Clappy,
Wow. I guess I could have been a lot clearer in my post :)
I was actually comparing three possible positions which might fit the concepts in the article you posted about:
The article's DIM leaps
Hypothetical long common on margin
Actual synthetic long constructed of short puts & long calls.
Note: The synthetic long in SUNW I mentioned was created at the money, with 1:1 ratio of puts to calls. The whole idea is to create a position that acts like stock but costs less to establish (but never forget the risks are the same long stock: If you take a synth long position with 10 short puts & 10 long calls, you are long 1000 shares and must have the capacity to buy them, 'cause with the short 10 puts thats what you are obligated to do, even though you only "spent" 14(00) * 10 = $14,000).
On the synthetic long position in SUNW, only the short puts and long calls (both leaps, same strike/month) are used to create the position. The effect is to be long SUNW @ 105. If SUNW goes up, the calls increase in value and the puts decrease in value, so it's like holding the common long. If SUNW goes down, the calls lose value and the puts increase in value, again it's like holding the common long.
I want to reiterate that the synth long is created by selling short (writing) 1 put for every 1 call bought long, at same strike/month. The put does not protect you. It exposes you to the point value loss (x 100 per contract) of any drop in the underlying. You are compensated for taking on this risk by being paid the cash premium which you use to buy the call.
I will now try to answer your question by the numbers:
********************************************
1) I didn't see any mention of common shares.
Was this position created with the 50% margin after your initial SUNW common purchase? If so, what
protects you from a margin call should the price of SUNW common suddenly drop?
The common position on margin is a separate example for discussion only. I did not do this, I only worked the numbers to see what the effect would be. You would want to ensure that you had some way to protect yourself from margin call risk, possibly by limiting your use of total margin capacity to some reasonable level.
I am willing to take that risk, as I think SUNW will be higher than strike 105 + net debit 14.5 = 119.5 by 03.
2) I agree. So the purpose of the collar you created, prevents your margined options position from
jeopardizing your margin limits. Correct?
This is not a collar, at least as I understand it. In my own actual account, when I sell puts of any kind and for any reason, I do so within my ability both financially and psychologically to be put (assigned) the shares. In the case of SUNW, for example, I am willing to pay 105 for the shares and expect to profit by expiry in '03.
I think the main difference between these positions (DIM, common on margin, synth long) is leverage, and
DIM position risks a bit less than the other positions.
3) The difference between your position and the strategy mentioned in the article, right? Or are you
comparing your ATM positions to similar positions that are DIM?
Your method uses ATM Calls and Puts. Where did the DIM come from?
No, the comparison of the base positions (3 discussed above) used to support the article's paying off of time-value for any of the base position types. The article uses DIM leaps.
4) Would these call/put positions be a long term hold for you providing that SUNW continues to climb at a
steady pace?
In other words, you would plan on executing them upon expiration. Right?
Probably hold for the long haul (exercise at or near expiry).
5) I assume you would buy equal dollar amounts in the Calls and Puts. (As opposed to equal number of
contracts.)
No. 1:1 short puts to long calls. Adding additional short puts (uncovered but secured by margin or cash) simply creates the equivalent of a covered call position on the common.
6) Over time, could the difference between the Call/Put premiums ever get grow greater or smaller in a way
that would decrease your profit potential?
I think you are asking if it's possible that the calls could shrink in price and puts grow in price while the stock goes up? I don't think that's very likely, as both calls and puts prices change with volatility, so both would tend to shrink or grow at same time, so the net position would be the same. I think. And the risk of early assignment on the puts increases as it goes further in the money (stock is falling) but if there's time value in them still, you are not likely to get put.
7) If your Puts are assigned, have you allotted a certain amount of margin to cover this?
I tend to be ready at all times to absorb any stock put to me. I do not like to take risks involving unacceptable outcomes, aka being put more stock than I can buy.
8) Have I missed any key points?
If all goes well, your margin and sale of the intitial puts will fund this for you. You are using other peoples
money to create this future common position. Correct?
In all cases, you are financing a long leveraged position at costs thus:
DIM leaps: with time-value bought
common on margin: with margin loan interest
synthetic long: both time value bought and put risk taken on (compensated with premium tho)
9) Would this strategy work with a more volatile stock? Chances are that the Puts would get assigned,
right?
The volatility makes both the puts and calls cost more. I am not sure if long term it would be meaningful.
I tend to keep this king of thing as simple for myself as possible. If I like a stock long term, I will buy common. If I want to buy now because price is low, but I don't have enough cash (but am expecting enough cash by expiry) I might do a synthetic long. Again, always considering what will happen if I get put.
hm |
