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Strategies & Market Trends : Option Trades
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To: zx who wrote ()11/9/1997 9:09:00 AM
From: Polartee  Read Replies (2) of 2341
 
Write uncovered S&P 100 Jan 990 calls

Options on the S&P 100 are showing a lot of implied volatility now...about 25-27%. My strategy tomorrow will be to write a Jan 990 call. The last bid was 8 7/8. The index closed Friday at 884.57. This means the S&P 100 has to rise by ((990+8 7/8)/884.57 -1)*100=12.9% before I start to lose money at settlement time (Jan. 16).

I went back through data using S&P 500 month-end closes (instead of the S&P 100 simply because I had it) from 1978 up to the last data point I have in 1994. During this period, there were only 6 times I would have lost money on such a trade (looking for two month holding periods where the market rose more than 12.9%), three of which were at the start of the 1982 bull market. If this historical distribution of returns holds true in future then the chance of loss is just 3.2% (6 out of 185 periods examined) and the largest loss would have been $2,200 per call.

I'm not sure the market will crash from here but I feel confident it's not going to boom in the short time to mid-Jan. I think this strategy represents a good play because it's partly portfolio insurance. One downside is that it does chew up a lot of the available margin in my account.

Buying puts is expensive, especially in/near the money puts and writing calls closer to the 884 level is obviously more risky.

Comments?

Regards,
John
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