Strategies

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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 Protective Puts
Example: XYZ is at 117. You own 100 shares and want to hold on until 2003 for tax reasons, and willing to pay a cost for insurance.
Outlook: Bullish on XYZ, but nervous about unseen events over the next eighteen months.
Possible strategy: LEAPS Protective Puts: Buy 1 XYZ Jan 03 110 put for 13 or $1,300.00.

*All values shown are at the time of expiration.

Stock Change
XYZ @ expiration
Long 110 put value
Stock P/(L)
Option Cost
Net Profit/(Loss)
+ 36.75%
160
$0.00
$4,300.00
($1,300.00)
$3,000.00
+ 23.93%
145
$0.00
$2,800.00
($1,300.00)
$1,500.00
+ 11.11%
130*
$0.00
$1,300.00
($1,300.00)
$0.00
+/- 0.00%
117**
$0.00
$0.00
($1,300.00)
($1,300.00)
- 5.98%
110***
$0.00
($700.00)
($1,300.00)
($2,000.00)
- 14.53%
100
$1,000.00
($1,700.00)
($1,300.00)
($2,000.00)

At expiration (01/18/03)
* Break-even: XYZ @ 130 (+11.11%)
** Unchanged: Loss of $1,300.00.
*** Max Loss: $2,000.00 if XYZ < or = 110 (-5.98%)

In Short: $1,300.00 cost (11% of stock value) insures stock position to a maximum loss of $2,000.00 (cost of put plus out-of-the-money amount of put) with unlimited upside potential after break-even point of XYZ@130.00. XYZ between 117 and 130 at expiration results in partial loss on net position.

CBOE Volatility Index (VIX)