Newbie Question: Married Puts aka Covered Puts

[mysticman]

Quote from Investorsources: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, in addition to everything else, you can trade more shares using the closer priced married put using the exact same strategy.

1) So now we are talking about 20-30% of the position. I know this is because the short deltas of the protective puts (.71). I believe this would be your answer to why it would not be 100%. The amount you want to pay off is either $1.00 (April 100 put) or $6.60 (your April 80 put) -- not some hypothetical $2.50. Have you answered yet why you would buy the 80 put instead of the 100?

So what is wrong with selling the Nov 85 call for $1.80 having a .28 delta? That seems to fit perfectly. Why can't you sell these to cover 100% of the position. In the unlikely event you are called out you would make money in addition to the premium income which pays off the put time premium whatever happens. Of course if you are buying the 80 puts you will have to wait many more months to pay off their time premium. That's over 6 times longer to break even and less net income.

2) Of course as said previously you need pay 14% more to buy a deeper ITM put, but you get what you pay for in terms of getting a bargain in time premium.

 

[rallymode]

People still make options trades based on intrinsic and time values of an option? I guess the late night infomercials have an audience after all.

All this typing for yet another way to tie up margin in a pretty hopeless bet.

 

[jj90]

Quote from Investorsources:

There is always excess premium inherent in near term month options when compared to
longer term ones, no surprise there.

???????????????? Are you saying near months will have more premium then far months?

I get why you are selling calls to half the stock position.

I would also like your response to Mo's question.

Quote from Investorsources:

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

I take it you mean the nearer TO THE MONEY strike.

As mystic has pointed out pretty well, leverage works both ways. Sure you can trade more of the position, and have more positive deltas if you buy the 80s, but your risk is also amplified. The idea is to minimize the downside risk, not open it up.

Please don't give a ridiculous answer. Considering the tone and quality of your posts, the previous posters and I have gone really easy not to annihilate your argument.

 

[MTE]

Quote from mysticman:

MTE, How are you calculating the 8.1?...

Mysticman,

As Eliot points out, I simply use the 5.25% interest rate and the current stock price (76.98*0.0525*474/360). My calculation may not be exactly right as the 5.25% interest rate may not be the best estimate for the next 474 days, but it is a good proxy.

Quote from Eliot Hosewater:

I think MTE is using current interest rates to get the cost of carry, i.e. the money tied up in the stock could have been earning about 5%/year until Jan 08. That would be an argument FOR using the Jan 08 call instead of the synthetic.

It doesn't matter, which one you have, synthetic call or "actual" call, it's the same thing, that's why they are called synthetics. The only difference is 1 trade and thus 1 set of commissions and slippage vs. 2 trades and thus 2 sets of comm. and slippage. If all you wanna do is buy a call then buy a call and forget about the stock, on the other hand, if you already have the stock as a long term investment and want to protect it then buy the put!

Sorry, I may be answering what someone else has already answered, but I'm too lazy to read all the post.

 

[mysticman]

Quote from momoneythansens:Could you expand on that for me please? Specifically, when you compare the premium on the CALL to the PUT. Thank you in advance.

If I had to guess what his answer would be, or perhaps what it *should* be, the time premium of the November 85 call is greater than that of the April07 100 put, both absolutely and per day (theta).

 

[Investorsources]

Quote from jj90:

???????????????? Are you saying near months will have more premium then far months?

I get why you are selling calls to half the stock position.

I would also like your response to Mo's question.



I take it you mean the nearer TO THE MONEY strike.

As mystic has pointed out pretty well, leverage works both ways. Sure you can trade more of the position, and have more positive deltas if you buy the 80s, but your risk is also amplified. The idea is to minimize the downside risk, not open it up.

Please don't give a ridiculous answer. Considering the tone and quality of your posts, the previous posters and I have gone really easy not to annihilate your argument.

lol.....this post is funny. especially the last paragraph. Its why i dont wast time with people like you.

But, ill give this one more shot in the next post to explain it to mystic man. So that I can use his posts for reference.

 

[cohenmichaela]

It's still a synthetic call any way you look at it regardless of the deltas. You are doing call credit spreads and backspreads. Same risk and same reward. Except your buying the synthetic and paying more...

Quote from Investorsources:

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.
.....]

 

[Eliot Hosewater]

Quote from rallymode:

People still make options trades based on intrinsic and time values of an option? I guess the late night infomercials have an audience after all.

All this typing for yet another way to tie up margin in a pretty hopeless bet.

What's your strategy for generating income with limited downside risk, without taking speculative directional positions?

 

[Eliot Hosewater]

Quote from mysticman:

I'm glad MoMoney is here. Finally some class. Maybe he can help figure this guy out. I don't know how much this gentleman knows about options. I think his problem is he writes too much at one time. I asked two simple questions which should have required simple answers. I can only comment on the above in this post.

He seems to be saying that $6.60 in time premium can be payed off in 3 months just as easily as $1.00 can. Either I am missing something or he is.

I think we need to be specific about what options we are talking about, what they cost, and what the deltas are (in case that is important for some unknown reason). That is better than guessing, isn't it? The Jan08 100 Put costs $25.80, has a delta of .56, and time premium of $2.88. The April07 put costs $24 and has a delta of .71 (another reason it is better than the 08) and time premium of $1.00. Obviously the better choice.

Now our friend wants to compete with the April07 100 put by going down to the April 80 strike to buy his puts, paying $9.60, most of which ($6.58) is time premium. Why does he want to do this? I dunno. But in doing that he loses deltas, getting only .45 deltas instead of the .71 deltas at the 100 strike.

He says he can generate income better this way, but how? So far the choice of puts has very little to do with the income from selling calls. He says buying the 100 put means that one will have to trade in smaller size. Why is that? Because of the cost of the entire position? There is only a 14%-16% difference in cost between the two positions. Time to read on....

Actually the deltas for the long puts are negative. I was thinking you would want smaller delta in case the stock went up. That way the put would lose less value than the stock gained, in case you wanted to sell the put at some point.

 

[rallymode]

Quote from Eliot Hosewater:

What's your strategy for generating income with limited downside risk, without taking speculative directional positions?

There is alot of information on ET already, take a look at the journal section. Perhaps use the search function and go back a few years. There are many ways to achieve what you seek, synthetic long calls isnt one of them IMO.