Hi John,
I've had pretty good results with setting up covered call surrogates, a.k.a. ratio spreads on high alpha stocks like ASMLF....
I've taken a page from Steve's book though, and "stepped into them" by buying outright calls at/near the lower bollinger, then selling the deep in the money calls when getting near the top bollinger (in anticipation of the stock price dropping, where I can cover them near the lower bollinger, when they get there)
If you buy Jan98 or LEAPs to begin with, and let them gain 10 points or so (not a big move for ASMLF) THEN sell the in-the-money calls, so the position winds up costing you nothing, both the long and short calls will have a delta close to 1, so you don't have to worry about the stock running away on the upside, and costing you money if exercised.
Example: (without stepping in.....if you don't have up-front cash)
Buy 30 Jan98 85 calls @ 11 1/8 = 33,375
Sell 20 Apr98 75 calls @ 15 3/4 = 31,500
sooooo, you recieve a CREDIT of $1875 for opening the position.
Of course, you have the 10,000 (+ credit) margin requirement, but there's a couple of big advantages over the straight covered call for this kind of position.......First, you have no capital outlay if the market tanks, and therefore you can't lose the substantial drop that a high p/e, high volatility stock like ASMLF would surely produce in a precipitous crash from current highs........85 is long way to drop !
Second, if you buy the stock and it drops 10 points (as ASMLF is known to do on occasion) you can buy the short calls back at 10 points less than you sold them for, and you've got 30 calls for the upward bollinger band cha-cha!
Third, the psychological factor of always having a downside contigency in place (without having to hold an 85 dollar stock in an uncertain market) makes me sleep a lot better.
Fourth, by selling one side, you help "lay off" some of the high volatility premium that you'd have to pay, in order to cover a CC.
Your maximum loss is the difference between the strikes (10 points) minus the credit you recieved....this occurs if, between now and Jan98, ASMLF doesn't move above or below 75/85. This method is even more foolproof if you can use 99 or 2000 LEAPs, but ASMLF doesn't have LEAPs available yet....
If you should decide to try this, bear in mind that if you simply put on the trade just as above, and don't touch it between now and say.....December, you'll have 10 calls working for you (30 minus 20) ONCE both sides have a delta close to 1. This is especially important to remember, because at first, the stock moving 10 points doesn't seem to make much for you, but when the 30 AT-the-money long calls, start to flex their deep-in-the-money delta (15 or 20 points in the money) then you really start seeing the money roll in. (IOW, don't cash out before the 30 calls have a delta of over .8)
This also works for PUT LEAP spreads, that you can just open, and leave in place in case the market DOES eventually crash....If you use LEAPs again, and take a credit, you can make money if the market goes to 10,000 (you keep the credit), or if it drops to 6000, you'll be RICH ! <g>
These option tools are pretty handy, eh ?
Dick |
