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The example I gave at
http://www.traders2traders.com/myfiles/cwest/QQQexample.htm ties up approx
$12,000 of capital. 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.
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.
-----Original Message-----
From: Free [mailto:free707@xxxxxxxxxx]
Sent: Tuesday, January 15, 2002 2:02 PM
To: Omegalist
Subject: RE: please critique this strategy
True, the broker is going to want margin to cover your risk with uncovered
puts. But, the risk is identical - it's just that with covered calls, you
put your money upfront; with naked puts, you keep your money (or it is held
as margin) but the loss potential is identical. It only seems riskier,
because you may have to come up with cash after you are in the position.
-----Original Message-----
From: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
Sent: Tuesday, January 15, 2002 3:57 PM
To: MikeSuesserott; Omegalist
Subject: 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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