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Posted by on August 25, 2008, 1:33 am
Hello all... I found this strategy on a BAC forum. The author claims
it is a way to collect dividends and avoid downside risk. Seems too
good to be true, I'm sure I'm missing something... any thoughts? I
simply copied and pasted it below.
"Similar... take say $10G... look at the Jan2010 LEAPS.
Put on a covered call position current price $30.21
2.50 Strike $27.5
Putting this covered call on will make your effective average price
$2.71 (basically you are protected from everything except nuclear
holocaust)
Now that $10,000 will get you 3700 shares.
because of the wide spread in the 2010LEAPS.... assume this covered
call will result in a $21 per 100 loss. so with 3700 shares its a
$777
loss.
BAC will pay 6 dividends between now and january 2010.
3700 shares * 0.64 dividend = $2368
September Div: $2368
December Div: $2368
March 09 Div: $2368
June 09 Div: $2368
September 09 Div: $2368
December 09 Div: $2368
Total Dividends recieved: $14,208
Total Loss on Covered Call: ($777)
Total Profit on $10,000 Investment: $13,431
A little long winded I'm sorry, but I've been doing with with high
div
stocks for years... and it's a great strat.
"
Thank you all for help in understanding!
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Posted by on August 25, 2008, 7:52 am
they could cancel the div's and the stock could be worth $5 by 2010
nothing is as good as it seems on first look
JAV
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Posted by pmess on August 25, 2008, 8:07 pm
> Hello all... I found this strategy on a BAC forum. The author claims
> it is a way to collect dividends and avoid downside risk. Seems too
> good to be true, I'm sure I'm missing something... any thoughts? I
> simply copied and pasted it below.
>
> "Similar... take say $10G... look at the Jan2010 LEAPS.
>
>
> Put on a covered call position current price $30.21
> 2.50 Strike $27.5
>
>
> Putting this covered call on will make your effective average price
> $2.71 (basically you are protected from everything except nuclear
> holocaust)
>
>
> Now that $10,000 will get you 3700 shares.
> because of the wide spread in the 2010LEAPS.... assume this covered
> call will result in a $21 per 100 loss. so with 3700 shares its a
> $777
> loss.
>
>
> BAC will pay 6 dividends between now and january 2010.
>
>
> 3700 shares * 0.64 dividend = $2368
>
>
> September Div: $2368
> December Div: $2368
> March 09 Div: $2368
> June 09 Div: $2368
> September 09 Div: $2368
> December 09 Div: $2368
>
>
> Total Dividends recieved: $14,208
> Total Loss on Covered Call: ($777)
>
>
> Total Profit on $10,000 Investment: $13,431
>
>
> A little long winded I'm sorry, but I've been doing with with high
> div
> stocks for years... and it's a great strat.
> "
>
> Thank you all for help in understanding!
The option could be exercised just prior to the ex-div date, in which case
you would not get the div and could well have a small loss.
PM
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Posted by lubow on August 26, 2008, 9:33 am
Want to make money in options:
The only "sure" way to profit is writing a call against stock you own at a
strike price greater than what you had paid for the stock while keeping the
stock through the expiration date. Guaranteed, even if the stock price
declines, you will make money off the call.
Of course, just holding the stock has more potential profit, but is not a sure
thing
From time to time I write 90 to 120 day calls with gold stocks, ABX in
particular, and has worked out nicely adding a few extra bucks to my dividend
yield.
> Hello all... I found this strategy on a BAC forum. The author claims
> it is a way to collect dividends and avoid downside risk. Seems too
> good to be true, I'm sure I'm missing something... any thoughts? I
> simply copied and pasted it below.
>
> "Similar... take say $10G... look at the Jan2010 LEAPS.
>
>
> Put on a covered call position current price $30.21
> 2.50 Strike $27.5
>
>
> Putting this covered call on will make your effective average price
> $2.71 (basically you are protected from everything except nuclear
> holocaust)
>
>
> Now that $10,000 will get you 3700 shares.
