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Strategies & Market Trends
A Study of Covered Strangle in a Rather Neutral Market
An SI Board Since August 2001
Posts SubjectMarks Bans Symbol
23 2 0 QCOM
Emcee:  PAL Type:  Moderated
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
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23<i> This is a risky move. First we do not know where the market is headingPAL-8/30/2001
22Wednesday, August 29, 2001 after the close. <b>Dow 10,090.90 -131.13 -1.3PAL-8/29/2001
21Memo to the diary: He been away for a short vacation with my lovely wife, my soPAL-8/28/2001
20August 23, 2001 after the close. <b> Dow 10,229.15 -47.75 -0.5% Nasdaq 1PAL-8/23/2001
19August 22, 2001 after the close. <b> Dow 10,276.90 +102.76 +1.0% Nasdaq PAL-8/22/2001
18Augus 21, 2001 after the close: The Fed cut fed funds rate to 3.5%, the lowest PAL-8/21/2001
17Memo to the diary: August 20, 2001 after the close: <b> Dow 10,320.07 +79PAL-8/20/2001
16On the one end of the spectrum we have $ 110,000 cash and keep it that way. The PAL-8/20/2001
15Since the options expired worthless, there is no open position. There is a temptPAL-8/20/2001
14Under buy/write the maxim return will be achieved when the stock closed at 65 orPAL-8/20/2001
13Remember that the three scenarios produce the following portoflios: a. 100% casPAL-8/20/2001
12The value of the holding on 8/17/01 Owns 1,800 shares of qcom plus $ 5,510 in cPAL-8/20/2001
11Now we have to comapre covered strangle against buy/write strategy. Under buy/wPAL-8/20/2001
10What the the maximum return for Covered Strangle and 100% cash/short puts? a. 1PAL-8/20/2001
9We know reach the point where we need to calculate the risk associated with eachPAL-8/19/2001
8What if the stock closed below 60? We will get assignment on Monday at a price oPAL-8/19/2001
7What if QCOM did not close at 61.56 on 8/17/01? Covered Strangle : owns 1000 shPAL-8/19/2001
6Let us compare covered strangle against other strategy. What if we use edamoPAL-8/19/2001
5Looking at trade confirmations, this is the latest play on the "trade portiPAL-8/18/2001
4To:rydad From: PAL Thursday, Aug 9, 2001 1:54 PM View Replies Rydad: thanksPAL-8/18/2001
3Here is a more definition of a strangle (and a straddle): To: PAL From: rydad PAL-8/18/2001
2Currently, in my trading account I am 50% invested and 50%. The conditions in whPAL-8/17/2001
1The question is why am I interested in a covered strangle in a rather neutral maPAL-8/17/2001
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