NetNews Usenet Archive 1992 #27/NN_1992_27.iso/spool/misc/invest/14001

Text File | 1992-11-19 | 2.7 KB | 58 lines

Newsgroups: misc.invest
Path: sparky!uunet!usc!venice!gumby.dsd.trw.com!meltami.dsd.trw.com!suhre
From: [e-mail] (Maurice E. Suhre)
Subject: Re: Writing options
Message-ID: <[e-mail]>
Sender: [e-mail]
Organization: TRW, INC.
References: <[e-mail]> <[e-mail]>
Date: Fri, 20 Nov 1992 00:22:37 GMT
Lines: 46

In article <[e-mail]> [e-mail] (cs101 student) writes:
>In article <[e-mail]>  writes:
>> So say I have 1000 shares of USAir and I want to write call options
    [Deletions.  mes]
>> how do I compute the cost of each option, for which month should
>> I write it for? is it worth it to write a smaller block or am
>> I just going to pay per contract?
>>
>Don't mess around in the futures market.  It is hopelessly complicated.

We aren't talking about futures here, we're talking options.

You can get an estimate of the price by looking in the options section
of the newspaper.  Option prices are frequently volatile and you need to
call your broker for an exact quote.

The customary calculations are to figure your return if the option
expires worthlessly including commissions, and also to figure your
return if the option is exercised.  Include the stock transaction profit
in the exercised return.  Try this for various months and option prices.
See if any of them seem OK to you.  Be sure to annualize the returns for
comparison purposes.  The Barron's column, The Striking Price, usually
has a few "buy/write" suggestions.  Buy/write means that you don't own
the stock but are going to purchase it specifically for the covered
write option strategy.

If you do a covered write and the option is nearing expiration but
still out of the money, you might consider purchasing the options back
(closing the position).  This reduces your profit slightly, but avoids
the inconvenience of being exercised and allows you to do another
write.  Since the stock is near the strike price, the time premium will
be fairly good.  If you don't plan to do another write, you might
regard it as insurance against a tender offer for the stock appearing
and having the stock jump up 10 points or so.  With the
merger/acquisition mania fairly well cooled down, this is a less likely
possibility.

Finally, if you are nearing the end of the time and the option is somewhat
in the money, you can consider purchasing the options and writing new
ones.  The portion of the purchase price which makes up the in-the-money
component can be recovered by a new write.

The other comments previously posted have been well put, IMHO.
--
Maurice Suhre
[e-mail]