Mark,
I'm sure Dr. Joe will give you the same advice (at least I hope so). You want to sell calls at the strike that has the maximum extrinsic value. Usually that is the first strike ITM or OTM. Also you want to sell fewer calls than you have long calls. His thumb rule is about 8:10 - so about 8 short calls for 10 long calls. Look at that on a P/L graph and you will see what he means by uncovered longs. The graph will typically increase at a steep (relative) rate up to the short strike and then flatter but still increase at a shallower rate above the short strike.
Once both the short and the long are ITM your profit comes from 2 areas.
First it comes from the decay in the extrinsic value of the short being greater than the decay in the extrinsic value of the long - which is why you want to sell the short that has the maximum extrinsic value.
Second it comes from having more intrinsic value in the longs but only because you have more longs than shorts. If for example you had the same number of shorts as you have longs, the gain on the intrinsic of the long will be exactly offset by the loss on the intrinsic of the short. If instead you have 10 longs and 8 shorts and the underlying moved by $1, the longs would gain $10 on the intrisic portion but the short position would lose $8 for a net gain of $2 on the intrinsic.
If the underlying was below the short strike (i.e. the short strike was OTM), for every $1 movement of the underlying, the longs would gain $10 on the intrinsic (same example as above) and a little bit on the extrinsic. since the short strike is OTM there is no gain/loss on the intrinsic but of course there is a gain on the extrinsic. Overall, it is the gain on the intrinsic of the long that is the significant contribution to your overall P/L which is why the P/L is steeper below the short strike and shallower above the short strike.
Hope this helps....
----- Original Message -----
From: "mark bluhm" <mbluhm2001@yahoo.
To: ConservativeOptionS
Sent: Sunday, November 29, 2009 11:56:54 AM GMT -05:00 US/Canada Eastern
Subject: Re: [ConservativeOption
Mark
From: joe & leigh <gass20@aol.com>
To: ConservativeOptionS
Sent: Sun, November 29, 2009 7:27:26 AM
Subject: [ConservativeOption
Would love for members to post their strategies and post questions for other members.
I am still trading the DLS and am satisfied considering the worst market correction in decades. I am trading a lot of naked puts and covered calls.
Someone who bought a second home (condo) in a place like Florida at the high of the real estate market to rent and generate income....his condo's market value is probably 40% below his purchase price. I know, I live there. However, he is still able to generate monthly rent comparable to when the real estate market was high while he waits for his condo's value to return to purchase price.
Well my leaps (condo) are well below cost basis. However, my current leap positions opened 39 months ago has generated about $3000/mo.(rent i generated). Initially, leaps were generating 8-10k per month and during the correction I was able to generate at least 1-1.5k per month...averaging over the time period the $3000/mo. My leaps are about the same % below purchase price than if I had bought a portfolio of buy and hold. The difference is I have generated $118,000 in premiums over the 39 months. Where the buy and hold owner generated no rent/income.
I am finding that selling puts if managed well is easier and less time consuming than the DLS strategy.
dr joe
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