Greetings Jeff!
You're off and running with a sister CCing forum. That's good! There is plenty to informational talk when it comes to CCs. I'm really interested in one of your writer's use of LEAPs to write short CCs against. Surely, that's a way to get more leverage from your investment dollars and higher premies.
Example, MOT is trading at around $56. The MOT LEAPs for the JAN.99 - 45 Strike @ 14 1/2 right now. Buy three MOT leaps for $14.5 * 3 = $4,350 as compared to the MOT stock itself for $56 x 300 = $16,800. A BIG DIFFERENCE!
The investor's paper net cost basis is basically $45 + 14.5 = $59.50 less commissions if called out of CCs! Now, if MOT increases to $60 dollars and the investor writes 3 CCs for the MOT June 60s @ 4.75 that would generate $475 x 3 = $1,425 in premies. Worst case scenario that the investor is called out in June. The LEAPs can be exercised at $45 by the investor to cover the CCs he/she is called out of at $60.
Cost to exercise the LEAPs $45 * 300= $13,500 stock + $4,350 (3 LEAPs cost)= 17,850 - $1,425 CC premies = net cost basis $16,425. Being called out of 3 of the June 60s CCs: $60 * 300 = $18,000 will be paid to you. Net profit: $18,000 - $16,425 = $1,575.00.
Rate of Return: 36.2% for 1 1/2 months worth of time!
Any comments on the margin requirements or execution of this technique. Would it work?
Good Luck Jeff! |
