Mystic, For the record, ill give this my best shot and if it doesnt work out then we can agree to disagree or I can give you my phone number and ill let you call me and ill explain it to you by phone. Im serious about that too. Its up to you. I dont really care if others agree or disagree. I put my work into practice, I dont need confirmation. Having said that, lets start with Elliot, who has disappeared it seems. Ill try and make this brief but i doubt it will be. First off, I was never talking about comparing the April 07 80's to the April 07 100's. I would never do this trade to begin with and that isnt what Elliot was asking. He was looking at the Jan 08 100's. Someone then came on and suggested the April 07's. Maybe it was you, I cant remember. I was never addressing that scenario, but I will now. Its hard not to write a lot of explanation, but ill do my best. As it relates the two April puts, 100's vs. 80's. 1) First off, remember taht Delta is over 0.80 for the April 100's. If you are looking at the April options at the 100 dollar strike price, I can assure you that delta is more than 0.80 and actually closer to 0.90., therefore, in case the stock runs away on you, it is advisable not to write a covered call on more than 15 to 20% of the stock position. I hope its clear as to why you cannot write a covered call on more than 15 to 20% of the position with this option having delta of 0.80+. However, if i had to choose between the 100' for April and the 80's for April, id still probably buy the 100's as you suggest. The premium can be paid back within 2 to 3 months, all things being equal. Now that the option premium is paid, great. No risk right. But the question is, now what?? 2) To answer the 'now what' question, all we have to do is what I love to do in this kind of scenario. Answer the three what ifs?? a) What if the stock goes down substantially b) What if the stock trades flat c) What if the stock goes up substantially. The answer to (a) No big deal. You are protected and you wont lose any money. You can exercise your right to sell the stock at 100 and you wont lose anything because you ideally already recovered the premium before the stock collapsed. (One can only hope that is the case). The answer to (b) You can choose to do nothing OR you can choose to write covered calls on 15 to 20% of the position. Again, that 15 to 20% has not changed and cannot change either. Because Delta is 0.80+, and the more time that expires, the closer delta gets to 1, which mean that at first in December/January you can continue to write covered calls on 15% to 20% of the position, but as time passes, and the stock still trades roughly flat, you cant continue to write covered callls on 15 to 20% of the position anymore because delta is getting closer to 1 as time expires on the option. What I mean is this. If the stock moves from 77 to 87 in Nov, the puts might drop only 8 dollars for the 10 dollar move in the stock, i.e. delta of 0.80. Im being conserative here by the way. However, come February if the stock has not moved one way or the other in any great particular fashion, but then one day it went from 77 to 87, the move in the option price will no longer be 8 dollars, i.e. delta of 0.80, but more like 0.90. That implies that if you were to sit around and write covered calls on a portion of your long position each month, the amount that you can continue to write drops as time passes. But the question is, why would anyone want to continue to write covered calls on a portion of the position AFTER they have already recovered the premium, right? Well, maybe Elliot is tired of waiting for Apple to move and wants to generate some income. Which leads us to (c) If I have paid off the $1.00 premium and now own the stock free and clear of any risk, im probably looking at somewhere in the vicinity of December or January, right. Because it has taken me roughly 2 months to pay off the premium. So, ideally, here I am in December with Apple at 77, my 100 married puts and all the premium already paid for, therefore, implying no risk. I can choose to do what I did in (b) above and contineu to write covered calls on a small portion of that postion (15%), but really, im not making much money doing that am I. NO, not really. What I hope for is that the stock basically takes off and begins an ascent upwards. Im hoping that come January when Apple reports their earnings, that the stock soars. So, I just hold on tight, I dont write any covered calls and simply hope that my long position, which again, I hold riskless, makes me some money. Remember that as time passes, delta gets closer to 1, so we are hoping that if Apple moves, it moves soon, otherwise, even it moves come March, it might not make us much money because Delta will be so bloody close to 1 that we dont make much money. So, yeah, youve got a stock that is free and clear where the premium was paid for by