BatMan, Here is how I worked it. I bought LU at $59 1/2 and immediately sold a Jan 2001 60 strike price call, zeual, for $19. That was one leg. Yesterday when the stock zippity-doo-dahed after the CEO gave an upbeat interview on CNBS, I bought the Jan 2001 50 put at 7 1/4. O.K., here is what I have ( I am ignoring commissions to make the arithmetic less problematic.):
Cash out: $5950 plus $725, or $6675.
Cash in: $1900.
Net outlay: $4775.
Standstill rates of return: If LU closes in 2001 above $60, I have earned $1225 on risk of $4775, or 25.65%. Since Jan 2001 is approximately 28 months away, you divide $1225 by 28 to get .916% per month, or 10.99% per year.
If LU closes at $50 or less, I make $1225 less $950 loss on the stock. That is a $275 profit. $275, using the same methodology as above, works out to 2.46% per year.
That is best case and worse case. If you add 2.46% to 10.99% and divide by two, you get an expected standstill return of 6.725%, much higher than other no-risk income plays with a maturity of a little over two years.
O.K, that being said, I have never hit a standstill return in my life. I will lift the short calls or long puts and put them back on probably 50 times during the life of this position. I call that tweaking. Even the way I entered the position is tweaking.
Actually, you can get nearly the same standstill return by putting the positions on at the same time, but I have a huge ego that tells me I can make a few % extra every time by legging in and tweaking.
If this were a straight account and not an IRA, I would do the same thing without the stock, shorting the $60 put and buying the $50 put and holding $4775 cash in case things go bad. But IRAs are not designed to allow folks to make money efficiently, so I have to use the synthetic short put (long stock, short call).
O.k., there are folks who wouldn't call this income. I call it income. And, the IRS definitely calls it income. <G>
MB |
