Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Vol who wrote (8775)	10/7/1998 2:22:00 PM
From: Douglas Webb	Read Replies (1) \| Respond to of 14162

Interesting idea... I charted the closing price of SPX.X for the last 24 months, and calculated the % change from the previous month. The average change was +1.3%, which indicates a bull market. The standard deviation was 3.8%, which measures the fluctuation from the steady upward trend. Taking two standard deviations about the average, my calculations show that SPX.X closes between -6.3% and +8.9% of the previous month's close. That's for the trailing 24 months, and during that time that range was only broken twice, at +9.5%, and -7%. To keep this accurate, you'd want to recalculate the range every month for the trailing 24 months... that'll adjust for long-term variations, like higher volatility in the bear market we're experiencing now. We should probably also use the closing price on the option expiration day, rather than the end of the month. Otherwise, we have to look at options that expire too soon, or still have 3 weeks of time value at the end of the month. Your suggestion was to sell a naked call one month out at 9% above the last close. You should use September's close, at 1025. We can assume that Oct's close will probably be between 961 and 1116. Let's look at some options: NOV 1998 950 CALL 73 1/4 x 75 1/4 NOV 1998 975 CALL 57 3/8 x 59 3/8 NOV 1998 1100 CALL 7 x 8 1/4 NOV 1998 1125 CALL 3 3/4 x 4 1/2 NOV 1998 950 PUT 38 1/2 x 40 1/2 NOV 1998 975 PUT 49 x 51 NOV 1998 1100 PUT 121 7/8 x 124 7/8 NOV 1998 1125 PUT 143 1/8 x 146 1/8 We think SPX.X will close below 1116, so we could write the 1125 CALL, or buy the 1125 PUT. We also think that SPX.X will close above 961, so we can write the 950 PUT, or buy the 950 CALL. We can also do any combination of these. The time value of each option is: SPX.X @ $977 NOV 1998 950 CALL 73 1/4 x 75 1/4 TV: 47 1/4 NOV 1998 975 CALL 57 3/8 x 59 3/8 TV: 56 3/8 NOV 1998 1100 CALL 7 x 8 1/4 TV: 7 5/8 NOV 1998 1125 CALL 3 3/4 x 4 1/2 TV: 4 1/8 NOV 1998 950 PUT 38 1/2 x 40 1/2 TV: 39 1/2 NOV 1998 975 PUT 49 x 51 TV: 50 NOV 1998 1100 PUT 121 7/8 x 124 7/8 TV: 0 3/8 NOV 1998 1125 PUT 142 1/8 x 145 1/8 TV: -4 3/8 Well, generally with spreads, we want to sell more time value than we buy. We could buy the 1125 PUT, and sell the 950 PUT, for a net investment of $106.625. At expiration, if SPX.X is > 950 and < 1125, we can close the position for $165, a 55% gain, I believe. I don't have McMillian's book here at work, but I think a spread like that is the way to go... I'm sure there's a section about spreads which discusses playing the decaying time value like this, on the assumption that you know the price won't stray outside your strike price range. Doug.

To: Vol who wrote (8775)	10/8/1998 1:01:00 PM
From: Zach E.	Read Replies (1) \| Respond to of 14162

Hey Volunteer, 10/6/98 SPX 985 9% out = 1075 Nov 1075 call 12.8 bid Margin requirement = 98.5 (10% of the index) One and one half month return = 12.8/98.5 = 12.6% Approx 8% per month Have I been smoking something? Can someone shoot a hole in this plan? I think that the problem is, that the premiums on index options are currently a lot higher than what is typical. Check out the VIX, it was really high on 10/6 (of course, it's even higher now). My guess is that typically, 9% out premiums are going to be a lot smaller than they are now. VIX = volatility index, a measure of how expensive option premiums are. Zach