Tag Archives | AAPL

Protection: Buy puts or sell calls

Please tell me what you would like to see as part of Options for Rookies Premium by leaving a comment.

I received a very basic question from a reader and decided this is an excellent topic for the options rookie. It may eliminate confusion concerning the difference between puts and calls.


Hi Mark

I own 1,000 shares of AAPL. Do I use puts or calls to protect my position?




Hello Ruth,

The answer is ‘either.’

The protection provided by selling calls is vastly different from that of buying puts. Let’s see if I can help you understand the difference so that you can make an intelligent choice.

My preference is to sell calls – one call for each 100 shares of stock owned. However, it’s a personal preference and not necessarily the better choice for you. Let’s consider your alternatives

Buying puts

If you want good protection – if you want to be certain you don’t get clobbered if the stock takes a big tumble – if you are afraid that such a tumble is possible, then you would probably want to buy puts. I say ‘probably’ because buying puts is often an expensive proposition. In today’s less volatile environment, there’s a good chance that you would be perfectly happy to pay the necessary cost.

You may buy a variety of put options, and as with any insurance, the greater your protection, the higher the cost of that insurance.

As I write, AAPL closed for the day near $350 per share. If you want to buy Apr 340 puts (expiring in 65 days), the cost is approximately $1,000 per put. You need 10 puts to protect 1,000 shares. That’s $10,000.

Paying that sum to protect an investment worth $350,000 seems to be a reasonable cost. If AAPL is lower than $340 per share when the options expire in April, you may exercise your right to sell those shares at $340. That’s true no matter how low AAPL may be trading. You have complete protection (from the moment you buy he puts until they expire) for the sum of $10,000.

You don’t have to sell the shares. For example, if AAPL is trading near $300, you may prefer to sell the puts and collect $4,000 for each (they are 40 points in the money and worth 100 x $40 each). You pocket a profit of $30,000, which cushions most of the loss ($50,000) from owning AAPL shares.

The other good news is that you own the shares as well as the puts. So, if the stock continues its very strong performance, you can participate in every penny of any stock price increase. Do keep in mind that if the stock is not at least 10 points higher in April than it is today, that you will not have made any money on owning the shares. But that’s not so bad. After all, you did purchase insurance and there’s a ton of value in feeling safe.

Bottom line: For $10 per share, you get good protection that lasts for 65 days.

Selling covered calls

If you are willing to settle for less protection (and that means getting clobbered if the stock moves under $300), and if you prefer a higher probability of earning a profit, albeit a limited profit, then selling calls is the right approach.

For example, you can sell the AAPL Apr 365 calls and collect $920 for each option. Collecting $9,250 (for selling 10 calls) is better than paying $10,000, but your protection is much less.

When April expiration arrives, the only ‘protection’ you have is the $9.25 per share that you received as premium when selling the calls. Thus if the stock declines by more than that amount, you would not make any money between now and that day in April.

However, this is important: If AAPL is $340 and you bought the put, you not only lose $10 per share from a decline in the stock price, but the put becomes worthless and you lose the $10 per share paid for that put. Total loss: $20,000. If you sell the call option, you lose the same $10 per share from the change in the stock price, but you keep the $9.25 collected when selling the call. Result: You lose $75.

It’s very attractive to choose the play in which your loss is only $75 instead of $20,000.

But, that misses the bigger picture. If something unlikely occurs and AAPL falls to $250, as a put buyer, your loss is still that $20,000. However, if you were the call seller, you would lose $90,000 when the stock falls by 90 points, and that $9,250 you collected will not feel like much of a consolation.

Similarly, if AAPL does what AAPL does and rises to $420 per share when April expiration arrives, the put buyer earns the full $70,000 as the stock move 70 points higher. Subtracting the cost of the puts, that’s an increase in value of $60,000. On the other hand, the call seller is required to sell shares at the strike price, or $365 per share. That gives her a profit of $15,000. Add to that the call premium and she earns a respectable $24,250. Respectable, but far less than the put buyer earned.

Thus, it comes down to this: Both buying puts and selling calls give you protection.

Buying puts works best when the stock makes a big move. It shields you from the big loss and allows you to prosper on a big gain.

Selling calls works far better when the stock does not take a big move. The truth is that the smaller move is far more likely than the bigger move. that makes the call sale look more attractive.

