Herm,
I was wondering if a strategy that I've seen listed as a repair
has ever been applied as an opening strategy. For lack of a better
name, the strategy is basically a combination between a covered
call write and a bull spread, but with some special conditions:
* Buy 100 shares of the stock and the at-the-money call
* Sell two the out-of-the-money calls if they equal the price
of the ATM call, giving you the call for "free".
Example: Intel (INTC) closed at 74.5 (call it 75 for this
illustration). Ignoring commission costs, we have the following,
based on CBOE quotes:
Buy 100 INTC at 75
Buy 1 INTC Feb 75 call at 4
Sell 2 INTC Feb 80 call at 2
Thus, if INTC closes below 75, you only have the loss that
you would from owning the stock anyway. If INTC closes between
75 and 80, you get profit from both the call and the stock
(maximizing at $1000 if the stock closes at 80+).
This hybrid strategy beats plain stock ownership for a close at
expiration between 75 and 85. It beats the simple CC write
(buy 100 INTC, sell 1 Feb 80 call at 2) for a close above 76,
and is less aggressive than a simple bull spread. Another advantage
of this strategy is that all positions are taken at once, eliminating
the risks of "legging in". Of course, one could also leg in with
this strategy, but it doesn't seem as necessary as with CC writing.
Any thoughts or comments from you or others on the thread would
be appreciated. I think that this strategy beats simple stock
ownership for stocks that one thinks will appreciate "a little".
Vol, some others and I talked about using this strategy on the
Dow Dogs with LEAPS, on another thread, but I think that it would be good on shorter time scales if used carefully with more volatile
(but not overly speculative) stocks.
Sorry this ran so long..
Zach |
