R. Gordon writes: I have found a few occasions where cost of the put and call in the same month and strike price offer a slight advantage to the investor. These situations are rare, but they do occur. IE, Stock at 85, 85 strike, 85 call bid price 4, 85 put ask price 3.375. Entering this position - sell the CC and buy the put, gives me a slight edge.
Put-Call Parity assures us that when the stock price and strike price are equal on a non-dividend paying stock, the theoretical value of the call is always at least as large as the theoretical value of the put. By how much depends on the risk-free rate of return and the time to expiration.
I ran the put thru a put-call parity analysis and I don't have any problem believing it was attractively priced if less than 130 days remained to expiration. I have a some incredulity about the possibility of getting more than 10 contracts before somebody notices something and corrects the price of the put.
From where I'm sitting, it looks like you wrote a covered call for 5/8. If the stock cost 42.5 on margin, and there is 1 month to expiration, this is a precommission pre-margin interest annual ROI of 17%. I will grant you that is a nice return for a "risk free" investment. I assume in such a scenario if the stock is below the strike you always exercise your put, and assume you are always called away in the event it's over?
How much time do you usually find on these plays? How much of a differential are you willing to go with? Example: The CPQ Jan 99 30 Leaps with the stock at 30, show Call bid 6 1/4, Put bid 4 7/8. This is a net profit of 1 3/8 on a cash investment of $15 for a risk free return of 9% before commissions and margin interest.
The last question I have is how do you go about trading this vehicle? The way it looks to me on the example you gave, you need to spend no more than 5/8s on your first buyback, otherwise you risk having the stock stay where it is, and the cc becomes a net loss. If I had that much faith in my TA, that last thing I'd be worried about would be buying puts for my covered calls. |
