jaytee,
My first question is, should I be overly concerned re/ the very low open interest (only 2) if I am purely thinking, in this example, of using the FEB o2 call as a vehicle to generate premiums? Will I have problems later (due to liquidity, I guess you would call it) with such low open interest?
It is somewhat of a problem in that it might force you to exercise your LEAPS to deliver stock if called out rather than sell the JAN calls at a fair price and buy the stock to deliver. In theory, you should do better selling the JAN calls, but with an outrageous spread of .80 that advantage could be wiped out.
<?>Secondly, am I better off with the FEB 7.50's instead? The lower cost of 11.50 makes a HIGHER percent return when you pay less on the same sale of the SEP 20's for 1.45, but I guess that is the trade-off(?) for the lower return potential if you do, in fact get CALLED OUT @ 20 bucks?
Again the JAN bid ask spread is a factor here. The theoretical value of the position at September expiration is only slightly different for the two choices, but if you are called out and have to exercise the JAN calls, you are correct that the JAN5 gives you a better return than the JAN7.5. As a % of investment, the difference is not that great. For the JAN5 you actually invest $12.35 and make $2.65 if called out, or 21%. For the JAN7.5 you invest $10.05 and make $2.45, or 24%. You need to make your own adjustments for transaction costs. If you do not get called out, and ultimately wind up selling the JAN calls, you will get more for the JAN5 than for the JAN7.5. The extra you paid is not lost, just tied up in the investment. But if the stock tanks, you can't lose as much with the JAN7.5. Also, with a little luck you can get your net cost basis much lower on the JAN7.5 with a couple of rounds of near term writes.
And last, but not least, to certify my ignorance . . . do any of you use those cc calculators? Which are the best, and can any old DUMMY use 'em?
Yes indeed. And if you come over to my new thread for all kinds of options strategies, there is a link to one that I like. It's very good for making the comparisons like you just asked about.
Message 16192513
Dan |
