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: Dan Duchardt who wrote (13086)	7/24/2000 10:14:49 AM
From: Jonathan Thomas	Read Replies (2) \| Respond to of 14162

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, I miscalculated the difference between purchase price 12 1/6 and the put strike 12.50, but corrected myself after I found it. BUT, I'm not sure I follow. If you buy that 10 put, you gain what you lose dollar for dollar below 10, so I believe you're mistaken. buy for 12 1/16 sell 12.50 call for 2 1/4 sell 12.50 put for 2 1/16 BUY 10 put for 1 TOTAL COST OF OWNERSHIP: $8.75 We don't disagree about the upside, so I won't comment on that. You own the stock, and have 3 5/16 of cash in your pocket. with a spread of the 12.50 and 10 puts, but with 3 5/16, how are you not going to make money? If the stock is at 11, you buy back the 12.50s, take 1 13/16 off the table as profit, keep the stock. If the stock is at 5, you excersize the puts, OR sell the 10 put for 5, buy back the 12.50 for 7.50, TOTAL COST IS 2.50 NO MATTER WHAT, profit of 1 5/16, even if the stock falls to 0. Am I missing something, or are you? The only thing I just thought of is that you covered your options position, but the value of the stock has tanked. The 10 put you purchase doesn't protect the underlying, just the 12.50 put. So, to be safe, you buy a 7.50 put cheap. Sure, you'll lose some if the stock goes to 5, but you're limited, and I wouldn't get into this play if I thought it would do that...My mistake for the overall position. I still belive it is a good play, however, especially without the 10 put. Thanks for pointing that out.. Ryan