Jack,
I thank you for your gracious endorsement of my analytical skills as written in your #6427.
However, that being said, and in deference to your many years of trading experience, I must take exception to your erroneous reply to Anthony # 6438. Despite your arrogant tone, which may now be redirected to this reply (g), I don't think you understood Anthony's trade.
WARNING to the reader: To go on reading this note will require a good knowledge of trading nuances, and the reader's patience and ability to put up with this writer's inability to make himself clear.
In essence, what I believe Anthony is suggesting is the same trade as jmar described in his # 6441. And as many readers of this thread have figured out by now, and which I have written to you via personal E-mail, I AM one of the "people on this BB right now who have ran into this". I believe the reason that you fail to realize the merits of this trade is because you have never owned a large position in an underlying stock long enough to afford the opportunity to use this trade for its specific application. Using this type of trade, I believe, is a case in point where the long term investor's needs will differ significantly from the day traders. Although I do think the trade can also be used by a day trader if he is willing to tie up significant capital.
In addition, I take exception to your statement, "you are notified by your broker that your sold calls were exercised for your stock". While I guess it is technically possible for the underlying stock to be called away, it is highly improbable that this would happen. Only if you are very close to, or at expiration, could I ever see the risk of this occurring. While selling Puts often runs the risk of premature assignment, a Call option will always have a time premium included in the price, and will protect against an early exercise. In other words the time premium precludes the Call Buyer from exercising his option earlier than expiration, since he would forego the time premium which he has already paid for. In the real world the Call Buyer could always
buy the stock on the open market for less then the stock's strike price plus the loss of the Call option proceeds. Therefore, I never consider the possibility of my underlying stock being called away prematurely, although I am prepared for such an eventuality .
I could go on like this and describe why I think you were wrong, but for the sake of the reader I think it is best to spell out when, why, and how, I have used this type of trade. Remember the prerequisite, or premise, for this trade is that the you already own the underlying stock and that you are mentally prepared to sell away some, or all, of that stock which you have sold Calls against.
Example:
In February of this year, when INTC was selling in its low 50s I recommended on this thread to increase Intel holdings. I stated that I was leveraging myself by selling Intel's stock and buying Intel Warrants. This gave me more than twice the exposure. However, in October when Intel was nearing 110, and the market was jittery with elections around the corner, I wanted to de-leverage myself in my non taxable account. Having done very well with Intel Warrants in my core position, I wanted to protect my profits. As we all agree, I could have simply sold my INTCW at the time and that would have been it. However, I chose to do the following instead.
I think INTC was trading at 108 at the time. To make it simple let's just say I was dealing the stock in units of 100 shares. Therefore, had I sold, my proceeds would be $10,800 and I would hold 100 shares less. Instead, I opted to sell 1- INTC Jan 95 Call, which, if I remember correctly, I sold at 19. Recall that INTC was trading at 108 at the time. However, I had locked in the sale of my INTC effectively at 114,(95 + 19). Further, I was protected from losing money from this transaction unless INTC went below 89, (108 - 19). In essence I had hedged my risk because I was prepared to lose my stock if INTC went up. Now one can stop here, or as I did, go on.
As we know Intel did go up, and went up big time. When Intel hit 122 I rolled my Jan 95 up to Jan 120s. Again, as I recall, that cost me about 15 points. So now I have given back 15 of the original 19 points, but I still own the stock, plus 4 points net from the option's sale. Again remember I was originally willing to sell at 108, but at this point I have locked in a sale at 124,(120 + 4 points net), Further, I would profit from the transaction, as long as Intel stayed above 116, (120 - 4 points net).
The reader should note that despite the fact that Intel's price went up 14 points the price of the option went up only 8 points, a little more than half. This results from the time premium eroding as the option contract gets further away from the strike price.
In actuality I did this one more time, last Thursday, rolling my 120's into 135's, but that is another story.
I apologize to those who have made it this far and who have not benefited from this dissertation, but I did warn you in the beginning.
Jack, Best Regards
Jules |
