no because I have to sell stock, pay a big capital gains on the profit or I have to borrow on margin and pay margin interest. not the same.
Yes I tied up some of the margin amount I can use for other stuff but I have 100% margin equity, VS borrowing to buy and paying interest on the margin debit. Now i just pay off the synthetic long covered call position that I got at a discount special over a period of months to cover potential assignment. Like how my parents used to buy that 40% off Television set by using layaway to get the TV delivered later in the future. and using some cash over time to pay for the cheaper TV so you get it on the delivery date. Now I am just using layaway to add a fractional stake in a drug company to my portfolio. without paying interest. Yes I know the dividends are part extrinsic part of the put premium. And beside someone has to take the otherside of the trade to help add liquidity to the options market. so I am helping the markets as well.
You can juice the return by putting the premium collected into a risk free interest bearing bank account or even a CD maturing at put expiration.
The cost to carry both positions is the same and the options pricing model assumes you use the premium you collect and put it in the risk free investment. Again there is no such thing as a free lunch LOL
I feel like this is going in circles. how is paying a margin interest on a margin debit over 11 months not considered as part of the cost to carry?
The margin interest rate is a lot higher than the current risk free rates at the banks. My broker wants ~7% for a $5000 margin balance.
You're not collecting any dividends up front today. You're getting a higher put premium but it's maybe 60% of the total dividends b/t now and expiration. The further out in time you go, the less premium per day that you receive and the closer to ATM, the more time premium per day. In that vein, I think the sale of the Jan 2012 35p would be a better choice. Tho you make a little less per day, you have $7 less risk. IMO, an even better choice would be the Jan 2011 35p which gives you about the same cost if assigned but a better profit per day if unchanged and again, with less risk. If you get lucky, maybe you get to repeat a similar put sale again next January. Obviously, the 40 put is superior if LLY runs up and you get to keep the entire premium but from a risk/reward perspective, I think it's inferior.