Quote from mysticman:
ISources,
don't take this flake seriously or representative of others here. He is an immature would-be trader who is trying to learn and likes to show off by typing in silly stuff in any forum that becomes popular. Just ignore him.
I did not mean to imply that waiting for the option expiration to exercise the put was inevitable. If you are at all familiar with risk graphs you can see how much premium would be left in the put, and this will vary depending on the stock price.
So what is the original idea that we have not picked up on?
Why do you limit yourself to selling calls on only 50% of the stock?
The idea??? What is that?
Finally, why should Eliot buy the put closer to the money when the time premium would cost many times more and his resulting position would be much worse? Go down to the 80 strike and instead of $1 the time premium skyrockets to over $6.50. Not a good choice. Your argument should have said delta instead of gamma. But if you have only $1 of risk it doesn't matter what your greeks are.
I apologize if i came off sounding as though you guys didnt get what he was doing. All I meant to say was that no one was addressing it directly.
First off, yes, delta my friend. Change in option price vs. 1 dollar change in stock price. I always mix up delta and gamma.
I certainly meant delta, gamma being rate of change of delta.
I hate talking in greeks anyway, and would rather just simply write out what we are talking about, which is what I did in the original post when i wrote, i.e....change in option price for each $1.00 dollar change in stock price.
Anyway, as for your question....
Why the nearer term strike than the deep in money strike you ask??
Obviously, the nearer term strike will contain less intrinsic value and more premium. However, if the individual is looking to generate a monthly income off the strategy after paying for the premium, which based on the 6.5 you suggest, should be done within 3 months all things being equal or 5 months at worst....then he can continue to generate monthly income thereafter on 50% of the position without risking the put options collapsing and not having enough long stock to cover such loss.
In the scenario where he buys the 100 option, what happens is that, yes, he can certainly generate back the 2.50 in premium paid for the options in similar fashion. But in smaller trading size. For example, he has one of two uncomplicated choices in my opinion, but an examantion of delta need be made first.
I dont know it, but ill hypothecate it from current option prices. The 90's are at ~ 18.7 while the 100's are at ~ 25.8 and the 110's are at ~ 34.00.
This tells me that delta is roughly 0.70 to 0.75 cents to the dollar.
So, the two choices.
1) Looking at the Nov 80's, he can choose to write near term options at the money on 25-30% of the position without peril and it will take him about 2-3 months all things being equal to pay back his 2.50 in premium or whatever it was, without negatively affecting his remaining uncovered position should the stock take off and sore RIMM style.
OR
2) He can write options on MORE THAN 30% OF HIS POSITION, on a strike price for a call that is out of the money. Say the 85's for November that are trading at ~1.80.
Bottom line, they both end up with roughly the same amount in his pocket. Personally, id prefer to go with option 1, if faced with this scenario.
However, the reason I wouldnt ever put myself in this scenario is that once the option is paid for, I can still only write options on 25 to 30% of my position each month thereafter because of the fact that my options are deep in the money.
And having already demonstrated that although my premium with the 80 or 85 puts is higher, ~ 6.50 or whatever it was vs. the 2.50 for the 100 puts, the issue is that it will still take nearly the same lenght to recoup the premium using covered calls. This is because the deeper money puts have a higher delta and therefore to compensate a SMALLER percentage of the long position can be covered, in order to compensate for the gap up risk, ala RIMM.
So, having now paid off both options in the same amount of time roughly, what position would you rather have. Id rather have my position because of two reasons.
1) If I want, i can now choose to continue to generate an income by continuing to write covered calls on a sizeable portion (i.e. 50% or so) of my position which wouldnt be as feasible on the other position because, as already demonstrated, I am tied to only being able to use 25 to 30% of my position to use covered calls.
2) The number of shares tradeable.
So, taking that into account, if Elliot or you or I wanted to execute such a trade with a finite amount of money, a lot more of it needs to be dedicated to buying a 25 dollar option vs. one that is trading at roughly half that amount. And when you are talking about 5000 shares of one and 50 contracts of the other, the difference of the number of shares changes dramatically.
For example, lets say I have $500,000.00 dollars to invest with here.
I have done this with excel in the past on my own stuff, but crudely, lets say 70% marginable on stock, 0% marginable on option.
At a 25.8 dollar option
You can buy 5000 shares of stock at 77 and 50 contracts of options at 25.8 without using any real margin.
At a 15 dollar option,
You are talking 5500 shares and 55 contracts respectily.
Thats a 10% difference right there that wasnt even accounted for through this whole discussion.
So, in addition to everything else, you can trade more shares using the closer priced married put using the exact same strategy.
I hope this answered your question. And i realize now why i dont get into lenght conversations over things that arent done by phone....it takes a long time to write all this out.
