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Dom,
for one thing, we have a confusion here of two completely different numbers.
One is the market value of a position held by the trader. This is the amount
of money we would get or pay if we were to unwind our position now,
commissions and slippage and gapping markets aside. The other thing is the
risk inherent in a position, as indicated by the margin for that position.
Whether the short call is covered or not has no bearing on Steve's
calculation of market value, only on the amount of margin required.
Now as regards the calculation, please remember what Steve wrote (you might
want to re-read below). His calculation was profit = 13 - 9.5 + 2.5 -0.5 =
5.5. You may notice that the first summand 13, the premium received for the
short call, has already been accounted for in Steve's sum. It wouldn't be
correct to add it a second time in a second calculation 13 - 14 to make the
loss appear only -1.
Here is the real "profit" for the position:
13 - 9.5 + 2.5 -0.5 -14 = -8.5.
As an alternative, we can compute the "profit" (the realized loss, actually)
of the long put separately as
-9.5 + 2.5 = -7,
and the "profit" (the unrealized loss) of the position that is still on as
13 - 0.5 - 14 = -1.5.
Having realized and acknowledged to ourselves the first loss of -7, we may
then call the remaining -1.5 a "temporary paper loss", if that makes us feel
any better.
Regards,
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: Dom Perrino [mailto:domenick@xxxxxxxxxxxx]
Gesendet: Wednesday, January 24, 2001 02:29
An: realtraders@xxxxxxxxxxx
Betreff: Re: [RT] conservative?
The Liability is that he has to deliver itwo stock on or
before the 3rd Friday in May. Since the stock is owned, the short call is
covered. I don't see why you would count the 14 points as a loss You might
count the 1 point increase as a temporary paper loss.(13-14)= -1.
.Dom
----- Original Message -----
From: <MikeSuesserott@xxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxx>
Sent: Tuesday, January 23, 2001 6:09 PM
Subject: AW: [RT] conservative?
> 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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>
>
>
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