Mystic,
For the record, ill give this my best shot and if it doesnt work out then we can agree to disagree or I can give you my phone number and ill let you call me and ill explain it to you by phone. Im serious about that too. Its up to you.
I dont really care if others agree or disagree. I put my work into practice, I dont need confirmation.
Having said that, lets start with Elliot, who has disappeared it seems.
Ill try and make this brief but i doubt it will be.
First off, I was never talking about comparing the April 07 80's to the April 07 100's. I would never do this trade to begin with and that isnt what Elliot was asking. He was looking at the Jan 08 100's.
Someone then came on and suggested the April 07's. Maybe it was you, I cant remember. I was never addressing that scenario, but I will now.
Its hard not to write a lot of explanation, but ill do my best.
As it relates the two April puts, 100's vs. 80's.
1) First off, remember taht Delta is over 0.80 for the
April 100's. If you are looking at the April options at the 100 dollar strike price, I can assure you that delta is more than 0.80 and actually closer to 0.90., therefore, in case the stock runs away on you, it is advisable not to write a covered call on more than 15 to 20% of the stock position. I hope its clear as to why you cannot write a covered call on more than 15 to 20% of the position with this option having delta of 0.80+.
However, if i had to choose between the 100' for April and the 80's for April, id still probably buy the 100's as you suggest. The premium can be paid back within 2 to 3 months, all things being equal. Now that the option premium is paid, great. No risk right. But the question is, now what??
2) To answer the 'now what' question, all we have to do is what I love to do in this kind of scenario. Answer the three what ifs??
a) What if the stock goes down substantially
b) What if the stock trades flat
c) What if the stock goes up substantially.
The answer to (a)
No big deal. You are protected and you wont lose any money. You can exercise your right to sell the stock at 100 and you wont lose anything because you ideally already recovered the premium
before the stock collapsed. (One can only hope that is the case).
The answer to (b)
You can choose to do nothing OR you can choose to write covered calls on 15 to 20% of the position. Again, that 15 to 20% has not changed and cannot change either. Because Delta is 0.80+, and the more time that expires, the closer delta gets to 1, which mean that at first in December/January you can continue to write covered calls on 15% to 20% of the position, but as time passes, and the stock still trades roughly flat, you cant continue to write covered callls on 15 to 20% of the position anymore because delta is getting closer to 1 as time expires on the option.
What I mean is this.
If the stock moves from 77 to 87 in Nov, the puts might drop only 8 dollars for the 10 dollar move in the stock, i.e. delta of 0.80. Im being conserative here by the way.
However, come February if the stock has not moved one way or the other in any great particular fashion, but then one day it went from 77 to 87, the move in the option price will no longer be 8 dollars, i.e. delta of 0.80, but more like 0.90.
That implies that if you were to sit around and write covered calls on a portion of your long position each month, the amount that you can continue to write drops as time passes.
But the question is, why would anyone want to continue to write covered calls on a portion of the position AFTER they have already recovered the premium, right? Well, maybe Elliot is tired of waiting for Apple to move and wants to generate some income.
Which leads us to (c)
If I have paid off the $1.00 premium and now own the stock free and clear of any risk, im probably looking at somewhere in the vicinity of December or January, right. Because it has taken me roughly 2 months to pay off the premium. So, ideally, here I am in December with Apple at 77, my 100 married puts and all the premium already paid for, therefore, implying no risk.
I can choose to do what I did in (b) above and contineu to write covered calls on a small portion of that postion (15%), but really, im not making much money doing that am I. NO, not really.
What I hope for is that the stock basically takes off and begins an ascent upwards. Im hoping that come January when Apple reports their earnings, that the stock soars. So, I just hold on tight, I dont write any covered calls and simply hope that my long position, which again, I hold riskless, makes me some money.
Remember that as time passes, delta gets closer to 1, so we are hoping that if Apple moves, it moves soon, otherwise, even it moves come March, it might not make us much money because Delta will be so bloody close to 1 that we dont make much money.
So, yeah, youve got a stock that is free and clear where the premium was paid for by December, but youve only got a couple months to wait to make some real money. And if the stock happens to go down, or not move much OR move, but not in a good enough time frame, you end up putting your capital into a postion that hasnt moved and even though you dont lose any money, come February/March, you realize that its time to exercise your right to sell your stock at 100. Again, you dont lose any money doing so, BUT YOU DONT MAKE ANY EITHER and you just spent 4 months of tying up big capital.
Basically, the April 07's dont give you enough time flexibility to do what you want to do.
Now, if we looked at the 100's for January 08 that had 2.50 in premium, you might be okay. Delta will be a bit lower, something in the 0.70 range than it was for the April 07 100's which we have shown to be 0.80+.
And it wont take you markedly longer to pay off the 2.50 premium for the Jan 08 100's than it would the 1.00 premium for the April 07 100's because, remember, delta is lower for the Jan 08 100's because there is more time remaining on them.
So, now that we have established why I like the Jan 08 100's more than the April 07 100's, the only debate is between:
The Jan 08 80's or 85's
vs.
The Jan 08 100's.
And ive already explained that one in my previous post.
Premium in the 85's is 6.5
Premium in the 100's is 2.5.
Delta is roughly 0.5 for the 85's
Delta is roughly 0.7 for the 100's.
And depening on which options you choose to write, you can recoup both premiums in roughly the same amount of time, perhaps a month longer in the case of the 85's.
But what you gain AFTER you have recouped the premiums is as important. YOU HAVE GAINED FLEXIBILITY.
Flexibility to continue to generate income by writing options on the 85's that are more lucrative than the 100's because DELTA IS LOWER.
The ability to buy more shares as demonstrated in my previous post ANDDDD the ability to, if i dont want to write any options, have more leveraged upside as teh stock goes higher. Because once Appl starts going up im making serious coin as delta goes down whereas witht he 100's I wouldnt me making as much.
In other words, my upside is more limited when I own the 100's.
So, in summary, 85s vs 100s
1) Yes more premium: 6.50 to 2.50
2) But only slightly longer to pay back the premium because delta allows covered calls on 50% of position for the 85's vs only 30% for the 100s.
3) Also can buy more shares with the same amount of capital as I am only spending 15 dollars vs 25 on the 100 option
4) And after premiums are recouped on both positions, much MUCH more flexibility for higher gains with the 85 position than the 100.
Im not saying the 100's arent a good investment. If you are a conservative investor who doesnt like risk, then yes, buy the 100's and KNOW taht you start off with only 2.50 in risk no matter what happens and that gets cut down as soon as you write your first option.
But, if you are sophisticated and understand risk vs. reward, youll set up a model in something as simple as excel and analyze all the options from 75 up to 100 and look at the what if? scenarios for each position.
I hope this helps. And if I have come off as condascending in the past, dont hold it against me, because I wasnt trying to.
Nice keeping it short.
Save yourself all the typing trying to disprove synthetic relationships! 