Ruth, it’s not a simple choice. However, if you want big protection, there is no substitute for owning puts. It you just want a small amount of protection and are not afraid of the downside, then selling calls works. From the tone of your question, I believe that put buying will work better for you. Not cheap, but it is excellent insurance against a disaster.

Read full story · Comments are closed

Iron Condors and the Greeks

Hello Mark.

1.  Last week I traded an iron condor on Apple (January and February expiration) at 350/360 on call side and 290/300 on put side.

Past Monday, the prices of all four options, January expiration, went up for no apparent reason!  My January positions started showing big losses.  February positions were fine for same company and same strike prices.  What happened?   

The implied volatility for January options increased.  You opened your positions when implied volatility was at its low point.  Because iron condors are positions with negative vega, they lose value when IV increases.  That's what happened to you.  If IV moves downward again, you will recover the losses quickly.  Otherwise, it's going to take the passage of time (without a concurrent stock move) to recover.

Today, both January and February iron condor went up in prices, and again I see big losses.  I thought time erosion and call spread would help me.  

There is more than one greek.  Each contributes to the value of an option independently of the others. 

Theta is your friend.  You earn a small amount each day.  However, that is being offset.  Gamma is the enemy.  If the stock moves too far, then you get short deltas quickly (on a rally) or get too long (on a decline). 

Vega is the culprit you right now.  Vega measures the dollars earned (or lost) every time the implied volatility moves higher or lower by one point.  Right now it is moving higher.

When the market falls and the put spread moves against you, the call spread will NOT decrease in value fast enough to compensate for the loss in the put spread.

It truly upsets me that you thought that selling a call spread for a smallish premium would ever be enough to completely offset the loss on the put side when the market declines.  Sure it helps, but never enough,  The IC strategy is not designed to have one winner to offset the loser.  It is designed to win when the market is not very volatile and doesn't move too far – as time passes. [And there is no need to wait until expiration to grab your profit]


Is it possible for me to calculate option prices, independently? 

Independently of what?  The market determines the prices.  The market determines whether you earn a profit or take a loss.  No you cannot calculate option PRICES independently.

What you can do is calculate a theoretical value for any option. You can make an estimate of where you think the options should be trading.  That calculation may give you the confidence to hold your trade, but it will be your opinion vs. the collected opinions of the rest of the world.

To make the calculations requires that you input an estimated future volatility for each option (that's all four of them) into an option calculator.  Not an easy task for anyone, let alone a rookie trader.  Estimating future volatility is very difficult.  Dare I say impossible for the vast majority?  It is better to allow the marketplace to generate the option values. Then you can make trades that you deem suitable.

You may not have planned it, but you decided it was a good idea to get short AAPL vega at the time you opening the iron condor position.

What happened to you and your trade is that you chose to own negative vega at a bad time.  Not much you can do about that now.

2. My broker, thinkorswim, does not charge commission if I buy back short options if they are worth 5 cents or less.  Is it a good idea to take this offer? 

Yes.  I approve of reducing risk whenever possible.  Paying 5 cents is cheap insurance.  If there is just one day to go prior to expiration, then that's different.  There is no urgency to pay the nickel at that time.  But I love to pay that price (and more) to exit. I am also happy to pay commissions to eliminate the risk.  Free commissions make it a no-brainer for me.

3.  How do I know where (in stock, equity or ETF) a pro like you invests in iron condor? 

You cannot know.  Nor should you care, except perhaps to see it as an example.

There is no 'best' premium to collect and there is no best strike price to sell.  Nor is there a best time to enter the trade – unless you are a strict adherent of technical analysis.

You (honestly, I am not making this up) want to own a position that makes you, comfortable.  If you try to guess which position makes someone else comfortable, how is that going to do you any good?  You would not know when that pro makes an adjustment or exits the trade.  You must find trades that please you.  Sure you can read about what I do, but there is no good reason for you to attempt to do the same. But think about this:  You have no idea whether I am struggling, doing ok, or making a ton.  Not am I going to tell you.  It is completely irrelevant.

4. [A later follow-up to the original e-mail conversation] I can see that options pricing is lot more complex than I imagined.  I thought that earlier I place trade for next month, I get better price.  But that is not true.

It is true as far as theta is concerned. However, there are other factors that influence the price of options.

Here is the bottom line for you:  You clearly jumped into trading a strategy with no clear understanding of how it works.  That's fine when trading in a paper-trading account, because that's one good place to learn all about the trades being made.  But when using real money it's just foolish to think you can trade now and learn later. 

