58 lines
1.7 KiB
Plaintext
58 lines
1.7 KiB
Plaintext
392 Part Ill: Put Option Strategies
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at its expiration, and the stock is called away. The short-term writer would have col
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lected two dividends of the common stock, while the LEAPS writer would have col
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lected eight by expiration.
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Stock sale (500 @ 50)
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Less stock commission
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Plus dividends earned
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until expiration
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Less net investment
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Net profit if exercised
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Return if exercised
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(net profit/net investment)
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Return If Exercised
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+
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July 50 call
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$25,000
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300
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250
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- 23,350
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$ 1,600
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6.9%
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January 50 LEAPS
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$25,000
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300
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+ 1,000
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- 21,150
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$ 4,550
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21.5%
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The LEAPS writer has a much higher net return if exercised, again because he
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wrote a more expensive option to begin with. However, in order to fairly compare the
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two writes, one must annualize the returns. That is, the July 50 covered write made
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6.9% in six months, so it could make twice that in one year, if it can be duplicated six
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months from now. In a similar manner, the LEAPS covered writer can make 21.5%
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in two years if the stock is called away. However, on an annualized basis, he would
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make only half that amount.
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Return If Exercised, Annualized
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July 50 call January 50 LEAPS
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13.8% 10.8%
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Thus, on an annualized basis, the short-term write seems better. The shorter-term
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call will generally have a higher rate of return, annualized, than the LEAPS call. The
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problems with annualizing are discussed in the following text.
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Finally, the downside break-even point can be computed for each write.
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Downside Break-Even Calculation
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Net investment
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Less dividends received
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Total stock cost to expiration
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Divided by shares held (500),
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equals break-even price:
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July 50 call
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$23,350
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250
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$23,100
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46.2
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January 50 LEAPS
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$21,150
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1 000
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$20,150
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40.3 |