Options for Volatile Markets by Richard Lehman & Lawrence G. McMillan

Author:Richard Lehman & Lawrence G. McMillan [Lehman, Richard & McMillan, Lawrence G.]
Language: eng
Format: epub
ISBN: 9781118102664
Published: 2011-06-27T16:00:00+00:00

Partial Writing, Mixed Writing, and Ratio Writing

Discussions thus far have assumed a one-to-one relationship between stock owned and calls written. They have also assumed that all calls written on one stock are from the same series (same month and strike price). More advanced strategies exist that involve writing more or fewer than one call per 100 shares of stock or writing calls in different series. Generally speaking, these strategies apply to larger portfolios, where thousands of shares of stock are involved, though they can be implemented with even a few hundred shares. In smaller portfolios, the added complexity and commissions could negate the benefits gained.

Partial Writing

Partial writing is a conservative mode of implementing an incremental return strategy. You might employ it if you hold at least 600 shares of a particular stock and want some incremental return from option premiums but don't want to have shares called away until the price rises much higher. You would start by writing calls on part of your position with the intention of rolling the position up (and possibly out) if the stock rises above the initial strike price. By writing on only part of the position, you are taking in incremental option income while building in room to roll for a credit if the stock reaches the initial strike price. That is, writing against only a fraction of your shares to begin with gives you the ability to roll not only up to a higher strike price or out to a more distant expiration but also to a position that consists of more contracts and still be fully covered.

You may not need that room, but it gives you the confidence that even if the stock moves up sharply, you will be able to roll without getting assigned at too low a strike price and without having to put in any additional money. Since you are assured that you will not be called away until your ultimate target price is reached, whatever you get from all the call writing is purely incremental.

You have to do some calculations and consider some what-ifs to figure out how best to implement a partial writing strategy, and you will not be able to make it work for a target price that is too high. Effective implementation may depend on how far above the strike price the stock goes before you roll.

Say you own 1,500 shares of OPQ, which is trading at $56. You do not want to sell at less than $70, but no 70 strike price is yet available, or if one is, it has too little premium. You begin by writing four calls at the 60 strike in a relatively near month. If they expire worthless, you can write the same strike again for the next month. If the stock moves up to between $60 and $65 after you've written your calls, you could roll to the 65 strike. To insure you receive a credit, you could write up to eight of these calls. That way,

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.