Option Trading Articles: Re: [ConservativeOptionStrategies] Re: drjoe

Sunday, December 27, 2009

Re: [ConservativeOptionStrategies] Re: drjoe - DLS Strategy income

Could you describe where $60,000 comes in picture as well as $3400.

-----Original Message-----
From: joe & leigh <gass20@aol.com>
To: ConservativeOptionStrategies@yahoogroups.com
Sent: Sun, Dec 27, 2009 3:30 pm
Subject: [ConservativeOptionStrategies] Re: drjoe - DLS Strategy income

peter...with spy at 112.48, dec 12- 80 strike at 37.00

40000/112.48 is 356/0.81 = 439 or 400 shares...short calls then would be 300 shares or 3 contracts.....400 leaps would be 14800 with 25200 to place in fixed income...therefore fixed income now is 60000+25200 or 85200 * 0.04 or 3400 dollars per year. with 300 short calls per month at roughly 1.5 or 450 * 12 or 5400 dollars...total then is 5400 plus 3400 or 8800 or 8.8% per year. now you're thinking not good ....well with only 14.8% (14800 in leaps)of your money at risk yielding 8.8% per year is not bad at all in my opinion. not the 15% i would like.

you can use IWM which has an correlation coefficent of essentially 1.0 with SPY. it has a higher IV and would yield around 10.5% per year with about 17.5% at risk....drjoe

--- In ConservativeOptionStrategies@yahoogroups.com, "Peter Worthington" <ptrworth@...> wrote:
>
> 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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