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

To: alanrs who wrote (21)	8/11/2001 12:18:36 PM
From: BDR	Respond to of 1064

<<Dan (or Dale or mathman or anybody with an opinion)>> I have an opinion but it won't be worth much to you. (g) I know just enough about spreads to be dangerous, so I think it best if I keep my mouth shut and learn along with you.

To: alanrs who wrote (21)	8/11/2001 12:43:21 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 1064

ARS, First, what disadvantages do I have going so far out in time for the calls sold. Am I better off not going for the entire cost of the bought call in one transaction, or writing less time more often to try and cover that cost. The disadvantage of the long term writes is that you are locking yourself out of any near term improvement if the price goes up. The net delta of the position is about -45% initially, and since all the options are so long term the deltas are quite stable over the next few months. Come September 2001 expiry, if the stock is at 15 you will be slightly in losing territory, and at 20 you will be in the red by $293 per contract combo (a combo being 1 long and 2 short contracts). It will take until April, 2002 for your position to be positive at 20. Even though the "end game" value at 2003JAN looks good, it takes an awfully long time to evolve. On the other hand, if you write SEP15 and SEP20 for a total of $1.85, at September expiry you are in positive territory from about 12 to about 22, with a position gain of $266 at 15 and $204 at 20. Then you can write again, and again. On the other hand, if the price goes down the long term writes are better. With that -45% delta you get to see your position grow a little, but don't get too excited. The value peaks somewhere below 10, and it's not going much over $200 by September. You can make the same kind of comparison for the 2002MAR series instead of the SEPseries. At March expiration, the 2003JAN writes leave you negative starting from just below 19, +$176 at 15 and -$63 at 20. But the 2002MAR writes have you net positive from below 7 to above 25, with a gain of $670 between 25 and 20. You can set the Hoadly analyzer tool up to create a very nice comparison chart for these scenarios. It is a little bit tricky to get all the parameters right (and hopefully I have done that, but it would be good to check), but worth the effort. Dan