% 9.9% |