covered options

[c.chugani]

Quote from Brons:

Your downside isn't unlimited. It's limited to the price of the underlying - premium.

you are right, my mistake.

I still don't get how writing the call option provides protection or insurance.

 

[c.chugani]

Quote from exQQQQseme:

Just to clarify...when you guys use the term "lower cost basis", you are not talking about your US income tax basis in the stock. Tax wise, let's say you buy 100 shares of Underlying (UND) for $20 per share. You also write 1 call against the stock and receive a premium of $2.

If the stock declines to below $20 at expiration, the call will expire worthless. The $2 premium will be a short term capital gain at the date of expiration. Your tax basis in the stock will still be $20.

4Q

I actually live in the EU so I am not well versed on US fiscal policy.

I was basically refering to lowering the purchase price. It has nothing got to do with taxes.

ie. buy stock at $20. Write call for $1 premium. The stock has essentially cost me $19.

 

[spindr0]

Quote from exQQQQseme:

Just to clarify...when you guys use the term "lower cost basis", you are not talking about your US income tax basis in the stock.

Answered only as an accountant would and could answer

Let's make these guys be technically correct.
Net investment.
Yeh, that's the trick.

 

[exQQQQseme]

Fair enough, Spin. Have a Happy New Year.

4Q

 

[spindr0]

Quote from c.chugani:
I still don't get how writing the call option provides protection or insurance.

The protection is the amount of the premium received. The deeper the call is ITM, the larger the premium (intrinsic) and the lower the risk is. However, the more the call is ITM, the lower the time premium will be (extrinsic). Risk and reward go hand in hand. In essence, you're giving up potential profit to limit the risk by going deeper ITM. Does that make sense now?

And HNY 2U2 4Q

 

[musicman]

Quote from exQQQQseme:

Just to clarify...when you guys use the term "lower cost basis", you are not talking about your US income tax basis in the stock. Tax wise, let's say you buy 100 shares of Underlying (UND) for $20 per share. You also write 1 call against the stock and receive a premium of $2.

If the stock declines to below $20 at expiration, the call will expire worthless. The $2 premium will be a short term capital gain at the date of expiration. Your tax basis in the stock will still be $20.

4Q

My use of the term “cost basis” does not apply to taxes , rather it gives me a idea of the net cost of my stock that include option write premiums so I can determine where to write future options as well as how much I made on the stock when I get called or sell it outright.

 

[jwcapital]

Quote from spindr0:

The protection is the amount of the premium received. The deeper the call is ITM, the larger the premium (intrinsic) and the lower the risk is. However, the more the call is ITM, the lower the time premium will be (extrinsic). Risk and reward go hand in hand. In essence, you're giving up potential profit to limit the risk by going deeper ITM. Does that make sense now?

And HNY 2U2 4Q

Good explanation. As I previously mentioned: going one handle ITM ($60.00 stock, JAN 10 55 CALL with premium of $9.40), you get optimal time value ($4.40 premium for the year; that's a 7.3% return right there if the stock finished ITM) and decent downside protection (16%). Plus, since I like dividends, I will receive a year's worth of dividends. So, suppose the dividend yield is 3%, the stock finishes in the money, and I received 7.3% time premium. That's a pretty good return. If the stock finishes below $60 (16% drop), then I lose a point for every tick below $50.6. But, I get to keep the entire premium and the dividends. And, if the stock's fundies are still good, I can buy more and write more LEAP calls. Again, I would do this with a stock like JNJ (long-term hold, buying on pullbacks). The pullbacks could simply trigger new buys with every 16% drop.