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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Geoff Nunn who wrote (72982)	10/19/1998 7:17:00 PM
From: Chuzzlewit	Read Replies (3) \| Respond to of 176387

Geoff, I agree with you right up until the time you reach your conclusion. I think that the reason that short maturity options lose their value much more rapidly than their longer maturity brethren is purely probabilistic, and reflects the rapidly decreasing probability of a stock to increase (or decrease) to a certain set figure before the fact. In essence, it is simply reflective of the more volatile nature of small number statistics. What I'm advocating is simply this. Suppose you have a choice between selling (on covered calls) a Nov $65 at 2 and a Dec 65 at $3.50 (The numbers are hypothetical). Suppose that at the end of the period the price of the stock remains at $60. The sale of the shorter option yields 3.33% of the price of the underlying stock, and this may be compounded on a monthly basis regardeless of whether the stock rises (and is called) or falls. Thus, the yield on the option would be 48.2% pa. But the longer maturity option yields only 40.5% by comparison. As a writer of options I am making my money by selling time value to a buyer, so it seems to me that I want to maximize the time value per day. I want to sell options at the point where the slope becomes steepest. From a practical point of view this occurs with maturities of one month. Even if the slope is steepest at say 2 weeks, there is nothing to be gained by waiting since I am looking to maximize my profits, rather than maximize my profits for each day I am short the option. Now the rest of the strategy is to use stocks that you really want to own, and I write calls that are about 10 - 15% out of the money. I've been doing that with good results on Dell since last spring. Empirically, I couldn't be happier since I have extracted about $12 in premiums per share and still own all of the underlying shares. TTFN, CTC