December, but youve only got a couple months to wait to make some real money. And if the stock happens to go down, or not move much OR move, but not in a good enough time frame, you end up putting your capital into a postion that hasnt moved and even though you dont lose any money, come February/March, you realize that its time to exercise your right to sell your stock at 100. Again, you dont lose any money doing so, BUT YOU DONT MAKE ANY EITHER and you just spent 4 months of tying up big capital. Basically, the April 07's dont give you enough time flexibility to do what you want to do. Now, if we looked at the 100's for January 08 that had 2.50 in premium, you might be okay. Delta will be a bit lower, something in the 0.70 range than it was for the April 07 100's which we have shown to be 0.80+. And it wont take you markedly longer to pay off the 2.50 premium for the Jan 08 100's than it would the 1.00 premium for the April 07 100's because, remember, delta is lower for the Jan 08 100's because there is more time remaining on them. So, now that we have established why I like the Jan 08 100's more than the April 07 100's, the only debate is between: The Jan 08 80's or 85's vs. The Jan 08 100's. And ive already explained that one in my previous post. Premium in the 85's is 6.5 Premium in the 100's is 2.5. Delta is roughly 0.5 for the 85's Delta is roughly 0.7 for the 100's. And depening on which options you choose to write, you can recoup both premiums in roughly the same amount of time, perhaps a month longer in the case of the 85's. But what you gain AFTER you have recouped the premiums is as important. YOU HAVE GAINED FLEXIBILITY. Flexibility to continue to generate income by writing options on the 85's that are more lucrative than the 100's because DELTA IS LOWER. The ability to buy more shares as demonstrated in my previous post ANDDDD the ability to, if i dont want to write any options, have more leveraged upside as teh stock goes higher. Because once Appl starts going up im making serious coin as delta goes down whereas witht he 100's I wouldnt me making as much. In other words, my upside is more limited when I own the 100's. So, in summary, 85s vs 100s 1) Yes more premium: 6.50 to 2.50 2) But only slightly longer to pay back the premium because delta allows covered calls on 50% of position for the 85's vs only 30% for the 100s. 3) Also can buy more shares with the same amount of capital as I am only spending 15 dollars vs 25 on the 100 option 4) And after premiums are recouped on both positions, much MUCH more flexibility for higher gains with the 85 position than the 100. Im not saying the 100's arent a good investment. If you are a conservative investor who doesnt like risk, then yes, buy the 100's and KNOW taht you start off with only 2.50 in risk no matter what happens and that gets cut down as soon as you write your first option. But, if you are sophisticated and understand risk vs. reward, youll set up a model in something as simple as excel and analyze all the options from 75 up to 100 and look at the what if? scenarios for each position. I hope this helps. And if I have come off as condascending in the past, dont hold it against me, because I wasnt trying to. Nice keeping it short.
Thanks. As you allude to, I'm not 100% sure that is what the poster meant though. No matter, I think I might sit this one out and observe from the sidelines
You're still long stock + long otm put which is a synthetic call. You can keep your directional (or non-directional) strategy as is and substitute the long stock and long put with a call and you have the same positions at a better price. Nothing new about diagonal backspreads except most people don't do them with the synthetic...unless there's a specific reason. Obviously the long diagonal will be short gamma and long vega. However, ratio'd as you suggest, would lower the gamma exposure but leave you long lots of vega. You'd also carry long deltas in the back month. A move to you're short strike would neutralize you're deltas due to the short gamma exposure. This leaves a position that requires a flat to limited move up without significant drops in volatility for profit. Is this your analysis as well?
Quote from Investorsources: To be honest with you, im not up on my greeks as much as you and some on here. I try not to get too complicated with them because all it does is confuse the issue. Ouch, and sadly a greek could have saved your argument: rho. 1) you buy the Jan 08 100 call at $6.60. The married put had a buy price of 74.90 and the 100 put cost 27.3. This implies $2.30 in premium. So already a big difference. Sure, one difference is that you're in the hole $7490 for a year and a quarter. At 5% interest, you've lost $468 over 1.25 years. Take your $2.30 in premium, add $4.68, and guess what, the total comes to $6.98. In short, you're paying .38 more for your married put than you are for a call.