I find it very sad that you are in this position.  What is your hurry?  You have the rest of your life to trade and now is the time for learning.



Read full story · Comments are closed

Ratio spreads. Part I

There are several commonly used option strategies that never get mentioned at Options for Rookies.  I have my reasons for ignoring those strategies.  However, because this is an options education blog, it's worthwhile to describe some of these methods, explain the pros and cons of using them, and each reader can judge whether such strategies are appropriate.

One such strategy is the ratio spread.  It is sometimes referred to as a 'front spread' because it is the direct opposite of a back spread.

Ratio Spread

This term can have a broad or more narrow definition.  It's the narrow definition that is used most frequently:

Broad definition: A ratio spread is any option strategy in which the trader sells more options than he/she buys. 

The more limiting definition includes: Similar to a vertical spread, all options are on the same underlying stock or index and have the same expiration date.  Only the strike price differs.  The options sold always have a smaller delta than the options bought.

Many times the ratio spread is initiated as a delta neutral position.  However, when you are trading with a market bias, you may prefer to select specific options and a specific ratio to suit your market expectations (more on that tomorrow).  Let's look at examples.

Note:  The following are randomly chosen spreads and are not recommendations.  I will not be trading any of these examples for my own account.

Example.  Ratio call spread

Buy 1 AAPL Jan 330 Call
Sell 2 AAPL Jan 350 Calls

This is referred to as a "1 X 2 call spread,"  with 'X' being used to represent the word 'by.'

As I write this (Nov 18, after the market close), AAPL is 308.43 and the estimated execution prices for this trade are $6.60 and $2.70.  The trader pays $6.60 for the call purchased and collects $2.70 for each call ($5.40 total) sold.  Thus, the cost to buy this position is $1.20.  As with any other options trade, that $1.20 is per share and the true cost is $120.

The total description of this trade is: "The trader bought the Jan APPL 330/350 1 x 2 call ratio spread at a net debit of $1.20"

IMPORTANT NOTE: If you describe this trade verbally, especially when entering the order through your broker, you MUST use the lowest common denominator for the ratio. 

In other words, if you enter this trade 20 x 40, the terminology is: "Buy 20 1 x 2 spreads at a net debit of one dollar and twenty cents for each 1 by 2."   Never, tell the broker that this is a total debit of $2,400 ($120 * 20).

Example.  Ratio put spread

Buy 2 AAPL Jan 270 Puts @ $7.10
Sell 3 AAPL Jan 260 Puts @ $5.20

This is a "Jan AAPL 270/260 2 by 3 put ratio spread at a net credit of $1.40"
This position is initiated with the trader collecting a cash credit of $140.

What's the Problem?

There is nothing truly 'wrong with spreads of this type, and experienced traders use them as part of their trading arsenal.  The main reason that I don't discuss ratio spreads is because they are positions in which you would be 'net short' options.  These are referred to as 'naked' shorts.

Many brokerage firms do not allow any of their customers to own positions with naked call options.  Others allow experienced traders to sell naked puts and calls.  Thus, some of you would be limited in your ability to trade this type of position, depending on the whim of your broker.

Risk Management.  That's the problem.  The major focus of this blog is to help rookie option traders learn to trade options successfully.  To do that, it's very important to recognize, and control, risk – in the form of 'how much money can I lose on this trade in the worst case scenario?'  Naked short positions make it impossible to gauge a worst case (for calls) and it bcomes difficult to keep a handle on current risk.

When short naked options, the loss is theoretically unlimited for calls and the value of the strike price (x 100) for puts.  In reality those extremes do not occur.  Yet, gigantic losses are possible.  That's why I never suggest that rookie option traders ever hold positions that are naked short any call options.  I make one exception for holding naked put options: If you want to accumulate stock positions for your portfolio, one acceptable method for attempting to do that is to sell naked put options.

