Dale,
I have been looking at doing just what you described. If you are long the stock, short the calls and long puts then you have what I have seen referred to as a hedge wrapper, collar or fence. Do you typically leg into the various positions? Most of us are writing calls against stocks we already own when we perceive the stock has run up and has an increased chance of pulling back. Isn't that moment in time also when it would make the most sense to buy the put?
All those names have been used. I just came across this site that has a nice table of options strategies with performance graphs
optionmax.com
They refer to buying stock and buying a put as a covered long. It is also called a virtual call. It is equivalent to a long call in terms of dollars gained or lost, but you have to put up a lot more money than simply buying a call. It is really like buying a call backed by enough cash to exercise the call.
You're right that the optimum time for both writing calls and buying puts is at the peak price of a stock. If you are a great market timer, that is certainly the way to go. Even better if you can forecast the next bottom after the peak, and the depth of the pull back to help determine which strike prices and months to maximize gains on the options. I will say, however, that if I was a great market timer I would do better just trading stock, or exclusively trading options to maximize profits. Buying protective puts is a compromise position that affords protection if you happen to be wrong in your guess that a stock is going to continue higher, and is far superior to a covered call for both downside protection and upside potential for large moves. Of course that comes at the expense of buying time premium instead of selling it. Combining long stock, short calls, and long puts somewhat neutralizes the time premium and limits the upside potential, but since you don't need the call for the downside protection you can aim at higher strike prices.
I honestly have not done much buying of protective puts, with regrets. I expect I will be doing a lot more in the future. They are especially attractive if you expect a big move to come soon, since during that event the time premium will not erode very much and might actually go up because of increased volatility. If DELL were to tank next week I would probably be able to sell the puts and the stock and still have a lot of the gain I could have realized by selling the stock instead of buying the puts. Not likely I would do that, but it emphasizes that the insurance I gained was quite inexpensive..
Dan |
