Herm, you're scaring me.
You suggested that Dave could buy 9 calls and write 15 calls against his 1000 shares of IOM. Your basis for this suggestion was my spreadsheet, which assumes that you double your long position by buying 1 option for every 100 shares, then write calls to cover the whole lot. In Dave's case he would buy 10 calls and write 20.
The problem is that earlier versions of the spreadsheet assumed that you wouldn't change the ratio. The version I have now still gives $1875 as the max profit for your scenario, like you said, so you're ok. But don't do that to me!
I'm curious why you chose 9 long calls and 15 short calls. Using that ratio, the entry cost is zero (plus commissions) and 400 shares are left free and clear. The maximum gain is $1875 (at stock prices from $12.50 and up), and the position outperforms stock ownership between stock prices of $10.50 to $14.75. (It beats just writing the $12.50 calls against the 1000 shares at all stock prices above $10.75)
However, buying 10 calls and writing 20 seems superior to me. There is a $250 credit for opening the position, which makes the position beat pure stock ownership at all prices below $15.25. The CC is beat from $10.50 and up, and the maximum gain of $2375 is available from $12.50 to $15.25. Bigger profit, and it outperforms pure ownership over a wider range of IOM prices.
Check out this scenario: Buy 15 of the $10 calls at $1.25, and write 25 of the $12.50 calls at $0.75. Entry cost is zero.
The maxiumum profit is $3375. The position is exactly equivalent to stock ownership below $10, hits it's maximum profit at $12.50, and continues to outperform pure ownership up to $16.25. It blows the straight CC out of the water, too. The breakeven point is at ~$11.10, which is lower than the other scenarios too.
If Dave were willing to sink another $1000 into the position, he could buy 35 calls, and write 45 calls. His max gain would rise to $7375, and he would outperform pure ownership from $10.25 to $20.25. Below that range he would lose the $1000. The breakeven point is a bit under $11.00.
I got this by running Excel's solver on the spreadsheet. I'll upload the new file tonight; I've added a box where you can enter the highest entry cost you're willing to pay (or lowest credit you're willing to accept) and a button which will run the solver.
webbindustries.com
Doug.
PS: I've also posted an update of George's spreadsheet. |
