Steve good Post. Thanks for the references.
Based on 10 contracts
Your Way My Way
Sell Feb 65Put..@ $7..$7000....Sell Feb 60Put..@3.375..$3375
Buy Feb 50 Put @7/8...$ 875
Net:..................$6125............................$3375
If on February X Day CPQ is:
$65.....Profit...$6125..........Profit.........$3375
$60.....Profit...$1125..........Profit.........$3375
$55.....Loss.....$3875..........Loss...........$1625
$50.....Loss.....$8875..........Loss...........$6625
$45.....Loss.....$8875..........Loss.........$11,625
Earnings for CPQ should be positive and propel the issue to $65. Assuming is stays there until February X day, your way produced more profit. Additionally, you put insurance, which cost $875, covers you if the stock falls to $50 or less.
I am also looking for exceptional earnings from CPQ. The reason I don't sell the $65s is the premium is less for deep in the money puts. If CPQ fails to hold $60 by X day, I'll sell the March Calls (next higher $5 increment) on my newly acquired stock to support any losses, if any.
Steve, I intentionally didn't address the margin issue because I limit margin on any account to 25%.
My way limits upside potential by vertue of the $60 put and no insurance at $50. Your way expands profit to $65 and limits losses at $50. Dilution is seen with the cost of the $50 put and the difference between the $65 adn $60 put premiums. There are several strategies which might be employed. If they were all listed here, it would be SI's longest post. To get a passing grade in this business you need a profit, regardless how you do it. Failure is seen with a loss,
Mike Gordon |
