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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe -- Ignore unavailable to you. Want to Upgrade?

To: Mathemagician who wrote (16)	8/11/2001 11:37:22 AM
From: Dan Duchardt	Respond to of 1064

M, Is that figure created using a covered straddle write on 100 shares and a CC write on 200 shares? That would be (almost) the apples to apples comparison. I think you are right that would be the closest to apples to apples, IF the covered strangle is backed by cash at the put strike in case of assignment. The rate of loss if the thing tanks would be higher for the covered strangle if you don't consider that cash to be part of the investment. This is comparable to the difference between a margined CC and one that is fully paid. If you only pay half the cost of the underlying, and all the losses come out of your half, that doubles your loss rate on the underlying. Dan

To: Mathemagician who wrote (16)	8/11/2001 12:07:13 PM
From: BDR	Respond to of 1064

<<Is that figure created using a covered straddle write on 100 shares and a CC write on 200 shares? That would be (almost) the apples to apples comparison.>> Since a short put and a covered call are (almost) the same thing, a covered straddle on 100 shares and a CC write on 200 shares should yield (almost) the same Profit or Loss Graph. Fig. 20-1 does not make that comparison. If those were the two choices being discussed then I don't think there is much difference between them except for the amount of cash required to initiate the positions. McMillan was trying to show what happens to the profit/loss profile if you add a short put to a CC write to create a covered straddle. The potential profit increases but is still capped and the potential losses also increase (in fact are doubled at any given price below the breakeven point) and are not capped (at least until the stock goes to zero). If one has the resources to accept the risk involved in doubling your exposure to a stock then it isn't a problem. Many would argue that shorting two puts is superior to either a combination or a CC write on 200 shares because less cash is required but that is another issue. What bothered me about the discussion that was initiated on the other thread (not by you) was that adding the short put to a CC write was presented as a way to juice up the profits in covered call writing but no mention was made of the corresponding increase in risk of losses. It was even advocated, erroneously, as an appropriate strategy to follow if one was bearish about a stock. If one's resources are such that it is prudent to do a CC write on only 100 shares, then it would be irresponsible to talk that person into doubling their exposure, whether by adding a short put, going long another 100 shares or doing a CC write on another 100. The sales job that I saw going on there suggested that this was easy money and that anyone who expressed caution about it was stupid. Compare Fig. 20-1 with the following quote: "No one knows where this market is going the next few months. Everyday we hear from so-called experts that the market will go north, yet the next guest on the show states the opposite. If a person limits his/herself into covered call he/she must know the direction of th market. I for one is not that smart to know where the market is going. Using the "CSS", it does not matter. It covers in either direction." Following advice like that could be hazardous to your financial health. I think he is confusing a covered straddle with something else, perhaps a butterfly spread.