randy, everyone has their own income goal as i mentioned in the dls strategy paper. what my income goal is immaterial. what is important i met my personal goal for the month.
i don't think that when assigned on a short put and then selling covered calls against them is rolling. never heard that term in regards to that situation. i personally never roll my itm puts at expiration preferring to be assigned and writing covered calls. as you said since they are three month options dividends do come into play by owning the stock.
you said, of course your covered call can continue to drop, pretty obvious. i don't consider that borrowing against the future. as my paper stated, in 3 months if it is down further and my minimum income goal can not be met because as you say the stock would generate less premiums...that is when i use my cash to sell more puts to average down the position. i usually only have about 1/3 of my money committed to the initial put/covered call positions and the rest in cash for adjustments, averaging down.
the two covered calls sold are at the cost basis of 68 and 72. i don't consider the "underwater" of $6200 important. this is an income strategy and only concerned with income generated not capital gains. unless the whole US economy tanks and never comes back, i believe major indexes like spy and iwm will. as long as i can average down and generate my minimum monthly goal...i am happy.....i've been able to do that for over 15 years.
if iwm is at $55 at august expiration you ask what will i do? if there is little or no time value for another short call for november expiration at the 68 and 71 strikes (90 days out). i will sell puts, equal number of contracts with strike of 55 (atm), 52 (5% otm) and 49 (10% otm). just enough additional contracts to meet my minimum monthly income goal. the 52 strike would be over 44% decrease from iwm's 52 week high. if assigned i could continue selling covered calls at cost basis and generating income. i feel a further decrease with that decline would be unlikely. i survived the 40% drop several years ago using this strategy and able to generate needed income and with keeping pretty much 50% of portfolio value in cash account. never selling any puts or covered calls below cost basis
drjoe
--- In ConservativeOptionStrategies@yahoogroups.com, Randy Harmelink <rharmelink@...> wrote:
>
> On Sat, May 22, 2010 at 4:42 PM, joe & leigh <gass20@...> wrote:
> > randy it would be helpful if you read my shortput paper in the file
> section.
>
> I don't see an income goal mentioned there. What "income goal" did you meet
> when you collected the $10,900?
>
> > what do you mean rolling....i'm not rolling anything
>
> Selling the Aug $68 call against the stock you had put to you for $68 is
> pretty much equivalent to if you had rolled the May $68 put to an Aug $68
> put. That's why I said "more or less rolling".
>
> For example, at expiration, the May $68 put should have been worth $2.93.
> The Aug $68 put is currently bid at $6.68 -- $2.93 of it intrinsic and $3.75
> of it extrinsic. So, theoretically, rolling the May $68 put to the Aug $68
> put would have gained you $3.75, instead of letting it get exercised and
> writing the call against the stock for $3.40 (which you may or may not be
> able to get Monday).
>
> Theoretically, the May $71 put could have been rolled to the Aug $71 put for
> income of $2.46, instead of the $2.16 you're getting for the covered call.
>
> There also should be a dividend payment before August expiration.
>
> Plus, you would have had time decay of the new put working for you over the
> weekend -- not so important on 3-month options, but I usually write
> next-term options. For example, there would only be 11 days between the 6/19
> and 6/30 IWM expiration, so the time decay over a weekend is more important.
> So I generally prefer to roll prior to expiration instead of getting
> exercised.
>
> > and i have no clue what you mean borrowing against the future instead of
> earning income. that is earned income ask my tax
> > accountant. that money will be generated and withdrawn monday. i have
> borrowed against nothing and the premiums are
> > clearly income...drjoe
>
> I say "borrowing against the future" because that's what the extrinsic time
> values on options are. In the next 3 months, your OTM call could be further
> OTM and would generate less income -- unless you move it further out, or
> less OTM. You can continue to collect "income" while your position gets
> deeper and deeper under water. That, to me, is borrowing against the future.
>
> For example, here's what I see from your entries:
>
> Description At Risk Income Return Annualized Sell 10 IWM Aug $58 Put @
> $3.00 $58,000 $3,000 5.17% 20.69% Sell 10 SPY *Jun* $99 Put @ $2.15 $99,000
> $2,150 2.17% 26.06% Sell 7 IWM Aug $68 Call @ $3.40 on $68 assigned
> $47,600 $2,380 5.00% 20.00% Sell 7 IWM Aug $71 Call @ $2.16 on $71 assigned
> $49,700 $1,512 3.04% 12.17% Sell 6 IWM Aug $59 Put @ $3.19 $35,400 $1,914
> 5.41% 21.63% *Total* *$289,700* *$10,956* *--
> * *21.06%*
> But the two call positions were written while the stock being held is $6,200
> under water from the assignments. I would think your "income" needs to
> reflect that discrepancy.
>
> What do you do with those two positions if IWM is $55 or $60 at August
> expiration?
>
Hey, thanks for the information. your post s are informative and useful.
ReplyDeleteNeueon Towers