To: TigerPaw who wrote (113410 ) 3/30/1999 12:00:00 PM From: Chuzzlewit Read Replies (1) | Respond to
TigerPaw, may I suggest a different strategy? Consider your total position. Here's a hypothetical example laid out in detail to illustrate the point.or above . That's the point that many people forget. They erroneously believe they have lost money if the stock climbs higher than the striking price plus the premium. So your maximum profit is $7 on this position ($45 - $38) which works out to 18%.4% in just 7 weeks. If you annualized that rate of return you come up with a profit of 251% per annum. The mistake that so many people make is they forget that they need to create a new position at expirey, but instead simply buy back the options because the stock price is above the striking price, and convince themeselves that they have lost money. Let's put two hypothetical trades back to back to illustrate what I'm talking about. Suppose the first position ended as outlined above, but that the stock was called away because the price ended up at $47 at expirey. We have already established that the first trade earned 18.4%. Let's suppose that a second position is initiated with the same stock, but this time a July $50 (3 month) call is written against the stock, and a premium of $6 is received. Let's assume that the stock closes at $40 at expirey. So, the purchase price was $41 ($47 - $6), and the loss on the position was $1 ($41 - $40), or 9.76%. Compounding the positions gives us 6.9% for a 20 week period, or 18.9% annualized.