The combination of

  • Horrific results are unlikely but possible
  • In general, brokers do not allow inexperienced traders to sell naked options
  • I believe that it takes a good deal of experience before considering selling naked options
  • I never sell them myself (simply because margin requirements are too high)

puts me on record for not recommending these trades to my audience of rookie traders.  Many experienced traders can handle  these spreads because they have seen what the market can do.  I assume that any trader who has been in the game long enough to have gained significant experience, survived because he/she already understands the importance of manageing risk. [That's my way of saying that traders who ignore risk will not survive very long]

Broken Wing Butterfly (BWB)

One other possibility for limiting risk and making the ratio spread a viable alternative is to buy one extra call or put option for each option sold.  In other words, there are no longer any naked shorts.  That option

  • Is farther OTM than the short options
  • Provides ultimate protection by 
    • Limiting losses
    • Reducing margin requirments
    • Creating a position that all brokers will accept

This new position is known as a butterfly spread – if the options owned are equally distant from the options sold:

Butterfly example:

Buy one AAPL Jan 330 call
Sell two AAPL Jan 350 calls
Buy one AAPL Jan 370 call

In most scenarios, the option bought is farther OTM and the distances are unequal. That new position is called a broken wing butterfly and is the position typically adopted by more conservative traders who want to trade ratio spreads.

Broken Wing Butterfly (BWB) Example:

Buy one AAPL 380 (or higher strike) call – instead of buying the Jan 370 call.

I'll have more to say about BWBs later in this series.

Next time I'll discuss the risk profile for ratio spreads and how your market outlook plays a role in choosing strike prices when trading ratio spreads.

to be continued




Read full story · Comments are closed

Alpha Indexes

Brendan Conway (WSJ) recently wrote an article that grabbed my attention.[Addendum: Article no longer available online]

He describes 'Alpha Indexes,' which are scheduled to debut for trading early next year, if the SEC approves.

The exchanges (and others who create special indexes and ETFs) are constantly seeking new products to attract the attention of investors and traders, even when those products are known to hurt naive individual investors.  One major example is the listing for trading of leveraged exchange traded funds.  The disclosures are there.  The warning is available to investors, but people do not read the fine print.  For example, I know that I've never read the fine print in a credit card agreement.  Investors just assume a product is what it apppears to be.  Often that is a very bad assumption.  But, I digress.


What is an Alpha Index?

An alpha index for a specific investment (AAPL stock, for example) increases in value when the stock outperforms a specified benchmark index.  It loses value when the stock underperforms its benchmark.  Pretty simple, right?

The details have not been announced, but I fear that this simple idea will be too complex for many individual investors.  Time will tell.

The benchmark index varies, depending on the underlying asset.  For example, Citigroup's alpha index will use a financial index as its benchmark.  AAPL may use the S&P 500, or a different index that is more heavily weighted in technology.

The good news

An investor can place a wager that his/her stock pick will do better than its benchmark.  When buying stock, there is always the risk of a huge stock market decline.  Owners of AAPL index shares do not have to be concerned with whether the market rises or falls.  All that matters is whether the stock outperforms its benchmark.

More good news:  The market tumbles by 25% but your stock declines by merely 20%.  Congrats.  You earn a profit.

Nervously bullish investors may prefer to own an alpha index, rather than stock.  They would not have to be concerned with a market decline.  Their investment is based on realtive performance.

The other side

Of course, there's the other side of the issue.  You like JNJ, a very conservative stock and decide to buy some JNJ alpha index shares.  Imagine owning that steady performer  in a strong bull market.  Your underlying stock has an outstanding year and  rises by 15%.  However, the benchmark increases by 30%.  That results in a sizable loss for the alpha investor.  Because the details have not been published, the size of that loss is currently unknown.

Two things are immediately obvious:

  • When you are bullish, you cannot buy alpha indexes for non-volatile stocks.  Volatility is your friend when you buy an alpha index in a rising market.
  • When defensive, and anticipating a steady or declining market, that's the time to own an alpha index on a non-volatile stock.  A small increase or decrease in the price of the underlying should be enough to outperform the benchmark in a falling market.

Much to consider

Before using these vehicles, an investor must be very careful.  The volatility of alpha indexes for volatile stocks will be very high.  Imagine trading options [I'd be shocked if options were not listed quickly] on this very volatile product.  

I find the concept behind the alpha indexes to be intriguing.  I see the merits.  But I fear it will become just another tool for gambling.

Whenever we choose stocks to own, we are surely making the bet that our stocks will outperform.  We believe we are picking stocks that will do better than average. Thus, buying alphas seems to be a reasonable play.  For investors who don't believe they can beat the market, passive investing (index funds) are, and will remain available.

Consider what happens when your chosen stock rises significantly.  As a shareholder, you earn a very nice profit.  However, as an alpha index owner, your profit may be very small because the benchmark fared nearly as well as your stock.  Instead of a nice profit, you have a small profit.  And when the benchmark slightly outperforms your stock, you lose money.  This is the risk that most investors will fail to see.

