Option Block 377: Covering The Cost of Your Put
Trading Block: A mild day on the street. The dollar weakened the most in six months, dropping from a four-year high. U.S. stocks fell, with the Standard & Poor’s 500 Index retreating after touching its average price for the past 50 days, as small-cap shares resumed a selloff following a fifth weekly decline. Beginning Monday, October 6, 2014, CBOE will calculate the spot value of the CBOE Volatility Index (VIX) using S&P 500 Index (SPX) options with weekly and standard 3rd Friday expirations that more closely bracket the 30-day target timeframe. Hewlett-Packard Co. (HPQ) is splitting into two companies, using a breakup to become nimbler after failing to keep up with the shift away from the printing and personal-computing businesses it pioneered.
Odd Block: Calls trade in Earthlink Holding Corp (ELNK), call stupids trade in Spansion Inc. (CODE), and put sellers in FedEx Corp (FDX)
Strategy Block: Mike Tosaw revisits buying a longer term call option and then sell calls against it.
Mail Block: Listener Questions and comments
Question from Allen Manning, Las Vegas - Hello everyone, I just started listening to the podcast, and I'm really enjoying it! I have a question about a strategy you’ve discussed in the past. As a covered call alternative, I was interested in possibly buying a LEAP with a 1 or 2 year expiration and selling monthly calls against it. When I looked up a few stocks and ran some preliminary numbers, I noticed that the cost to purchase a deep in the money LEAP (about 80 Delta) option was usually higher than the total money I would make selling monthly calls for the duration of the LEAPS.
What I did to get these rough numbers was to take the money earned from selling the initial 1-month call (after commission cost) and multiplying it by 12 or 24. I'm assuming one or more of these possibilities:
1. The method I used to get these figures is wrong, even as a rough estimate.
2. This strategy will only work with certain stocks/underlying that have optimal greek numbers.
3. This method only works when assuming the underlying LEAP also appreciates in value to offset its own cost.
4. Commission costs make this strategy less successful.
Any information you can provide about this strategy is greatly appreciated. Thank you, and keep up the good work on a great program!
Around the Block: What is going to happen in Hong Kong?