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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: Dr. Id who wrote (226)	4/25/2001 12:08:35 PM
From: Mathemagician	Read Replies (1) \| Respond to of 5205

Id, Suppose you bought the stock at, say, 20 and wrote a 20 call with a premium of 3. We can summarize as follows: Cash outlay = 17 Maximum Profit = 3 when stock is >=20 Breakeven point = stock at 17 Maximum loss = 17 Further, suppose you wrote an uncovered put with a strike of 20 and a premium of 3. Your cash oulay is The summary is: Cash outlay = 8.5 (17 worth margin, secured by 8.5 worth of securities or cash equivalent. This varies by broker.) Maximum Profit = 3 when stock is >=20 Breakeven point = stock at 17 Maximum loss = 17 So, for ATM calls and puts with the same premium the risk/reward is the same for less capital outlay. This yeilds a greater ROI. Granted, it is a special case for them to be identical, but the general shape of the risk/reward curve is the same under all circumstances. Draw a few and check it out for yourself. dM