To me, this has nothing to do with investing and is another tool which traders can use for gambling purposes.  Although this appears to be an excellent product, and experts have been hired to work out the details, I'm concerned about the gambling aspects of this new vehicle.


The SEC will fail to do its job to limit useless new products:

Instead of encouraging traders to short specific alpha indexes, we are sure to see inverse alphas.  Perhaps they will be named omega (last letter of Greek alphabet) indexes.

Leveraged alphas are another useless possibility.  The alphas may not be sufficiently volatile for some, and perhaps we will be forced to tolerate 2x and 3x leveraged alphas.


Switch to TradeKing and get up to $150 in transfer fees reimbursed.


Read full story · Comments are closed

Covered Calls and Naked Puts Revisited

Free Webinar this afternoon

Tuesday 10/12/2010 5PM ET

Adjusting Iron Condor Positions

Register here

When a rookie trader first becomes aware that some positions produce identical profits and losses, regardless of the price of the underlying asset, it's truly an 'aha' moment. 

It's as if a veil has been lifted and the world has become a brighter place.

  Because I believe this is an important concept and truly enhances a rookie's ability to understand options far more quickly, I devoted a chapter to the concept of equivalent positions in The Rookie's Guide to Options.  I also  provided a solid introduction to the topic in some earlier posts.

Because the primary purpose of this blog is to provide an education to option rookies, let's take a closer look at two different strategies: covered call writing and naked put selling.

But first a word of caution:  These two strategies are most beneficial to investors whose only investment experience consists of owning a portfolio of stocks, mutual funds, or exchange traded funds (ETFs).  Each of these strategies is a less risky method for investing in the stock market – when compared with owning stocks.  The investor earns a profit more frequently, loses less often and does well when the market rallies, trades in a narrow range, or even when it undergoes a small decline.  In each of those scenarios the covered call writer and naked put seller outperform their counterparts who simply own stock.

However, these are considered to be 'not-so-safe' strategies.  If the market tumbles, losses can be sizable.  In that respect, losses are similar to (but smaller than) losses incurred by thsoe who own stock.  And upside profits are limited, whereas the investor who owns stock has the potential for unlimited gains.

Nevertheless, these are both very popular strategies because they are safer than owning stock and offer an investing style that is easy to learn.  I use these strategies to introduce rookies to the world of options.  Once these methods are well understood, then I move on to less risky plays.


If the simple algebra used in the proof that these methods are equivalent was not enough proof, let's take a look at the profit/loss graph for a pair of equivalent positions.  Although this is not strictly 'proof' I hope that seeing identical graphs goes a long way towards convincing you that these positions truly are equivalent.

Previous posts offered more details about covered call writing and naked put writing ('write' has the same meaning as 'sell' – when the investor is not selling an option that was bought earlier).

To be equivalent, the option part (the call or put option that is written, or sold) of each trade must have these elements in common:

  • The same underlying asset
  • The same strike price
  • The same expiration date

Risk Graphs

APPL Jan 300 covered call


AAPL Jan 300 naked put

These graphs are essentially identical.  Any minor difference occurs because the price of the trade execution always plays a role.  Our discussion is based on the assumption that neither trade is made at an advantageous price over the other.  

Interest rates are very low, but it does cost more to carry the covered call position (cash required to buy the position) than the naked put (cash collected when selling the put) and thus the CC should appear to be slightly more profitable by the cost of owning the position through expiration.

One myth that can be destroyed here is that a naked put is riskier than a covered call.  The positions are equivalent.


Other positions

These are not the only two option positions that are equivalent.  Keep in mind that calls are puts and puts are calls (all a trader has to do to convert one to the other is add stock – long or short – to any position).


Free e-books by Mark Wolfinger:  There is a shopping cart, but the cost is zero.

Sampler Version of the Rookie's Guide to Options

Introduction to Stock Options: The Basics

Read full story · Comments are closed


It’s been almost one year since I last published an options quiz.  Time for another. 

Your participation is appreciated becasue it helps me gauge which material is most appropriate for readers of Options for Rookies








3) You decide to trade some Weeklys and open an iron condor position by selling an out of the money SPX put spread (1100/1110) and an out of the money SPX call spread (1220/1230).  All options expire in one week.  SPX is trading at 1160. [Corrected to 1160]

By Tuesday of expiration week, ONE of the following events occurred:

To reply, choose ‘other’ and enter (for example) a,b,c,d


4) Let’s assume you have been bullish and earned a significant profit on your investment portfolio since May 2010. You are concerned with protecting your profits. 

