Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Jonathan Thomas who wrote (13063)	7/19/2000 11:08:16 PM
From: Bridge Player	Read Replies (1) \| Respond to of 14162

<<If you bought the stock for 12 1/16, then sold the Oct. 12.50 Puts for 2 1/16 (bid) and the Oct. 12.50 calls for 2 1/4 (bid). Your NUT would be 7.75. You have downside protection to 7.75, upside to 16 13/16.>> Ryan, please help me to understand this analysis. When you say that you have downside protection to 7 3/4, I assume you mean that if the stock closes on October expiration day at exactly 7 3/4, that you would break even on these trades. If there is another meaning that you intend, I missed it. Lets see now. On the long stock with covered calls, you paid 12 1/16 for the stock and sold October calls for 2 1/4. That makes your cost basis on the stock 9 13/16, so at 7 3/4 you would be holding the stock with a net loss of 2 1/16. On the naked puts, you sold the October 12 1/2 for 2 1/16, and thus, after assignment at 12 1/2, own more stock at a cost basis of 10 7/16. So at 7 3/4 you would hold this stock with a net loss of 2 11/16. All this is before 4 commissions. What am I missing? BP.

To: Jonathan Thomas who wrote (13063)	7/23/2000 3:03:18 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

Hi Ryan, If you bought the stock for 12 1/16, then sold the Oct. 12.50 Puts for 2 1/16 (bid) and the Oct. 12.50 calls for 2 1/4 (bid). Your NUT would be 7.75. You have downside protection to 7.75, upside to 16 13/16. If called out you make 62% in 3 months. If you think it's too risky, buy the Oct. 10 Put for 1 (ask), or the Oct. 7.50 put for .50 (ask) as downside protection. Purchasing the 10 strike would make this an guaranteed position, because you'd own the stock @ 8.75, and would be guaranteed that 1.25 profit, no matter how low the stock fell below 10. So, you can guarantee a 1.25 on an 8.75 investment in 3 months (max). So, worst case is a 14.3% profit during that time, best is 61% (or 43% with the protective put). Someone tell me if I'm missing something. Hmm...I've almost convinced myself to dip into margin to make this play...Tell me what you think of these 2 companies all... Bridge Player has raised the right questions regarding this scenario. I've been looking at some of these combination plays myself, and it seems to me you have not correctly considered the potential consequences of writing the put. If you look at best case and worst case scenarios, the most return you can get is the premium plus the 7/16 gain on the underlying, which gives you a gain of 4_3/4 or 61.3%. However, the worst case is that if the stock falls to zero you lose your initial 7_3/4 plus an additional 12_1/2 you must pay somebody for worthless stock for a total loss of 20_1/4. Breakeven is actually at 10_1/8. For any closing price lower you wind up owning twice as much stock with an average nut at the breakeven point. The protection you get from the strike 10 put reduces the greatest possible loss to 11_1/4, while reducing the maximum gain to 3_3/4, or 42.9%, and it raises breakeven to 10_5/8. For any closing price between 10 and 12_1/2, you wind up owning twice as much stock at this breakeven price. While both of these provide reasonable protection, neither one guarantees a profit if the stock takes a dive. As always, buying the protective put reduces your worst case downside at the expense of limiting your greatest possible gain and raising your breakeven. (Dan, did you get my private email I sent you?) Yes, and sent a belated reply.. thanks. Dan