spindr0, I believe I couldn't sell those naked OTM calls unless I use margin, which I don't want to. Selling calls on existing equity positions would be the only way without margin. My findings are not terribly encouraging, though. By the time I am in the situation of holding the shares, they have usually already dropped enough that the short-term OTM call premium is negligible or zero. Only long-term calls still have some value.
You lost me there. I did some searches on the subject, looks like I have a lot of reading to do on this topic.
How so? I would buy stock for $30 now. Pay $3.30 for the puts. Upfront investment is $33.3. But stock has moved down to $25 or below. Stock + put is worth $25. I would have collected $3.50 of dividends by then, if they don't get lowered. So I have $28.50 left. That's 85.5% of the original investment. Ie .14.5% downside worst case. Is this math right? True. A couple. Cost per day drops for the longer dated puts at equal strike price. More obviously, for same-dated puts, cost per day increases for higher strike price.
------------------------------------------------------------------------ Quote from spindr0: Re your put protection idea, the last thing to mention for tonight is the possibility of collaring your positions. Sell OTM calls to fund the cost of put protection (reduced cost for ATM closer to no cost for equidistant OTM strike). ------------------------------------------------------------------------
Simpliefied explanation... Equity buyer pays for stoick. If margined, pays more since borrowing. Put seller retains cash, receives interest. That's better for the put seller. Since the positions are equivalent, put price + carry cost = call price Hence, call premiums are higher. Read about conversions and reversals and it will make sense.
Math is right but when I looked at it, T was $29.25 and I think you'd get 9 dividends for $3.87 That's about 11+ % (unless I got the # of divs wrong)
spndr0, Thanks. I won't use margin though, just cash account. And interest collected on put premiums would be very close to zero at most brokers currently. Of course, that can change over time. But currently, it should not be a very important factor. Will do.
Yes, I rounded up the stock price by mistake, was too lazy yesterday. I didn't count the exact number of dividends either, I had calculated the dividends using the current yield %. Seems like it isn't that bad of a trade, if I think T will appreciate over the next 2 years. I didn't calculate the break-even point. I don't really have an opinion on the long-term direction right now. But I certainly hope their merger with T-Mobile gets nixed, and that it happens soon. A good time to enter would be after the bad news hits and the shares go down on the news. Still, I would be much happier using a collar with some other security. I prefer to own indices than specific stocks. I will look at SPY collars. Maybe EEM or IWM.