34 lines
2.1 KiB
Plaintext
34 lines
2.1 KiB
Plaintext
Cl,apter 2: Covered Call Writing 55
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one writes against, the higher his returns and the lower his break-even point will be.
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This is true for both cash and margin and is a direct result of the way commissions are
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figured: Larger trades involve smaller percentage commission charges. While the per
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centage returns increase as the number of shares increases for both cash and margin
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covered writing, the increase is much more dramatic in the case of margin. Note that
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in Table 2-14, which depicts cash transactions, the return from writing against 100
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shares is 9.9% and increases to 12. 7% if 2,000 shares are written against. This is an
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increase, but not a particularly dramatic one. However, in Table 2-15, the return if
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exercised more than doubles (21.6 vs. 10.4) and the return if unchanged nearly triples
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(13.0 vs. 4.4) when the 100-share write is compared to the 2,000-share write. This
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effect is more dramatic for margin writes due to two factors - the lower investment
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required and the more burdensome effect of margin interest charges on the profits of
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smaller positions. This effect is so dramatic that a 100-share write in a cash account in
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our example actually offers a higher return if unchanged than does the margin write
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- 7.1 % vs. 4.4%. This implies that one should carefully compute his potential returns
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if he is writing against a small number of shares on margin.
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TABLE 2-14.
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Cash covered writes (costs included).
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Shares Written Against
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100 200 300 400 500 1,000 2,000
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Return if exercised (%) 9.9 10.0 10.4 10.8 11.2 12.1 12.7
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Re~rn if unchanged(%) 7.1 7.2 7.5 7.7 7.9 8.4 8.7
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Break-even point 40.1 40.0 39.9 39.9 39.8 39.6 39.5
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TABLE 2-15.
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Margin covered writes (costs included).
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Shares Written Against
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100 200 300 400 500 1,000 2,000
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Return if exercised (%) 10.4 15.8 16.6 17.4 18.4 20.4 21.6
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Return if unchanged (%) 4.4 9.8 10.3 10.8 11.4 12.3 13.0
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Break-even point 41.2 41.1 41.0 41.0 40.9 40.7 40.6
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WHAT A DIFFERENCE A DIME MAKES
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Another aspect of covered writing that can be important as far as potential returns
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are concerned is, of course, the prices of the stock and option involved in the write. |