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Mike,
A couple of comments about your comments :).
The example I gave at
http://www.traders2traders.com/myfiles/cwest/QQQexample.htm ties up approx
$12,000 of capital, not $50,000 as you mentioned. Also the amount of capital
deployed can be reduced if the margin of the long stock position is
increased. I believe Reg. T will allow the amount of equity in the trade to
fall to 25% of the mark-to-market value of the underlying, whereas a broker
would insist on more margin for naked puts than what Reg. T would stipulate.
I think the amount of capital required to do the trade is about the same
whether it's leveraged covered calls or naked puts.
You raised early assignment as an issue. In the example, if there was an
early assignment would that not increase the ROI as the number of days the
position was opened would be reduced?
I'm not sure I'd agree that the risk is the same. For example, when the
underlying's price falls, I'd expect the delta of the naked OTM put which
has the same strike price as the ITM short call to move towards 1.0 faster
than the delta of the call would move away from 1.0. Admittedly a minor
difference, but a noticeable amount for large positions.
I also think it would be considerably more difficult to sell OTM puts than
to sell ITM calls for a large position. In the example I used 1000 shares,
however, imagine that the position was 100,000 shares and 1000 options. And
in the event of the stock price falling and the position becoming a "loser,"
I'd expect that buying back the sold calls and selling the stock would be
easier than buying back short puts as their volatility would probably have
risen much higher than the sold calls.
Does the profit graph or ROI still look the same given changing amounts
deployed in the leverage covered calls position in comparison to naked puts
after factoring in higher broker required margins?
Colin
-----Original Message-----
From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
Sent: Tuesday, January 15, 2002 2:02 PM
To: cwest@xxxxxxxxxxxx; Omegalist
Subject: please critique this strategy
Colin,
I am *not* saying that. I am saying your strategy has the *same* risk as
selling naked puts. Just look at the payoff graphs.
Michael Suesserott
> -----Ursprüngliche Nachricht-----
> Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
> Gesendet: Tuesday, January 15, 2002 21:57
> An: MikeSuesserott; Omegalist
> Betreff: RE: please critique this strategy
>
>
> Mike,
>
> I guess I should have prefaced the strategy by saying that naked options
> aren't really a choice in terms of trading safely and real-world margins.
> Although a smaller amount is theoretically used to sell naked
> puts, a broker
> would want "something" additional behind the trade. Just selling
> uncovered
> puts would be simpler, but as you say much more risk is entertained.
>
> -----Original Message-----
> From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
> Sent: Tuesday, January 15, 2002 12:43 PM
> To: cwest@xxxxxxxxxxxx; Omegalist
> Subject: please critique this strategy
>
> Hi Colin,
>
> please be advised that the profit graph of this position (long 1000 QQQ,
> short 10 QQQ Jun02 36 Calls) is *exactly* equivalent to short 10 naked QQQ
> Jun02 36 Puts; you can use any option analysis software to verify this.
>
> The differences:
> your combined position has a large amount of capital - some $50,000 - tied
> up (stock price plus margin); furthermore, the ITM calls may be subject to
> early assignment.
>
> The equivalent naked puts would have only about $ 4,000 tied up at current
> prices; no immediate assignment risk exists because the puts are OTM.
>
> To sum up, the option strategy you asked to be discussed is a
> more expensive
> way of selling naked options. It is true that the sale of naked
> options can
> be very lucrative, but the (nearly) unlimited downside risk is to be
> considered also. I for one wouldn't want to take it.
>
> Best regards,
>
> Michael Suesserott
>
>
> > -----Ursprüngliche Nachricht-----
> > Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
> > Gesendet: Tuesday, January 15, 2002 19:51
> > An: Omegalist
> > Betreff: please critique this strategy
> >
> >
> >
> > Not too long ago a probable and/or realistic annual return that could be
> > expected was discussed on the list and I believe the consensus
> > was that not
> > more than 40% p.a. could realistically be expected, barring
> excessive risk
> > and an extraordinary "banner" year. I'm raising a strategy for
> discussion
> > that has the potential to exceed 40% p.a. that also encompasses several
> > "trading safely" features, if you will, and can usually support
> > quite large
> > fills with little slippage.
> >
> > The goal of the strategy is to sell rich covered call premiums that are
> > deep-in-the money. In the example I've used QQQ and QQQFJ (Jun'02
> > 36 call).
> > Not that the latter is the richest, it's just an example. The strategy
> > includes borrowing against the QQQ units or shares either
> through a margin
> > account or privately.
> >
> > The calculations of this strategy can be viewed at the following link. I
> > didn't include them in the email because the listserver at
> > eskimo.com seems
> > to "object" to formatting, html and most attachments.
> > www.traders2traders.com/myfiles/cwest/QQQexample.htm
> > <http://www.traders2traders.com/myfiles/cwest/QQQexample.htm> .
> > (Although NS
> > will probably screw the formatting anyway :-)). BTW, if anyone
> needs some
> > space for a time at ../myfiles/yourname/, they're welcome.
> There are a few
> > users already.
> >
> > I look forward to any comments that may expose any not so obvious
> > floors in
> > the strategy or suggestions to improve its return.
> >
> > Colin West
> >
> >
> >
>
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