> because of the wide spread in the 2010LEAPS.... assume this covered
> call will result in a $21 per 100 loss. so with 3700 shares its a
> $777
> loss.
>
>
> BAC will pay 6 dividends between now and january 2010.
>
>
> 3700 shares * 0.64 dividend = $2368
>
>
> September Div: $2368
> December Div: $2368
> March 09 Div: $2368
> June 09 Div: $2368
> September 09 Div: $2368
> December 09 Div: $2368
>
>
> Total Dividends recieved: $14,208
> Total Loss on Covered Call: ($777)
>
>
> Total Profit on $10,000 Investment: $13,431
>
>
> A little long winded I'm sorry, but I've been doing with with high
> div
> stocks for years... and it's a great strat.
> "
>
> Thank you all for help in understanding!
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Posted by Bill Reid on August 26, 2008, 11:07 am
> > Hello all... I found this strategy on a BAC forum. The author claims
> > it is a way to collect dividends and avoid downside risk. Seems too
> > good to be true, I'm sure I'm missing something... any thoughts? I
> > simply copied and pasted it below.
> >
> > "Similar... take say $10G... look at the Jan2010 LEAPS.
> >
> > Put on a covered call position current price $30.21
> > 2.50 Strike $27.5
Not sure I'm following this...if you are "writing" a "covered call"
(which is the only thing that makes sense in the context of what
you wrote), you just "sold" a call that allows the buyer to purchase
your stock from you at $27.50, which means the buyer can instantly
turn around and make $0.21 profit (considering the buyer had to
pay $2.50 for the call, or $30.00 total cost) by selling the stock.
You now have $32.50 and no stock, which is OK I guess, but
not apparently what you were going for here...
> > Putting this covered call on will make your effective average price
> > $2.71 (basically you are protected from everything except nuclear
> > holocaust)
There's ONE catch...there were probably some very complacent
shop-owners in Hiroshima back in the '40s...
But I'm not sure where you are getting the $2.71 "effective average
price"...if you "wrote" a covered call for $2.50, your ACTUAL "effective
average price" would be $30.21-$2.50=$27.71. Or am I getting the
"strike" and "option price" reversed here? In any event, you've still
managed to give away a "sure" profit to somebody in exchange
for a "sure" profit for yourself...everybody's a winner! But you're
not gonna be collecting any dividends in this case...
> > Now that $10,000 will get you 3700 shares.
No, to "write" a "covered call" (meaning you ALREADY own the
stock), $10,000 gets you about 330 shares...what exactly is going
on here?
> > because of the wide spread in the 2010LEAPS.... assume this covered
> > call will result in a $21 per 100 loss. so with 3700 shares its a
> > $777
> > loss.
Where is the loss coming from? If you sold the calls, you made
$2.50, and the "risk" is that the stock will be called away from you
and you won't be able to profit from the dividends and the price
increase, or that the stock will fall more than $2.50 (minus any
dividends you collect).
> > BAC will pay 6 dividends between now and january 2010.
Unless they don't, ANOTHER "catch", and a biggie, since if
they cut the dividend the stock will tank big-time and you will
most certainly lose money overall...and the dividends will actually
go to the lucky owner of the stock that you sold to him
for $0.21 less than the market price, the FIRST catch...
> > 3700 shares * 0.64 dividend = $2368
> >
> > September Div: $2368
> > December Div: $2368
> > March 09 Div: $2368
> > June 09 Div: $2368
> > September 09 Div: $2368
> > December 09 Div: $2368
> >
> > Total Dividends recieved: $14,208
> > Total Loss on Covered Call: ($777)
Still not sure where the loss is coming from...and of course,
you still would have only about 330 shares with $10,000 for a
"covered call", so just divide that dividend return by about
twelve to get the actual number...
