Re: Selling covered leaps and reinvesting proceeds including margin
In the example that I gave, the one contract that you sell covers 100 shares.
At present, for the Dell Jan 2001 calls (leaps) the Bid-Ask for the 90's is $18.50 - $19.25 and for the 85's is $16.87 - $17.50. As an approximation, if Dell appreciates $5 in the short term, the bid and ask for the 90's will appreciate to $16.87 - $17.50 (the current prices of the 85's). In other words, $5 of Dell appreciation is about the same as a $5 reduction of the strike price.
Using these updated bid-ask nos. the "loss" to the call writer that
results from a $5 Dell price appreciation would be either 100 ($18.50 - $16.87) = $163 using bid prices, or 100 ($19.25 - $17.50) = $175 using ask prices, or about $169 on average, rather than the $134 in my example. The sales proceeds for the leap contract would be 100 x $18.50 = $1850 and the Dell shares you could buy using margin would be $3700 / 65 11/16 = 56. If Dell appreciates by $5, then the Dell shares would appreciate by $5 x 56 = $280. Your net gain would be $280 - $169 = $111 (ignoring commissions, interest, and reduced time value of the leaps). This magnitude is smaller than in my original example but the principle is the same. As I previously indicated, you can continue this process by selling additional leaps on the newly acquired Dell shares, then buying still more Dell shares, etc.,etc., until you get to less than 100 shares of uncovered Dell and can no longer sell a full contract.
I understand that as long as the strike price of these calls (90)is at or above the current Dell share price (65 11/16), then you get full credit for the sales proceeds flowing into your margin account. That is how it has worked for me. If and when the Dell share price were to approach the $90 strike price, you might want to buy these options back and sell options with a higher strike price.
If you want to be a little more aggressive, you could sell the 85's or 80's (still Jan. 2001).
I hope this helps. You probably should review this with your brokerage firm to ensure that it works the same way there. I am doing this at Suretrade.
JB |
