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jeff..<ot>if the stock drops, the premium on the option you have sold, may or may not increase...it depends on the level of volatility you sold at, and the time that has elapsed....the hypothetical as stated gives a premium of 13 with a 45 strike and the stock at 45...come jan01, if the stock at 40, the premium will be about 5...time has eroded same...at this point the 03 will be out, and a 0345 put may fetch about 14..so you buy back 20@5=10k, sell 20@14=28k, net to cash 18k...still no increase in exposure, as the strike still the same...now you have a 45 strike, and for simplicity sake if you held the cash from the original sale and didn't go long, your position would be sell 20@13=26k,buy 20@5=(10k),sell 20@14=28k=net to cash=44k/20 contracts=22per contract net, which if the stock assigned at 45, your cost now 23(45-22)...you keep on doing this, sometimes in a nimble fashion, and you will build portfolio value, up or down markets...."leaps" are the key...for it becomes an "investment" tool, not a "trading" position...remember the premium on a put that has a longer expiration will always increase more on days of high volatility, than its nearer counterpart...this works to your advantage..the result of repositioning is not cumulative as your exposure risk stays constant, but subtractive, as new premium reduces your cost basis...takes a few years of doing it before you see exponential increases in portfolio value... |
