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.

Covered Combination

Example:                 XYZ stock is trading at $52 

Outlook:                  You are neutral to moderately bullish and would like to increase your return or purchase more shares on a stock pullback.

Possible strategy:    Covered Combination:

                                        Long 100 shares XYZ @ $52

                                  Sell one XYZ  55 strike call @ $2.40

                                  Sell one XYZ  50 strike put @ $2.00

                                                       Net Investment $47.60

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock Price

Stock Value

Sell 55 Call

Profit/(Loss)

Sell 50 Put

Profit/(Loss)

Net Profit

(Loss)

60

$8.00

($2.60)

$2.00

$7.40

55

$3.00

$2.40

$2.00

$7.40

52

$0

$2.40

$2.00

$4.40

48.80

($3.20)

$2.40

$.80

0

45

($7.00)

$2.40

($3.00)

($7.60)

40

($12.00)

$2.40

($8.00)

($17.60)

 

 

At Expiration:

  • Maximum Profit = (Call Strike Price - Stock Price Paid) + Net Credit
  • Maximum Profit = (55 -52) + $4.40 = $7.40
  • Breakeven = (Stock Price Paid + Put Strike Price - Net Credit) / 2
  • Breakeven = (52 + 50 - 4.40) / 2 = 48.80
  • Maximum Loss = Significant loss may occur on the downside

In Summary: If assigned on the short call, the rate of return will be much better than a Covered Call strategy because of the premium collected from the short put.  Be prepared to increase your stock position if assigned on the short put.  Special approval from your broker may be required to sell put options.

CBOE Volatility Index (VIX)