Sunday, December 27, 2009

[ConservativeOptionStrategies] Re: drjoe - DLS Strategy income

 

Drjoe. Thanks for the response.

 

I am sorry I omitted to divide by the delta of the LEAP to get the contracts, but this made little difference to my calculations. I did use the same LEAP -  Dec12 80

 

So I should divide my $40,000 by the PRICE of the leap and not the current price of the SPY?

 

The strategy on p6 states

 

How many contracts of the leap should we purchase?

 

Above we allocated, in our buy-and-hold portfolio, $500,000 and for this example we allocated all $500,000 to SPY.  SPY at $123.84 we would own 4037 shares (500,000/123.84).  Each contract in options has 100 shares.  Therefore, we would have 40 leap contracts (rounded down).  The delta of the December 2010 - $90 strike leap is 0.81.  An equivalent stock position (ESP) would be 40/0.81 or 49 contracts.  The current market value of the leaps is $40.23/share.  The total cost to purchase would be 49*100*40.23 or $197,127.

 

Substitute your $500K with my $40K (everything else is similar) and I get 3-4 LEAP contracts which seemed to confirm my original figures.

 

I said I must be missing something, and it seems I am. I will spend more time to fully understand the rationale.

 

Peter

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