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Steve,
your calculation reminds me of this guy who had just bought a car on the
installment plan, and now thought to himself, my car is worth $ 20,000, the
down payment was $ 4,000, hey I have a profit of $ 16,000.
Even though the May 55 call you are short may not be in-the-money, it still
has a value; and since it is *you* holding this short position, this means
that you are liable for the current value of the call which in our example
was 14 points. To get your bookkeeping right, you would have to subtract
that amount from your "profit".
Hope this makes it a little more clear.
Regards,
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: Merkley, Steve [mailto:smerkley@xxxxxxx]
Gesendet: Tuesday, January 23, 2001 19:49
An: 'realtraders@xxxxxxxxxxx'
Betreff: RE: [RT] conservative?
Hi mike,
If on feb. 15th the itwo is at 52, the may 55 short call would be non
callable so his 13 points would not be in jeapardy. The stock would not
have produced income, but no loss from it either. The feb 50 long put could
be sold at that point for a loss even if it were at 2.5, there would still
be an overall gain of 5.5 points. (13 - initial prem. on short, less 9.5,
the initial output on the put, plus the 2.5 sell price for the put when sold
at 2/15. So the gain seems to be 5.5 points for this particular scenario.
Am I missing something?
Steve Merkley
-----Original Message-----
From: MikeSuesserott@xxxxxxxxxxx [SMTP:MikeSuesserott@xxxxxxxxxxx]
Sent: Tuesday, January 23, 2001 6:22 AM
To: realtraders@xxxxxxxxxxx
Subject: [RT] conservative?
Ben,
here is a possible scenario: come Feb 15, suppose ITWO shares trade at 52
which is about the price you bought them. Suppose further that volatility
has gone up by 10%. This is certainly a possibility for this stock - has
happened almost every month during the past year. Then the Feb puts you are
long from 9 1/2 might be at 2 1/2, and the May calls you are short from 13
might be at 14. Result: a loss of about $ 8,000 on your investment of $
50,000. This is what volatility plus time decay can do to an option
position!
In my years of trading options I have been there, done that, quite a few
times, more often than I care to remember. But I learned, and have now moved
on to more sophisticated mistakes. <g>
Ben, I don't want to spoil the fun for you, and I agree that this strategy
is great in situations where you have high volatilities that you expect to
collapse. But it does have its pros and cons, and produces income only if
used at the appropriate time.
Regards,
Michael Suesserott
-----Ursprungliche Nachricht-----
Von: proffittak@xxxxxxx [mailto:proffittak@xxxxxxx]
Gesendet: Tuesday, January 23, 2001 12:45
An: realtraders@xxxxxxxxxxx
Betreff: Re: AW: [RT] conservative?
hello
if on 2/15/01 the price is 52 then the put would not protect me, however
the July
55 call which lost 1 month out of 2 month premium will be down from
13 to 6.5 at best and to 8.5 at worst
which is PLENTY protection,
in addition.
this is an income position
since it produces 48000 per year income NET on a 50000 outlay,, it is
terrific!
the day before expiration if the price is 52 then will buy the March 50
put
buy back to close the May 55 call
and sell the July 55 call
still netting an additional 4000 for the next month income
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