ARS,
I did end up selling 2 QCOM calls Friday, so I am back to 6 contracts out. I got 5.42 each for the Jan 03 140's. I have sold this one before and is back to my original strategy of selling calls against my most expensive shares at a strike well above cost, mostly ignoring the time element. Previously sold for 6.52 and bought back for 3.97 between 5/3 and 6/13.
You are quite right in observing that the time element is of little consequence for any short holding period of a long term LEAPS. That leads to a question about your motivation for writing these calls. The obvious answer, which I will assume to be the answer unless you correct me, is that the calls afford some downside protection, and opportunity for profit on the calls as the stock swings up and down. The amount of protection or profit potential you are getting for these short term swings is characterized by delta, which is currently at 33% for these calls. For every dollar of stock movement, the calls move $.33. Equivalently, for every dollar the stock moves the value of your CC moves $.67.
Delta is fairly stable for long term options. For your case it is only adding or subtracting about 3% for each $10 move in the stock. But for a CC position changes in delta always work against you. The higher the stock moves the bigger delta gets, reducing the rate at which you investment value grows, and the lower the stock moves the smaller delta gets, accelerating the rate at which your investment value declines. Even though the delta changes are initially small in this case, they are doing nothing to help you and are hurting a little.
Given that your intent seems to be capturing gains on the movement of the LEAPS prices in the near term, where time erosion is of almost no consequence, it is worthwhile to consider an alternative comparable strategy. Suppose instead of selling LEAPS on any remaining uncovered stock you instead sold 1/3, and then bought it back at such time you would have bought back the LEAPS. The rate of change of your position would then be a constant 67% of what the full position would have been. Initially, this would be the same as the CC, but it would be better than the CC if the stock made substantial moves in either direction. For most stocks and most brokers, there is far less overhead in the bid/ask spreads and fees for stocks than for options. That being the case it is difficult to find any advantage to trading the short LEAPS calls over trading an equivalent fraction of the stock position.
I'm not suggesting anyone undo a CC position involving long term calls that has already been established, especially if the intent is to just ride the position to expiration and keep the full premium. But I recommend at least a parallel "paper study" of what could be accomplished by trading a fraction of the stock instead of selling and buying long term calls over and over again. To make the comparison valid, the fraction of the stock position sold and purchased should be the delta of the LEAPS call that is being sold and repurchased. I think you will find you can do better trading the stock because of the reduced overhead.
Regarding puts, I was thinking of selling the following:
2 NTAP Jan 03 10's @3.70
1 SEBL Jan 03 25 @4.50
1 QCOM Jan 03 50 @10.20
Knowing very little about puts, I have no feel for the merit of this plan, but feel that I would most likely be willing to buy those stocks at those prices, and that 18 months will give me ample opportunity to get a starting point of understanding and maybe chances to trade. I will be obligating myself to keep $9,500 in cash for 18 months (not really, I know, but under my own rules for now I would), for which I will be recieving roughly $2200 now, so my total investment is $7300. When I put the whole thing into a word proposition, I don't find any negatives I am unwilling to risk, and a fairly decent return, especially for a learning experience.
For the group, 2200 gain on 7300 invested is 30% in 18 months. That is a decent return on a relatively conservative investment. If you believe the economy will recover in the next year it's almost a sure thing. The star of the group in terms of rate of return is NTAP; $3.70 gain on $6.30 invested is almost 59%. Of course this one has the greatest risk (based on current prices) because you are writing much closer to the money than with the others. It is always worthwhile to compare cash backed put writing with a comparable CC position to see which works out better. Based on the prices I see now, the best put bid is $3.60, so the return would be 3.60/6.40 or 56%. The stock was last offered at $11.80 with the 2003JAN10 calls bid at $5.60, so a CC could be opened for $6.20 with a potential gain of $3.80. This is a somewhat better return, 3.80/6.20 or 61%, but involves two additional transactions compared to the short put. Is it worth it?
There is a distinct advantage to the CC approach if you are willing to take the risk (and if you benefit from it) of legging into the position. If you can catch the stock at a low, and wait until it bounces to write the call, the 80% delta gives you a good chance of lowering the net investment even further, potentially pushing that return up into the 100% area. The 20% delta of the put makes its price rather insensitive to the stock movement, so you are not going to change the return all that much by waiting for a better price. Of course the leg in game can work against you too, so playing it can cost you.
Dan |
