The market has been in a rather neutral, trading in a range of around 7% to each side of NASDAQ 2000. This thread is a place to see if a covered strangle is appropriate in this environment, and we pick qcom as the stock to which we did the strangle. There are various requirement for a stock to make it suitable for this option strategy.
The covered strangle is compared to 4 other strategies and we compare the risk and potential rewards. All the data are actual trades. Adjustments are in the amount of cash, number of options and shares to make it easy for illustration.
We started with $ 110,000 cash in July 2001.
bought on 7/18/01: 1,000 QCOM at $62.25 use them as collateral for CC. Remaining cash $ 47,750
Sold on 7/24/01 : 10 puts QCOM aug60 at 5.70 collect $ 5,700 (QCOM at $ 58)
Sold on 8/2/01 : 10 calls QCOM aug65 at 4.20 collect $ 4,200. (QCOM at $ 68)
Saturday August 18, 2001. Option expires worthless, got to keep the premium. Stock closed at 61.56.
The other four strategies we are comparing against are:
1. 100% cash - leave it in money market
2. 100% cash - write 20 aug60 puts backed up by that cash
3. buy/write - buy 1,800 qcom and write 18 aug65 calls
4. buy/hold - buy 1,767 of qcom and hold.
and of course the 5th is that covered strangle.
The finish line is aug 18, 2001, when the option expired and qcom closed at 61.56.
Various what ifs are presented to examine the risk and maximum return potential.
There are detailed calculations and various mathematical equations in the next 16 posts.
However, the summary of this study can be found on post # 14 and post # 16:
Message 16233104
Message 16234140 |
