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

To: FaultLine who wrote (1032)	6/11/2001 11:41:25 PM
From: Mathemagician	Read Replies (1) \| Respond to of 5205

Wanna have some fun? Here's a look at a covered straddle, covered combination, covered call, and naked put with one of my favorites, NTAP. Prices are at the close today. Covered Straddle Buy 100 NTAP at 17.84 Sell Jan-02 20 Call at bid of 4.80 Sell Jan-02 20 Put at bid of 6.30 Cash Out = $1784 Cash In = $1110 Net Cost = $674 Capital Requirement = $2000 Equity Needed = $2674 If NTAP finishes above 20 the call is exercised, the put expires, and you pocket 4.8 + 6.3 + 2.16 = 13.26 per share, or $1326. If NTAP finishes below 20 the call expires, the put is exercised, and you now own 200 shares of NTAP with a total cost of $2674, or a cost basis of 13.37 per share. Covered Combination Buy 100 NTAP at 17.84 Sell Jan-02 20 Call at bid of 4.80 Sell Jan-02 15 Put at bid of 3.40 Cash Out = $1784 Cash In = $820 Net Cost = $964 Capital Requirement = $1500 Equity Needed = $2464 If NTAP finishes above 20 the call is exercised, the put expires, and you pocket 4.8 + 3.4 + 2.16 = 10.36 per share, or $1036. If NTAP finishes below 15 the call expires, the put is exercised, and you now own 200 shares of NTAP with a total cost of $2464, or a cost basis of 12.32 per share. If NTAP finishes between 15 and 20, both expire and you are the proud owner of 100 shares of NTAP with a market value above 15 and a cost basis of 9.64. Covered Call Buy 200 NTAP at 17.84 Sell 2 Jan-02 20 Calls at 4.8 Cash Out = $3568 Cash In = $960 Net Cost = $2608 Capital Requirement = $0 Equity Needed = $2608 If NTAP finishes above 20 the call is exercised and you pocket 4.8 + 2.16 = 6.96 per share, or $1392. If NTAP finishes below 20 the call expires and you now own 200 shares of NTAP with a total cost of $2608, or a cost basis of 13.04 per share. Naked Puts Sell 2 Jan-02 15 Puts at 3.4 Cash Out = $0 Cash In = $680 Net CREDIT = $680 Capital Requirement = $3000 Equity Needed = $2320 If NTAP finishes above 15 the put expires, and you pocket $680. If NTAP finishes below 15 the put is exercised, and you now own 200 shares of NTAP with a total cost of $2320, or a cost basis of 11.6 per share. I intentionally avoided calculating ROI. If there's one thing we've established for certain on this board, it's that ROI is essentially arbitrary. :) However, I will go as far as to say that a greater net cost and lower capital requirement result in generally lower ROI as margin use is phased in. dM