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To: Tommaso who wrote (171395)6/9/2002 6:03:39 PM
From: rolatzi  Read Replies (3) of 436258
 
The best way to visualize a short put and a long call is to graph out the profit or loss of each as a function of the price of the stock. Short a put limits your profit if the stock goes up or stays pat but your loss is unlimited if the stock goes down. Conversely, long a call limits your cost if the stock goes down or stays pat while your profit is unlimited if the stock rises. Combine these two graphs into their sum and you get a profit loss curve that resembles a stock, you lose money if the stock goes down and gain money if the stock goes up. Thus, this combination is a synthetic form of holding a share.

It is a little more complicated because of differences in price between put and call, and how you choose the strike price for the options but that is basically it.

I too sold some puts on NEM on Friday and will keep them if they get assigned to me and then sell calls on them if I feel like my exposure to pm stocks is too great. That way I can make money if the price of gold shares doesn't move very much. If gold moves back up again, my profit is limited but it all depends on my comfort level. In the mean time I can make some money by the decay of option premiums. BTW, option premiums decay most rapidly in the last month of their life as time value decays to zero. For that reason I sell options that have one to two month duration. That allows me to hold them for at least a month, keeping out of trouble with the 31 day wash rule on income taxes and giving me the most rapid decay of time value premium.

BTW, BTW, when I buy options, I generally buy them around six months out and sell them at around 3 months life. While this limits my potential profit, it also means that I don't have to pay much in the way of time value. I also try to pay attention to volatility so that I'm selling options when the volatility is high and buying them when the volatility is low. This generally means that I am buying options when the Bollinger bands are tight and selling them when the bands open up. There are web sites that list stock volatility for the last 10, 30 and 60 days. This helps in the decision.
Ro
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