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Strategies & Market Trends : BEFRIEND THE TREND Short-term Options Trading Thread -- Ignore unavailable to you. Want to Upgrade?

To: Dan Duchardt who wrote (843)	2/15/2002 7:34:10 AM
From: Dr. Stoxx	Read Replies (1) \| Respond to of 4058

Dan, dude! Didn't follow a bloody word of what you said, there, but it sounded brilliant! Now I know what my Philosophy students feel like when I'm lecturing on post-structuralist epistemology! TC

To: Dan Duchardt who wrote (843)	2/16/2002 12:19:30 AM
From: Dan Duchardt	Read Replies (1) \| Respond to of 4058

Example comparing a buy-write CC to a naked put.: (for our resident philosopher <ggg> and other interested parties) Take the closing prices today on QQQ Stock 35.80 (rounded off from 35.78, but option prices are all in .05 increments so it's close enough) C-MAR36 1.45 P-MAR 1.55 If I buy the stock and sell the call my net cost is 35.80 - 1.45 = 34.35. If at expiration the stock is $36 or more, I must sell it at 36 for a net gain of 1.65. If the stock closes below 36 I keep it, but I may be ahead or behind on the trade. At 35, I lose .80 on the stock for a net gain of .65. At 34.35 I break even. At 34 I lose 1.80 on the stock for a net loss of .35 and for every dollar down after that I lose another dollar, but I still own the stock at a net cost of 34.35 On the other hand, if I sell the naked put, I collect 1.55. If at expiration, the stock is $36 or more, the put expires worthless, I keep the 1.55 and own no stock. If the stock closes below 36, I must buy the stock for 36 to meet assignment. At 35, I lose $1 on the stock for a net gain of .55. At 34.45 I break even. At 34 I lose $3 on the stock for a net loss of .45 and for every dollar down after that I lose another dollar, but I own the stock at a net cost of 34.45. At every possible closing price, I will have made .10 less on the naked put than on the covered call. Above 36 I don't own the stock. Below 36 I do. BUT, with the naked put for one month I have $35.80 per share that I did not use to buy stock, and that will earn interest. The option prices are assuming a bit over 3% interest, so that works out to about $.10 which increases my gain by .10 and/or lowers my net cost to 34.35, exactly the same as the CC. These two positions have exactly the same profit/loss profile. If the stock closes above 36, you make 1.55 (including the interest) and own nothing. If the stock closes below 36 you own stock at the same net cost. It is not only the value at expiration that obeys this equivalence. Notice if you look at the option quotes that for every pair of options at a given strike the delta of the call plus the delta of the put (or the negative of the put delta if you are a purist who uses negative put deltas) adds up to one. This is no accident. The net delta of a CC is 1 (long stock) minus call delta (short call), which is exactly the delta of the short put. So in theory the value of the short put tracks the stock price in exactly the same way as the CC, for all price movements at all times. Dan