31 lines
2.0 KiB
Plaintext
31 lines
2.0 KiB
Plaintext
Mixing Exposure • 247
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compelling enough, this is the time to figure out a clever way to get more
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exposure to it.
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Y ou can write calls as long as they are at least at the same strike
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price as your previous purchase price or EBP; this just means that you
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are buying at $16 and agreeing to sell at at least $16, in other words. Also
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keep in mind that any dividend payment you receive you can also think
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of as a reduction of your EBP—that cash inflow is offsetting the cost of
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the shares. Factoring in dividends and the (very small) cash inflow as-
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sociated with writing far OTM calls will, as long as you are right about
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the valuation, eventually reduce your EBP enough so that you can make
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a profit on the investment.
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Over-/Underexposure
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Options are transacted in contract sizes of 100 shares. If you hold a number
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of shares that is not evenly divisible by 100, you must decide whether you
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are going to sell the next number down of contracts or the next number
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up. For example, let’s say that you own 250 shares of ABC. Y ou can either
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choose to sell two call contracts (in which case you will not be receiving
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yield on 50 of your shares) or sell three call contracts (in which case you
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will be effectively shorting 50 shares). My preference is to sell fewer con-
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tracts controlling fewer shares than I hold, and in fact, your broker may or
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may not insist that you do so as well. If not, it is an unpleasant feeling to get
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a call from a broker saying that you have a margin call on a position that
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you didn’t know you had.
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Getting Assigned
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If you write covered calls, you live with the risk that you will have to deliver
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your beloved shares to a stranger. Y ou can deliver your shares and use the
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proceeds from that sale (the broker will deposit an amount equal to the
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strike price times the contract multiplier into your account, and you get
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to keep the premium you originally received) to buy the shares again, but
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there is no way around delivering the shares if assigned. |