Strategies

A  A  A     

Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

LEAPS® Collar

Situation: Stable Finance, Inc. (ZYX) closed today at 56.50. You buy 100 shares of ZYX for your
self-directed IRA at the closing price.

Outlook: You plan to draw on the IRA upon your retirement on December 31, 2004. You want to preserve the value of your ZYX investment at little or no cost.

Possible Strategy: LEAPS collar on ZYX.
Buy one December 2004 ZYX LEAPS 55 Put at 9.50.
Sell one December 2004 ZYX LEAPS 65 Call at 9.40.
Total cost is 0.10, or $10.00.

*All values shown below are at the time of expiration.

Stock Change
ZYX at exp.
ZYX Profit/
(Loss)
ZYX 55 Put Profit/(Loss)
ZYX 65 Call Profit/(Loss)
Net Profit/
(Loss)
+23.89%
70
$1,350.00
$(950.00)
$440.00
$840.00
+15.04%
65****
$850.00
$(950.00)
$940.00
$840.00
+6.19%
60
$350.00
$(950.00)
$940.00
$340.00
+0.02%
56.60*
$10.00
$(950.00)
$940.00
0.00
0.0%
56.50**
$0.00
$(950.00)
$940.00
$(10.00)
- 2.65%%
55***
$(150.00)
$(950.00)
$940.00
$(160.00)
- 11.50%
50
$(650.00)
$(450.00)
$940.00
$(160.00)

AT EXPIRATION (12/20/04)
* Break Even: ZYX @ 56.60 (+.01%)
** Unchanged: Loss of $10.00
*** Max. Loss: $160.00 @ ZYX 55 or lower (-2.65%)
**** Max. Gain: $840.00 @ ZYX 65 or higher (+15.04%)

In a nutshell: You pay $10.00 to lock in a value of $55 for ZYX stock until December 2004, with downside risk of only $160.00 while allowing upside potential of $840.00.


CBOE Volatility Index (VIX)