Interesting idea...
I charted the closing price of SPX.X for the last 24 months, and
calculated the % change from the previous month.
The average change was +1.3%, which indicates a bull market.
The standard deviation was 3.8%, which measures the fluctuation from
the steady upward trend.
Taking two standard deviations about the average, my calculations
show that SPX.X closes between -6.3% and +8.9% of the previous
month's close. That's for the trailing 24 months, and during that
time that range was only broken twice, at +9.5%, and -7%.
To keep this accurate, you'd want to recalculate the range every
month for the trailing 24 months... that'll adjust for long-term
variations, like higher volatility in the bear market we're
experiencing now. We should probably also use the closing price on
the option expiration day, rather than the end of the month.
Otherwise, we have to look at options that expire too soon, or still
have 3 weeks of time value at the end of the month.
Your suggestion was to sell a naked call one month out at 9% above
the last close. You should use September's close, at 1025. We can
assume that Oct's close will probably be between 961 and 1116.
Let's look at some options:
NOV 1998 950 CALL 73 1/4 x 75 1/4
NOV 1998 975 CALL 57 3/8 x 59 3/8
NOV 1998 1100 CALL 7 x 8 1/4
NOV 1998 1125 CALL 3 3/4 x 4 1/2
NOV 1998 950 PUT 38 1/2 x 40 1/2
NOV 1998 975 PUT 49 x 51
NOV 1998 1100 PUT 121 7/8 x 124 7/8
NOV 1998 1125 PUT 143 1/8 x 146 1/8
We think SPX.X will close below 1116, so we could write the 1125
CALL, or buy the 1125 PUT. We also think that SPX.X will close above
961, so we can write the 950 PUT, or buy the 950 CALL. We can also do
any combination of these.
The time value of each option is:
SPX.X @ $977
NOV 1998 950 CALL 73 1/4 x 75 1/4 TV: 47 1/4
NOV 1998 975 CALL 57 3/8 x 59 3/8 TV: 56 3/8
NOV 1998 1100 CALL 7 x 8 1/4 TV: 7 5/8
NOV 1998 1125 CALL 3 3/4 x 4 1/2 TV: 4 1/8
NOV 1998 950 PUT 38 1/2 x 40 1/2 TV: 39 1/2
NOV 1998 975 PUT 49 x 51 TV: 50
NOV 1998 1100 PUT 121 7/8 x 124 7/8 TV: 0 3/8
NOV 1998 1125 PUT 142 1/8 x 145 1/8 TV: -4 3/8
Well, generally with spreads, we want to sell more time value
than we buy.
We could buy the 1125 PUT, and sell the 950 PUT, for a net
investment of $106.625.
At expiration, if SPX.X is > 950 and < 1125, we can close the
position for $165, a 55% gain, I believe.
I don't have McMillian's book here at work, but I think a spread
like that is the way to go... I'm sure there's a section about
spreads which discusses playing the decaying time value like this,
on the assumption that you know the price won't stray outside your
strike price range.
Doug. |