> > Total Profit on $10,000 Investment: $13,431
OK, divide that "profit" by about twelve...not saying you can't
make money by selling "covered calls" against dividend paying
stocks, LOTS of people do this and make some fairly consistent
returns OVER the dividend rate, just that the numbers the guy
presented just don't make any sense in the context of the
"strategy" he appeared to be talking about...
> > A little long winded I'm sorry, but I've been doing with with high
> > div
> > stocks for years... and it's a great strat.
> > "
Let me guess..."Lowbrow" wrote this?
> > Thank you all for help in understanding!
Look, some people can NEVER "get" how options "work", and
if you don't "get" how they work, don't worry about it, because they
aren't magical and allow you to make money where it doesn't exist.
The first sign that you DON'T "get" options and probably never will
is that you believe that somehow they allow you make gigantic
sums of money with no "risk"...
I remember once at work, this guy comes running into my
office all excited, said he just found a magical way to make
a lot of money with NO RISK. The strategy was--you guessed
it--WRITING COVERED CALL LEAPS AGAINST CERTAIN
STOCKS.
He had a very specific stock in mind, and we went over the
numbers on my whiteboard. Because the call premium was
so high on the LEAPS, effectively the stock would have to
lose HALF it's value for him to lose money. He saw this and
instantly said, "BUT WHAT ARE THE CHANCES THAT'S
GOING TO HAPPEN?" Of course, I told him the truth, what
I knew from experience: it happens all the time, that ANY time
you buy a stock, you have better be prepared to watch it fall
by AT LEAST 50%, ANY STOCK. He didn't seem convinced,
and left quite convinced he had found a "magic formula" for
making money.
Well, a few months later the stock had fallen by about 85%,
and I saw him in the hallway and asked about how his strategy
was working, and he instantly said he had never gone through
with it so he he hadn't lost anything, but of course he had a
NEW "sure-fire" way of making money in the stock market...so
it was back to the white-board again...
You're probably more confused now that ever, but I can make you
even more confused. EVERY investment has a certain "risk-reward"
profile, that represents the sum of all the probabilities of the various
possible profits and losses you may make on the investment.
A "covered call" does remove the "zero" or "total loss" probability
from the equation, because even if your stock goes to zero, you
STILL have the option premium you collected when you sold the
call. This is balanced by the "opportunity risk" of the probability
the stock will "go to da moon", and your stock will get "called away"
and you lose all that potential profit.
In some cases, given a presumed set of probabilities for a stock's
future price action, selling "covered calls" makes "sense", because
you CAN make more money more "reliably" than if you didn't sell
the calls. In other cases, it makes no sense at all, and in general,
you can usually make MORE money than a "covered call" strategy
on the kind of stocks where it "works" by just buying stocks that
are going to "go to da moon" and collecting the profit after they
make that trip.
> Want to make money in options:
>
> The only "sure" way to profit is writing a call against stock you own at a
> strike price greater than what you had paid for the stock while keeping
the
> stock through the expiration date. Guaranteed, even if the stock price
> declines, you will make money off the call.
What an idiot. Of course you ALWAYS make "guaranteed" money
on the calls and puts THEMSELVES by WRITING either calls and puts.
But whether or not you make money overall ALWAYS depends on the
subsequent price action of the underlying stock. If you have written a
call for $5 against a stock, and the stock goes down $10, you've lost
five dollars...moron.
> Of course, just holding the stock has more potential profit, but is not a
sure
> thing
On the upside, you have "opportunity risk", you "lose" the ability
to profit fully from the rise in the stock...cretin.
> From time to time I write 90 to 120 day calls with gold stocks, ABX in
> particular, and has worked out nicely adding a few extra bucks to my
dividend
> yield.
Sure you do, just like you ALWAYS make money trading
commodities without having the slightest clue as to where
commodities are going (whack-o conspiracy theories do not
count as "clues")...
---
William Ernest Reid
Post count: 1160
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