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I have a question about the protective put on the CC position on MCOM. I have sold JAN25 calls for 8 1/4 and want to buy puts for down side protection. The puts are very expensive. The cheaper puts I can get are JAN12.5 for $1 1/4 or JAN10 for 3/4 while the stock is about $27. My question to you is how many strikes down should one go for this kind of protection. Suggestions from any one who has this kind of experience are most welcome!
Amit
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Amit,
These puts are going be expensive because of the time premium, and most likely volatility. As most WINSers will probably share, puts are actually kind of subjective, depending on the stock, the time, the price, and the tolerance for risk. Most of the time, and a lot of people will disagree with me, I would be willing to part with 25% of my CC premies for downside protection equal to the CC time, and a couple strikes below the current stock price. I only do this when my NUT isn't much lower than the current stock price, or if I'm dealing with larger volumes of money. If I sold calls and got $1000 in premiums, $250 worth of puts takes a sizable chunk of my profits. If I'm dealing with with $10,000 worth of CC premies, $2500 is well worth locking in $7500 in profits. Do you get my meaning? Some may see that same situation with exactly the opposite stance.
you'll get a lot of different opinions about puts, some will say that if you pick the right stock, you don't need them. If you're using WINS, selling the call at the right time, and buying the puts at the same time will actually work out in your favor in terms of using the puts to generate more money. They will increase in value as the stock runs though it's cycle (downward if you sell the CC at the right time). I use puts partially for profit, but more for protection. I recently executed my next round of CCs on NOVL, and this time I did not buy puts. Why? Because my NUT is under 19, and I don't feel I need downside protection any more. If/when NOVL gets back to 30, I will consider buying the 25s for puts profit. Does that help you at all?
Ryan |
