Call Options: making Gains
Here's the collection of basic charts, again:
and the problem we posed in Part 3:
The slopes of the gains chart are (left to right):
0 then -1 then +1 then -1 then +1 then 0
and, more importantly, the five changes in slope
(starting at the first break) are:
-1 then +2 then -2 then +2 then -1
and that identifies the buying
and writing (uncovered)
or, in our other language, the writing (naked)
(Why do I hate that language?)
or selling (short).
I have no idea whether the above strategy has a name ... so we'll call it the
gummy. How would it work in practice?
Here's the real, live list of call options again. Note that we need five (count 'em) five
calls (according to the gains chart, above, 'cause
there are five bends, eh?) and (surprise!)
there are exactly five in the options list below.
The sequence is:
S(-1) B(2) S(-2) B(2) S(-1)
The total outlay of monies? It's $6.625 - $4.25 + $.50 - $.125 + $.0625 = $2.8125
times 100 (the contract, ya know), and that makes
$281.25, so it ain't cost us anything ... yet!
sell an oct 40
|| That'll bring in $6.625
buy TWO oct 45s
|| That'll cost us 2($2.125) = $4.25
sell TWO oct 50s
|| That'll bring in 2($.25) = $.50|
buy TWO oct 55s
|| That'll cost us 2($.0625) = $.125|
sell an oct 60
|| That'll bring in $.0625|
But can we make any money?
If so, under what circumstances ... and how much
... and what's the downside risk ... and can we retire on our winnings?
Notice that when the stock price is low (below the first option strike price) the
graph is horizontal with a gain of $281.25
and that ain't
no accident 'cause at these stock prices we won't exercise our options and neither will
anybuddy that buys our options and we just pocket the initial
and notice that we lose if the stock price lies in
the range $43 to $47 or $53 to $57 otherwise we win but it won't be enough to retire on ...
Coming soon to a website near you ... a spreadsheet to do all this stuff.
SURPRISE! Here it is!
Click to download the spreadsheet
Y'all gotta un.ZIP it.
Here's a picture of the spreadsheet as it'd appear on your screen:
Click for the BIG picture