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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: PAL who wrote (1855)8/9/2001 4:30:45 PM
From: rydad  Read Replies (2) of 5205
 
Ok, after thoroughly reading your Covered Short on a Strangle strategy, it sounds pretty good. Let's see if I got some major points straight and if my analysis of a comparison to just writing a covered call on QCOM. I'll use the same data you provided. ( I used your format to make the comparison easier.)

Given:
owns 100 shares of qcom, currently at 65

if one was to sell one covered call (Jan 02/75 call). You get $800 premium ($8 for the call)

if qcom is less than $75 on Jan expiration, you keep the $800 and your shares.

if qcom > 75 your stock is called away and you have $7500 + $800 = $8300.
if qcom < 75 you keep your stock and $800 premium.

The risk is: qcom < 57 or qcom > 83 (the later is opportunity cost)

HERE's THE MAIN POINT:
If one followed the "Covered Short on a Strangle" strategy (CSS):

The risk is: qcom < 47 or qcom > 93

The CSS strategy has increased my "range of safety". In other words, I am protected more on the down side ($47 instead of $57) and I am protected more on the up side ($93 instead of 83).

Also by selling the put, I have basically more than doubled my return ($1800 vs $800)

Am I reasoning correctly? What's the drawback?

Of course there is the added posibilty of having your put assigned. But as you said, this should be done with a stock you wouldn't mind owning more of.

Now here's my question, what is the advantage of selling 5 months out (Jan 02)? As opposed to 1, 2 or even 3 months out. I am assuming the same strategy can be done on a shorter term. I guess the premiums are higher as you go farther out.
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