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.


Covering Your DIAMONDS®

Situation: You own 100 shares of the DIAMONDS (DIA), for which you paid 96.25, with DIAMONDS currently trading at 103. You have a long-term bullish outlook on the DIAMONDS, but you are concerned that short-term performance may lag. You wish to partially protect your unrealized profit, and generate income. DIAMONDS have a 52-week high of 113.64 and a 52-week low of 79.50.

Outlook: You are neutral to moderately bullish in the short term, looking to outperform in a flat market. You expect DIAMONDS to have strong returns after one fiscal quarter (3 months), but are willing to sell at 110.

Possible Strategy: Covered Call.
Hold onto your DIAMONDS position and sell 1 DIA September 105 call at 5.10 against it.


*Note that all values shown below are at the time of expiration.

% Change
DIA at exp.
105 Call Value
DIA P/(L)
Premium Received
Net Profit/(Loss)
+10.00%
113.30
$830.00
$1,705.00
$510.00
$1,385.00
+5.00%
108.15
$315.00
$1,190.00
$510.00
$1,385.00
+1.94%
105.00*
$0.00
$875.00
$510.00
$1,385.00
+/- 0.00
103.00***
$0.00
$675.00
$510.00
$1,185.00
-4.76 %
98.10
$0.00
$185.00
$510.00
$695.00
-9.08%
93.65
$0.00
($260.00)
$510.00
$250.00
-11.50%
91.15**
$0.00
($510.00)
$510.00
$0.00
-13.06 %
89.55
$0.00
($670.00)
$510.00
($160.00)
-100.00%
0.00****
$0.00
($9,625.00)
$510.00
($9,115.00)

At expiration (09/21/02)
* Maximum Gain: $1,385.00 if DIA > or = 105.00 (+1.94%)
** Break Even: DIA at 91.15 (-11.50%)
*** Unchanged: Gain of $1,185 if DIA shares are sold at 103.00, $510 (premium received) if DIA shares are retained
**** Maximum Loss: $9,115.00 if DIA = 0 (-100.00%)


In short: If DIA remains unchanged or below the 105 strike prices, overall P/(L) is equal to DIA P/(L) plus premium received from the sale of the call. If, at expiration, DIA is above 105, profit is limited to $1,385. Maximum risk is equal to full value of DIA shares (which can fall to zero) less the premium received from the call sale.

CBOE Volatility Index (VIX)