45 lines
2.2 KiB
Plaintext
45 lines
2.2 KiB
Plaintext
Chapter 2: Covered Call Writing
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TABLE 2-20.
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Net return-cash account.
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Return If Exercised
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Sell 500 XYZ at 45 $22,500
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Sell 500 XYZ at 40 20,000
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Less total stock sale
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commissions 560
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Plus dividends ($1 /share) + 1,000
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Less net investment - 39,600
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Net profit if exercised $ 3,340
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Return if exercised = 3,340 = 8_4%
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(cash) 39,600
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69
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Return If Unchanged
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Unchanged stock value (500
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shares at 42) $21,000
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Sell 500 at 40 + 20,000
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Commissions on sale at 40 280
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Plus dividends ($1 /share) . + 1,000
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Less net investment - 39,600
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Net profit if unchanged $ 2, 120
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Return if unchanged = 2, 120 = 5 _4%
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(cash) 39,600
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because half of the stock will be called away if it remains unchanged (the in-the
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money portion) whereas the other half will not. This is consistent with the method of
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calculating the return if unchanged that was introduced previously.
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The break-even point is calculated as before. The "total stock cost to expiration"
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would be the net investment of $39,600 less the $1,000 received in dividends. This is
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a total of $38,600. On a per-share basis, then, the break-even point of 38.6 is 8.1 %
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below the current stock price of 42. Thus, the amount of percentage downside pro
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tection is 8.1 %.
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The foregoing calculations clearly demonstrate that the returns on the "com
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bined" write are not exactly the averages of the in-the-money and out-of-the-money
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returns, because of the different commission calculations at various stock prices.
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However, if one is working with a computer-generated list and does not want to both
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er to calculate exactly the return on the combined write, he can arrive at a relatively
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close approximation by averaging the returns for the in-the-money write and the out
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of-the-money write.
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OTHER DIVERSIFICATION TECHNIQUES
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Holders of large positions in a particular stock may want even more diversification
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than can be provided by writing against two different striking prices. Institutions,
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pension funds, and large individual stockholders may fall into this category. It is often
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advisable for such large stockholders to diversify their writing over time as well as
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over at least two striking prices. By diversifying over time - for example, writing one- |