MTE, How are you calculating the 8.1? Eliot, don't start a good sentence with a "But". As MTE points out, your position *is* a synthetic call, so your question does not make sense. You can buy a 100 call and have an equivalent position, but there may be reasons why the married put would be better. You can also get an even better deal by buying the April07 100 Put for 24.50 -- less than $1.00 in time value so you couldn't lose more than that plus the cost of carry which would be less than before. The further you go out in time the longer you have to wait for your insurance in the event the stock goes down.
I think MTE is using current interest rates to get the cost of carry, i.e. the money tied up in the stock could have been earning about 5%/year until Jan 08. That would be an argument FOR using the Jan 08 call instead of the synthetic.
Eliot, cost of carry is a cost .... deducted from your profits. The shorter the time, the less costs you have to pay, ergo ..... The April07 put we be the best choice. Now as regards the married position, obviously overall a call would cost less, but that is not all there is to it. Firstly, the time value of the 100 call in either April07 or Jan08 is 3 times the puts. And then you would have to calculate the hefty margin to hold the short diagonal call spread with a 20 point strike differential. And then there are other reasons -- or so I have been told -- to prefer the synthetic but I can't talk about that.
Eliot, quite honestly, my friend, do not listen to those telling you that this strategy is not a good one, or for that matter, equivalent to a long synthetic 100 call, when the premium on the call is significantly more than the puts. You have the right idea on how to make money in these markets when you start looking at these types of strategies. Ive got others, no rocket science per se, but im not going to discuss them in such a forum. In relation to this particular strategy, Ill say the following: 1) The gentlemen that said that you have to wait to exercise your ability to take the loss because the option is longer term. I tend to disagree. If the stock were to collapse, he could exercise his right to sell and therefore, lose his $2.78 of premium paid for the puts. That same loss would be only $1.00 dollar, obviously, if he choose the 07 puts, however, the idea that he would have to wait to exit his position is an incorrect one. 2) And further the idea of the original poster is one that many of you have not picked up on, or quite simply, are refusing to acknowledge. Elliot, I did something similar with the SMH last year. I had originally bought 10,000 shares of the stock at 32.25 in Sep 04 and bought 100 contracts of the 35 dollar strike puts for roughly $5.00. The idea??? To generate back the premium of the puts by selling covered calls on 50% of the long stock position. There is always excess premium inherent in near term month options when compared to longer term ones, no surprise there. I made some mistakes along the way and still managed to generate a 15% to 20% return for the year. Perhaps not a great return for some on here, but realistically speaking, on a larger account, that is very reasonable and especially so considering the minimal risk of the strategy. We could get into how some months you cannot write a call because the stock goes down too much or what have you, but the idea is right. My advice to you in regards to Apple and what you may be intending to do.....dont buy the 100 puts, buy a nearer strike price. Something in the 80 to 90 dollar range if the stock is at 77. The reason is gamma. Change in option price for each dollar change in stock. The more in the money the option (put) the more the option will drop in line with the stock. What you want is a scenario where the option ideally drops only 50cents to each dollar move in the stock. That way, you enable the strategy of selling covered calls on 50% of the position without shooting yourself in the foot if the stock moves higher. There are many option calculators out there allowing you to calculate implied volatility and then working backwards to determine all the what ifs for each strike price. Experiment with it and see what put option is best. Ideally, what you want is to be able to generate all the premium back in about 4 to 5 months and then own the position free and clear.
Not to your liking, I see. Well, that too bad. I suppose thats why I try not to discuss what I do, that way I dont have to get into a pissing contest with people, that frankly, I really dont give a sht about. But thanks for your insight, if ever I was able to learn something about trading on this forum, 'what a joke' sure did it.
ISources, don't take this flake seriously or representative of others here. He is an immature would-be trader who is trying to learn and likes to show off by typing in silly stuff in any forum that becomes popular. Just ignore him. I did not mean to imply that waiting for the option expiration to exercise the put was inevitable. If you are at all familiar with risk graphs you can see how much premium would be left in the put, and this will vary depending on the stock price. So what is the original idea that we have not picked up on? Why do you limit yourself to selling calls on only 50% of the stock? The idea??? What is that? Finally, why should Eliot buy the put closer to the money when the time premium would cost many times more and his resulting position would be much worse? Go down to the 80 strike and instead of $1 the time premium skyrockets to over $6.50. Not a good choice. Your argument should have said delta instead of gamma. But if you have only $1 of risk it doesn't matter what your greeks are.
Could you expand on that for me please? Specifically, when you compare the premium on the CALL to the PUT. Thank you in advance.
