As mentioned on the JustCoveredCalls group, you're off a decimal point -- 10 contracts would net you $210, not $2100.
$0.21/$37 = 0.57%
On Sun, May 16, 2010 at 1:56 PM, Louis <loupi3@yahoo.com > wrote:
I'm always (like everybody else) looking for a low risk, simple trading plan that doesn't rely on the unreliable (TA methods that work one day and fall apart the next, curve fitted backtesting, unrecognized variables, fundamental analyses that don't work like they should, etc,etc).
I like CSP's since they bring in cash rather than spending it and it's always good to play with OTM (other people's money). The risks involve, I think, mainly being forced to purchase a stock at a lower than expected price, and this may often be a benefit, depending on the stock, but in a declining market, it can be tricky.
It also ties up capital.
I'm thinking about a crude but possibly effective plan. I doubt if I'm the first to think about it. It's too obvious and that's why I want to throw it out to see what I may be missing.
I'm considering selling front month OTM puts (say roughly 10% OTM for some downside protection), with a diverse group of underlyings in order to spread the risk. A possible tweak would be to wait until expiration week, which would diminish risk even more, but at the sacrifice of benefiting from the time decay.
Taking one position as an example I'll use AXP for no other reason than that I happen to be looking at it at the moment.
At the moment it's selling at $40.64. If I sell the May 37 put at .21, then I'll receive $210 per contract,$2100 for 10 contracts, less commissions. If I consider $37000 as the amount risked, then the return is about 5.6%, (although there is no actual investment).
Compounded, the initial 37K which you leave sitting in your brokerage account would double in about 13 months.
The delta,BTW, on the position is -12, which I think loosely interpreted means a 12% chance of closing ITM.
AXP may or may not be a good choice for an example, but considering the principle alone, what are your thoughts?
Lou
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