To investorsources : Ok, I see my shot worked. And you shot back. Good now we can get down to business. In your previous post on page 7, you typed a lot of details. But the main point you left out is what happens when you haven't yet covered the premium on the put. You explained nice and dandy what happens when the premium is covered, but you once again ignored the downside. Take AAPL 08' 100 puts with $2.50 in premium. You also sell the Nov 06 80 calls for 2.5. Now AAPL is trading at half it's value 1 day and now the calls are worthless, and if the premium on the calls have covered the put premium, you have a riskless position, albeit one that doesn't have much upside unless AAPL returns to pre-crash levels. Same with the 07's. Pretty basic, we all understand that, the 08s give one more time. But in doing so this position ties up massive capital, and cost of carry is a cost. (75*100)*0.0525*(473/365) = some amount + the premium on the put will yield around the same price as the Jan 08 100 call. Sure having the stock allows for more flexibility, but the forgone oppoturnity cost of interest is a factor. As said by previous posters, your position is similar to the Jan08 100 call + selling a nearmonth closer to the money call, say the Nov06 80/85s. And so for opening the upside ala your stock position, simply buy more then you short. You can always sell another series of nearmonth calls to recoup the extra calls premium. Now consider your 08 85s puts. This is also moot, as to cover the premium in these puts the nearest month you have to sell is the Jan 07 95s. You have to wait just as long as the 100 puts, no advantage except possibly more positive deltas as the stock goes up, but only to an amount as you still have the short call. If you sell the Nov series with the greatest premium, you still don't cover the premium on 85s and if AAPL crashes to half it's value, exercising would mean forsaking the premium and taking a loss, selling more calls at the lower price to recoup the premium forces the ORIGINAL intention of the position, which is bullish to be revoked. So even when you recoup the premium, AAPL still has to trade up to pre-crash levels. Sure you have time, but still the same as if you had the 100s.
Back from the sidelines... Respectfully, it's seems that synthetics are not fully understood Save yourself all the typing trying to disprove synthetic relationships! Unless stock is already owned and/or dividends, cost of carry, tax, commissions etc. are considerations, there is no benefit to the synthetic CALL (long stock + long PUT) over the natural (long CALL) or vice versa. I'm just reiterating what others have already said. It's not an issue that is really up for debate or open to opinion or interpretation - no matter how much you type... Good luck. MoMoney.
Appreciate your response. One thing to point out though is that I never intended on selling THE ENTIRE AMOUNT COVERED for the Nov 06 calls. I would never cover my entire long stock position with a call of the Nov 80 calls for 2.50. I would only do as much as delta has allowed me. But, i dont blame you if things I said werent clear. I know I was clear about that point though, and it is crucial to the rest. But, really, Im just done with this argument. Not because I dont respect what anyone has to say, but because there are too many wise guys who think they know it all and type the dumbest, most condascening crap i have ever seen in my life for a message board that is supposed to be littered with professionals, not university guys trying to get their concepts down pat.
It's hard to stay away from all this nonsense. Unfortunately, i am not as diplomatic as mo. Here is a quick summary of this whole thread for the uninitiated to options. Synthetic long calendar spread. Now most good option traders know that long calendars are a useless bet unless you are betting on vega and maybe catch a few deltas which doesnt seem to be the case here. It gets worse, throw in the big distance between the months and it becomes a straight out insanity. As i said before, this whole idea to pay for the time value in 3-4 months and end up owning the intrinsic between the spot and the put for free is just ridiculous and best suited for late night entertainment. And yes, the intrinsic value is exactly the same as the call plus your cost of carry on the longs. Having said that, if i had a crystal ball that could show me where the spot will end up around expiration each month for the next 3-4 months(which is your underlying bet) there's a ton of other strats much better suited for the underlying bet. Carry on with this strat to make money, but i do hope no one is taking this seriously.
You have answered many questions in all your typing, but some still remain. It seems that several here have now shown you that when you figure in the cost of carry, the premium on the calls is equal to the cost of the puts plus cost of carry. In #2 above you ask how to generate back the call premium, and instead of doing what this thread is all about (selling near-term calls on your married put position), you go into a right-angle turn and talk about an entirely different position. What was wrong with selling the November 85 call that I suggested in my last post? What makes you avoid that and do something entirely different? Let's say you are long the natural April07100 call. Then you sell the 85's against that creating a short call spread. Have you done a risk graph on that? Have you worked out the scenarios for that? If you had done either of these things you would see that the results are the same as selling the 85 calls against your married put position. In all your typing, why don't you give an example of how you think it would be different?