I apologize if i came off sounding as though you guys didnt get what he was doing. All I meant to say was that no one was addressing it directly. First off, yes, delta my friend. Change in option price vs. 1 dollar change in stock price. I always mix up delta and gamma. I certainly meant delta, gamma being rate of change of delta. I hate talking in greeks anyway, and would rather just simply write out what we are talking about, which is what I did in the original post when i wrote, i.e....change in option price for each $1.00 dollar change in stock price. Anyway, as for your question.... Why the nearer term strike than the deep in money strike you ask?? Obviously, the nearer term strike will contain less intrinsic value and more premium. However, if the individual is looking to generate a monthly income off the strategy after paying for the premium, which based on the 6.5 you suggest, should be done within 3 months all things being equal or 5 months at worst....then he can continue to generate monthly income thereafter on 50% of the position without risking the put options collapsing and not having enough long stock to cover such loss. In the scenario where he buys the 100 option, what happens is that, yes, he can certainly generate back the 2.50 in premium paid for the options in similar fashion. But in smaller trading size. For example, he has one of two uncomplicated choices in my opinion, but an examantion of delta need be made first. I dont know it, but ill hypothecate it from current option prices. The 90's are at ~ 18.7 while the 100's are at ~ 25.8 and the 110's are at ~ 34.00. This tells me that delta is roughly 0.70 to 0.75 cents to the dollar. So, the two choices. 1) Looking at the Nov 80's, he can choose to write near term options at the money on 25-30% of the position without peril and it will take him about 2-3 months all things being equal to pay back his 2.50 in premium or whatever it was, without negatively affecting his remaining uncovered position should the stock take off and sore RIMM style. OR 2) He can write options on MORE THAN 30% OF HIS POSITION, on a strike price for a call that is out of the money. Say the 85's for November that are trading at ~1.80. Bottom line, they both end up with roughly the same amount in his pocket. Personally, id prefer to go with option 1, if faced with this scenario. However, the reason I wouldnt ever put myself in this scenario is that once the option is paid for, I can still only write options on 25 to 30% of my position each month thereafter because of the fact that my options are deep in the money. And having already demonstrated that although my premium with the 80 or 85 puts is higher, ~ 6.50 or whatever it was vs. the 2.50 for the 100 puts, the issue is that it will still take nearly the same lenght to recoup the premium using covered calls. This is because the deeper money puts have a higher delta and therefore to compensate a SMALLER percentage of the long position can be covered, in order to compensate for the gap up risk, ala RIMM. So, having now paid off both options in the same amount of time roughly, what position would you rather have. Id rather have my position because of two reasons. 1) If I want, i can now choose to continue to generate an income by continuing to write covered calls on a sizeable portion (i.e. 50% or so) of my position which wouldnt be as feasible on the other position because, as already demonstrated, I am tied to only being able to use 25 to 30% of my position to use covered calls. 2) The number of shares tradeable. So, taking that into account, if Elliot or you or I wanted to execute such a trade with a finite amount of money, a lot more of it needs to be dedicated to buying a 25 dollar option vs. one that is trading at roughly half that amount. And when you are talking about 5000 shares of one and 50 contracts of the other, the difference of the number of shares changes dramatically. For example, lets say I have $500,000.00 dollars to invest with here. I have done this with excel in the past on my own stuff, but crudely, lets say 70% marginable on stock, 0% marginable on option. At a 25.8 dollar option You can buy 5000 shares of stock at 77 and 50 contracts of options at 25.8 without using any real margin. At a 15 dollar option, You are talking 5500 shares and 55 contracts respectily. Thats a 10% difference right there that wasnt even accounted for through this whole discussion. So, in addition to everything else, you can trade more shares using the closer priced married put using the exact same strategy. I hope this answered your question. And i realize now why i dont get into lenght conversations over things that arent done by phone....it takes a long time to write all this out.
I'm glad MoMoney is here. Finally some class. Maybe he can help figure this guy out. I don't know how much this gentleman knows about options. I think his problem is he writes too much at one time. I asked two simple questions which should have required simple answers. I can only comment on the above in this post. He seems to be saying that $6.60 in time premium can be payed off in 3 months just as easily as $1.00 can. Either I am missing something or he is. I think we need to be specific about what options we are talking about, what they cost, and what the deltas are (in case that is important for some unknown reason). That is better than guessing, isn't it? The Jan08 100 Put costs $25.80, has a delta of .56, and time premium of $2.88. The April07 put costs $24 and has a delta of .71 (another reason it is better than the 08) and time premium of $1.00. Obviously the better choice. Now our friend wants to compete with the April07 100 put by going down to the April 80 strike to buy his puts, paying $9.60, most of which ($6.58) is time premium. Why does he want to do this? I dunno. But in doing that he loses deltas, getting only .45 deltas instead of the .71 deltas at the 100 strike. He says he can generate income better this way, but how? So far the choice of puts has very little to do with the income from selling calls. He says buying the 100 put means that one will have to trade in smaller size. Why is that? Because of the cost of the entire position? There is only a 14%-16% difference in cost between the two positions. Time to read on....