Please consider cost, how much protection is gained, and the possibility of earning a lot more money if the market undergoes another major rally



5)  Poll: This question is directed to you as a trader/investor.  I am not looking for a theoretical reply, but am asking which of the following worked for you. 



Thanks for participating


“Your book is well written, comprehensible, coherent and detailed.  I was especially pleased with the absence of useless chatter.”  VT 



Read full story · Comments are closed

Writing Calls Against LEAPS. Vega Risk

TradeKing webinar today, 5PM ET.

Adjusting Iron Condors Part I

Hi Mark,

OK I did my homework on the following scenario and I am

My original idea was to buy
LEAPS VLO Jan 15 @ 4.35 and short Sept 18 Call at .40. You said:
"The volatility is more than a consideration. This trade is very vega
sensitive and I believe that if you make this play repeatedly, your
results will be based on IV."

I compared the HV [MDW: Historical volatility] and IV and they are relatively close at this point. [MDW:That tells you that IV may be at a reasonable level, but does not describe potential risk.]

I ran the numbers with IV decreasing and it does affect LEAPS pricing.  However, doesn't that imply the stock price is more
stable because IV typically decreases on rallies?  [MDW: Not always.  IV does rise and fall for reasons other than how the market has been recently trading.  And IV for a single stock can easily get separated from 'market IV']

I went to the CBOE site and ran the numbers, but my more important question is
this: I purchased the 15 strike LEAPS.  Let's
go worse case to the upside and assume company is a takeover target @30.00, with the deal closing before my short options (Sep 18C) expire.

This is how I am viewing the trade:
My long 15 call is worth 15+ any time value. [MDW: There will be zero time value if the takeover is for cash]
My short 18s  cost 12 and the loss is $11.60.
Although not profitable at this time [MDW: 'at this time'?  There is no other time.  You will shortly have cash and no investment], my net cost for the investment is 3.95 (4.35 – 0.40)…

My cost at
this point is 3.40 (15-11.60) exposing me to a .55c loss  [MDW: This is not an accurate calculation.  Your cost remains $3.95, per the previous paragraph,  The position is now worth $3.00. That's a 0.95 loss]

[MDW:Please let me know what part of the trade I am missing.

Don, You are missing the fact that a 95-cent loss on a $3.95 investment is a very bad result.  A 24% loss is significant.

You used a single, low-priced stock, trading with a 33 IV and want to discover generic rules that apply to all situations.  You see the dollars lost as a number, and not as a percentage of the investment.  That's not reasonable.  Try this with AAPL and consider the results.

As we know there
is no reward without risk but I see the two risks: 1.
Stock sinks;  2. Dramatic upside
I am interested in hearing your thoughts. 

Yes, those are two of the risks.  Add another: an IV decline not related to a rally.

b) "Do you understand that by the time the stock hits 19, you are short
delta and continue to lose money on a continued rally?"

I don't get this
part and I am really trying to understand.  [The delta of your short option becomes higher than the delta of your long option.  Hence, you are net short delta and lose money on a price increase]

c) Look at the stock trading at 20. Drop IV by 25%. How does the trade
look now? How about 21 on the stock and IV down 50%?
I have not made any of these calculations. That's your assignment.  When
trading LEAPS, you want to know, not guess, what happens in a bunch of
'what if' scenarios.

OK, I did this hundreds of ways so that other readers and you can pick
apart my thinking:
I used 40% IV and then reduced it to 20% for VLO. 
I set up the trades as mentioned above.  [MDW: Don, The assignment was to help you decide if you really like this type of trade. My looking at the numbers does not help you develop a plan.

Is the risk/reward reasonable?  Can you make a wild stab at the potential reward?  What if IV declines and you must sell options @ 20 cents instead of 40 cents?]

[Don goes on to offer data, if you care to see the details, click here]

Thanks for reviewing this.  Hope I set it up in a way that makes sense.


Yes, it makes sense.  But the data is for you to review

The bottom line remains.  When you own LEAPS, a plan such as yours is not unique.  Many try this plan, and everyone who adopts it owns the LEAPS for a long time.  The price of that option is very susceptible to changes in IV because these options are rich in vega. 

The other factor that followers of this strategy ignore, is the possibility that the monthly income stream can be cut in half or worse, when IV drops or the stock price declines.

This strategy can prosper.  But it has more risk than you see. 


Read full story · Comments are closed