Profiting with Synthetic Annuities: Option Strategies to Increase Yield and Control Portfolio Risk (Fernando Lopez-Lezcano's Library) by Michael Lovelady

Author:Michael Lovelady
Language: eng
Format: epub
Publisher: FT Press
Published: 2012-06-17T16:00:00+00:00

Figure 5.7. Updated DE tracking template

Other than that, nothing much has happened. But only ten days have elapsed since I purchased Deere. Let’s skip ahead a few days. I sold two November calls and bought one November put. On October 28, 2011, the SynA options transactions and tracking summary looked like Figure 5.8.

Source of screenshot: TradeStation Technologies, Inc.

Figure 5.8. DE SynA as of October 28

The stock price moved up to $78.65. The options trades produced net cash of $388 ($300 + $162 – $74), which is shown as a reduction to cost basis in the CSynA row of the tracking summary. Delta dropped from $300 to $183, and theta went from zero to $8.38 per day. At a rate of $8.38 per day, the payback period went from 517 to 71. This is a little longer payback period than the initial 49 months when setting up the CSynA, but it is common for the payback period to fluctuate. I could lower the period by selling another call option, but the price action has been good, so I am not concerned about the difference.

You can choose how you want to structure the CSynA. Selling more calls swaps current income for potential capital gains and reduces volatility. After the options transactions, instead of the CSynA moving dollar for dollar with the underlying stock, it moves only $183 for each $300 move in the stock, or 0.61 or 61% as much.

With no options outstanding, the expectation is that all returns would come in the form of capital gains and a small dividend. By selling options, you choose to emphasize current income and less volatility over capital gains.

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