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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Night Writer who wrote (11330)8/2/1999 9:31:00 PM
From: Greg Higgins  Read Replies (3) of 14162
 
Night Writer writes (condescendingly):Buying the 40 puts to off set the risk of selling the 45 puts is the idea.

What I'm suggesting is that the two strikes were not a single player doing a spread. I'm suggesting that someone (X) sold the 45's and the MM who bought the 45's sold the 40s to lay off part of his risk.

If you are confident CPQ would turn up by Jan, there are 3 ways to play it: 1) Buy the stock, 2) Buy the Calls 3) Sell deep in the money puts.

The stock play is standard, everybody does it, but if all you have is stock and no cash you pay interest on the margin.

The call play would be most options players choice, but the Jan 20 calls are 5 and change now, you have to put money out of pocket and if you don't have cash, you're paying margin interest again. The safer deeper strikes cost more out of pocket, and the OTM strikes require you to call a price.

In this instance, selling the deep in the money puts is just like buying the stock, your losses and gains are nearly 1 for 1, but you additionally get the interest on the margin premium, this acts as a cushion against small down turns and increases your return. Notice that only this maneuver lets you capture all CPQ gains between 20 and 45 between now an January net credit!

I think a credible case can be made in this instance for solely selling the DITM puts for someone who is convinced they want to buy the stock.

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