dwayanu,
A friend of mine e-mailed me your post and asked me what I thought. Since you said comments welcome, I will throw in my 2 cents.
My complements on a very well thought out post. I must say that looking at it gave me pause. However, when evaluating option strategies I think it is more important to keep track of Portfolio Equity than Portfolio Value. Here is why.
Quick example: If I own 1000 shares of a $50 stock (assuming no margin) my portfolio value and my portfolio equity are equal at 50,000. If I then purchase 500 more shares of that stock on margin, my Portfolio Equity is still 50,000, but my Portfolio Value is 75,000, an increase of 50% without any change in stock price. No profit has been made here. So increase in Portfolio Value is a feel good figure.
So using your NTAP example:
$95,000 = initial portfolio equity
After NTAP goes from 95 to 105, your portfolio equity is:
+ 105,000 stock value
- 6,500 loss after buy back Sept 95 call
--------------
98,500 Portfolio Equity
So a 10 % rise in stock price has resulted in your portfolio equity rising 4%
---------------------------
So lets assume that the stock rises to $125 per share and you do the same thing, rolling out, at Sept 115 and 125 calls. For simplicity lets assume that the new options are about the same price (in reality they would be just slightly higher)
Now with NTAP at $125 let's look at your portfolio equity:
+ 125,000 stock value
- 6,500 loss after buy back Sept 95 call
- 6,500 loss after buy back Sept 105 call
- 6,500 loss after buy back Sept 115 call
--------------------------
105,000 Portfolio Equity
So a 32% rise in stock price has resulted in an 11% gain in Portfolio Equity, where just holding the stock without doing options at all would have resulted in a gain in portfolio equity of 32%.
It would seem to me that with this strategy you are kind of shooting yourself in the foot since the original reason for owning NTAP was capital appreciation.
note: IF the stock price stays at 125, until the expiration of the new Sept 125, the Portfolio Equity will THEN be $115,500 (net gain in Portfolio Equity of 22%)
Hey, when has a stock like NTAP stayed constant for a month? :-)
Another way to look at selling a covered call is that even though you immediately take in the value of the option, you are just holding the stakes until the outcome of the bet has come been determined. You may be required to give it back and more. Until that time, thinking that you already have a profit is just an illusion. :-(
Steve's Disclaimer: Real world results may differ.
Hey, what the hell do I know anyway?
Steve 667
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