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Strategies & Market Trends : A Study of Covered Strangle in a Rather Neutral Market -- Ignore unavailable to you. Want to Upgrade?

To: PAL who wrote (8)	8/19/2001 6:29:36 PM
From: PAL	Read Replies (1) \| Respond to of 23

We know reach the point where we need to calculate the risk associated with each strategy. The starting point is $ 110,000 to start with. Opportunity cost is not factored in; as edamo wrote: you cannot spend opportunity. Therefore, we should look at the size of the holdings at the end of 8/17/01 and what it would be were the stock closed at a different level. a. for 100% cash/short put, the breakeven level can be easily calculated: Premium = 5.70, and strike price $ 60. Then the breakeven level is 60 minus 5.70 = $ 54.30. b. covered strangle: you have 1,000 shares of qcom, and the ctock falls below 60, then you are assigned 1,000 shares of qcom. The covered call option becomes worthless, so you keep the premium. Totdal cash before assignment is 57,650. After assignment at $ 60/share, you will have 2,000 shares of qcom MINUS $ 2,350. Where is the breakeven level? 2000 x - 2,350 = 110,000 2000 x = 112350 x = 56.175 Therefore, the risk level is lower for 100% cash/short put as summarized below: a. covered strangle: qcom should close above 56.175 b. 100% cash/short put : qcom should close above 54.30 (Remember previous post: 100% cash/short put is preferred over covered strangle if qcom closed below 63 3/4, but keeping all cash and do nothing is the best if qcom closed below 54.30)

To: PAL who wrote (8)	8/20/2001 2:58:10 AM
From: PAL	Read Replies (1) \| Respond to of 23

Remember that the three scenarios produce the following portoflios: a. 100% cash/short put : 2,000 qcom + 1,400 b. covered strangle : 2,000 qcom - 2,350 c. buy/write : 1,800 qcom + 5,510 in a down market a) is definitely better than b) because you have the same number of shares but b) has a margin debit balance. If the market really is under severe pressure, then a) and b) will suffer greater losses than c) since they have more shares. At what point will the portfolio holdings of a) and b) be smaller than c)? a) vs c) 2000 X + 1,400 = 1,800 X + 5,510 200 X = 4,110 x = 20.55 b) vs c) 2000 x - 2,350 = 1,880 X + 5,510 200 x = 7,860 x = 39.3 Therefore, the lines of a) and c) intersect at 20.55 and the lines of b) and c) intersect at 39.3