Wanna have some fun? Here's a look at a covered straddle, covered combination, covered call, and naked put with one of my favorites, NTAP. Prices are at the close today.
Covered Straddle
Buy 100 NTAP at 17.84
Sell Jan-02 20 Call at bid of 4.80
Sell Jan-02 20 Put at bid of 6.30
Cash Out = $1784
Cash In = $1110
Net Cost = $674
Capital Requirement = $2000
Equity Needed = $2674
If NTAP finishes above 20 the call is exercised, the put expires, and you pocket 4.8 + 6.3 + 2.16 = 13.26 per share, or $1326.
If NTAP finishes below 20 the call expires, the put is exercised, and you now own 200 shares of NTAP with a total cost of $2674, or a cost basis of 13.37 per share.
Covered Combination
Buy 100 NTAP at 17.84
Sell Jan-02 20 Call at bid of 4.80
Sell Jan-02 15 Put at bid of 3.40
Cash Out = $1784
Cash In = $820
Net Cost = $964
Capital Requirement = $1500
Equity Needed = $2464
If NTAP finishes above 20 the call is exercised, the put expires, and you pocket 4.8 + 3.4 + 2.16 = 10.36 per share, or $1036.
If NTAP finishes below 15 the call expires, the put is exercised, and you now own 200 shares of NTAP with a total cost of $2464, or a cost basis of 12.32 per share.
If NTAP finishes between 15 and 20, both expire and you are the proud owner of 100 shares of NTAP with a market value above 15 and a cost basis of 9.64.
Covered Call
Buy 200 NTAP at 17.84
Sell 2 Jan-02 20 Calls at 4.8
Cash Out = $3568
Cash In = $960
Net Cost = $2608
Capital Requirement = $0
Equity Needed = $2608
If NTAP finishes above 20 the call is exercised and you pocket 4.8 + 2.16 = 6.96 per share, or $1392.
If NTAP finishes below 20 the call expires and you now own 200 shares of NTAP with a total cost of $2608, or a cost basis of 13.04 per share.
Naked Puts
Sell 2 Jan-02 15 Puts at 3.4
Cash Out = $0
Cash In = $680
Net CREDIT = $680
Capital Requirement = $3000
Equity Needed = $2320
If NTAP finishes above 15 the put expires, and you pocket $680.
If NTAP finishes below 15 the put is exercised, and you now own 200 shares of NTAP with a total cost of $2320, or a cost basis of 11.6 per share.
I intentionally avoided calculating ROI. If there's one thing we've established for certain on this board, it's that ROI is essentially arbitrary. :) However, I will go as far as to say that a greater net cost and lower capital requirement result in generally lower ROI as margin use is phased in.
dM |
