Option strategy?

Question

Can someone give me advice on the following strategy. For example: Buy 100 shares of Google currently at 390 to hold for a while.

I buy a Jan 07, 390 put for $25.90.

Then I sell a Jan 08 call 500 at $28.80.

I have covered the cost of the put and even pocketed a little. I have protected the downside completely and can make a profit up to 500 for Google. Is there something I am missing. THese are current prices BTW. Thanks

Answer 1

Forget what the hoosiers say about commisions. You're talking about $5000 worth of trades and probably paying about $10-30 in commissions total (if you're paying more than that, let me know. We'll get you straightened out).

Let's focus on your trade.

Typically, you want to buy more time and sell less time. So even though you've got a decent collar which almost pays for itself AND gives you dollar for dollar downside protection, you can do even better! Ready?

Ok, right now, your risk curve looks pretty good. Very little risk, with upside of up to about $120! Breaks down like this:

<390 +$2.70 (profit even to the downside!)

390 to 500, stock price - current price + 2.70 profit

>500, you max out at $110 profit + 2.70 (up until Jan 07) where your coverage runs out.


So you ready to have some fun?

Here's what you do. Instead of selling the Jan '08 500 call, sell the front month call instead. Start with the Sep 410's or Oct 430's and keep selling front month OTM calls to generate income on your position.

Your cost /mo on the put is about $6/mo, but your income / mo on your calls should be at least $8-12 depending if you sell a way OTM call, or can better time the ebb/flow of the closer to the money calls.

As you get closer to Jan, you can roll out your put and keep doing what you're doing again! It's a great way to earn a good monthly income AND protect your position on the downside.

And what happens if your 430 call gets exercised? Oh darn, you only made $40 on the position, got paid a premium for the call and still own the put. Pocket the profit and set up another position like you had, but this time around $430!

Hope that helps!

P.S. Instead of owning the stock in the future, you can buy a deep ITM long term call or leap. That'll further increase your return as well.

Answer 2

NC is right about commissions and time value decay. You also have a full year where your downside is not covered. There is also the oportunity cost of the $39,000 you paid for the Google stock.

Answer 3

Excellent strategy by Yada Yada Yada!!!

Answer 4

the Delta of the put is not 1, so you are not actually fully protected until some later point.

Answer 5

You left out commisions and time value decay...