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A leap collar is, IMHO, a rotten way to trade. Why would anyone ever
sell a long option... why would I ever obligate myself to exit a position
at a predetermined price .. going out a period so long that I can do no
meaningful forecasting. I didn't advocate a covered write.
I said the repair was superior. Additionally under most proposed
tax treatments unless the collar is significantly OTM it can be consider
a constructive sale. Even if it is OTM the IRS has begun counting
deltas instead of otm percentages. If there enforcement becomes aggressive
in that area listed collars pass away.
Ira Tunik wrote:
I am not one that favors the covered write as a repair
method. It still leaves you open to a lot of down side. I realize
that you can keep rolling it down. You wouldn't own the stock if
you didn't think it was going higher. For a repair I would prefer
using a leap collar. That way you limit your downside, put money
into your account and get part of the rally. Take CSCO
trading at 41 1/2, if you buy the Jan 02 40 puts at 8 1/2 and sell the
45 calls at 9 5/8 you pocket 1 1/8 sans commissions and reduce your risk
to 3/8 and you you have limited profit. If the stock starts to rally
in accordance with your system you can buy in the call, you buy a near
term call or you can do any number of strategies that will benefit your
bottom line by a rising price. In the mean time you have limited
your risk and if you are parked for a year and it goes out at 45 or higher
your return is over 11%. At least this way you are getting paid fairly
well for holding the stock. Yes there is an opportunity loss if you
stay parked, but it gives you a stock to trade around. Just another
idea thrown into the pot. Ira.
The Doctor wrote:
A "stock" repair strategy (unless I missed some intermediate
quotes) is generally done for free. In a repair a stock is down about
20% - 30% and your objective is to get to break even without getting any
additional risk or spending any additional $$. Say you bought the
stock at $100 and it's currently at $70. You don't expect it to get
back to $100 .. but it might have a shot at $85. For every hundred
shares you own you buy a $75 call and sell 2X $85 calls for even money.
In essence every 100 shares becomes a covered write off of one of the $85
calls. The rest is a 75/85 bull spread. No dollars and no additional
risk (you have capped your upside at $85 on a position twice as large and
some people would view capped upside as opportunity risk). You essentially
buy a 1 x 2 75/85 call back spread for even. For every 1 point move
above $75 you make $2. At $85 you break even. This strategy
is also far better than conventional covered writing except that a covered
write gives you a downside cushion.
Ira Tunik wrote:
What do you mean by a repair strategy? It has
very little to do with price, it has to do with what you want to accomplish
and the least expensive way of doing it. Give an example of the repair
you are thinking about. Ira
JAC1390@xxxxxxx wrote:
What are
some guidelines with regard to amount of premium one should pay if
they are engaging in a repair
strategy?
Thank you in advance,
JAC
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