Options strategy:
Buy a leap deep in money call & keep selling 2 month calls on this stock.
How to choose price/ expiration dates: 20% below current price, delta needs to 80% or more.
Why?
Example: AAPL Current Price=446, 6/5/13
Leap 340=$121.90, Delta=80, For every $1 in price increase, option will increase by $0.8 & fall by $0.9 (assume)
Sell Aug 5% =470 strike= $12.8
340
|
121.9
| ||
470
|
12.8
| ||
446
| |||
Expiration Aug price
|
-12200
|
1270
|
Net
|
440
|
11640
|
0
|
710
|
420
|
9840
|
0
|
-1090
|
400
|
8040
|
0
|
-2890
|
460
|
13300
|
0
|
2370
|
480
|
14900
|
-1010
|
2960
|
500
|
16500
|
-3010
|
2560
|
Why this strategy makes sense:
Deep in money leap call acts like a stock. In this example, for Jan 2015 calls, premium paid is ~$5 only for 2 years! And recovering that premium by selling call in 2 months. After this deep in money call is like holding a stock. You'll gain or lose as regular stock. Only limiting max loss to 30% in this example for really wrong bet. You can stop out & trade deep in money call same way as regular stock. If price holds, keep selling calls to earn dividends or close out for a decent profit. E.g. 20% profit in 2 months for 5% movement in stock!
No comments:
Post a Comment