We know reach the point where we need to calculate the risk associated with each strategy.
The starting point is $ 110,000 to start with. Opportunity cost is not factored in; as edamo wrote: you cannot spend opportunity. Therefore, we should look at the size of the holdings at the end of 8/17/01 and what it would be were the stock closed at a different level.
a. for 100% cash/short put, the breakeven level can be easily calculated: Premium = 5.70, and strike price $ 60. Then the breakeven level is 60 minus 5.70 = $ 54.30.
b. covered strangle:
you have 1,000 shares of qcom, and the ctock falls below 60, then you are assigned 1,000 shares of qcom. The covered call option becomes worthless, so you keep the premium. Totdal cash before assignment is 57,650. After assignment at $ 60/share, you will have
2,000 shares of qcom MINUS $ 2,350. Where is the breakeven level?
2000 x - 2,350 = 110,000
2000 x = 112350
x = 56.175
Therefore, the risk level is lower for 100% cash/short put as summarized below:
a. covered strangle: qcom should close above 56.175
b. 100% cash/short put : qcom should close above 54.30
(Remember previous post: 100% cash/short put is preferred over covered strangle if qcom closed below 63 3/4, but keeping all cash and do nothing is the best if qcom closed below 54.30) |
