you ever thought of a fixed-term risk? This is a good description for the operation of covered writing. This strategy is very common in the market and consists of two parts. The first is to buy a stock and the second to launch or sell a call option on the same action. How
done? How I can win or lose? Can be made at any time? This and other questions that spring to mind when they first hear those two words, is what we will try to unveil in the next paragraphs.
Quite possibly the most know what it is buying a stock, but not which involves the release of the call or option to purchase. This last operation is to sell a right to another investor to buy shares (our actions) at a certain price (exercise price or strike price), charging investors a premium for the right. In other words, buy stocks and sell the other hand the right to buy the shares other at a certain price and in return receive a bonus.
Here we will dwell on some details needed for the sale of the right or option to purchase:
1 - The options listed on the Bolsa de Comercio de Buenos Aires as stocks, bonds or other instruments, but its liquidity is lower. Among the options are more liquid Grupo Financiero Galicia, Pampa Holding, Tenaris, Petrobras Energia and Mirgor.
2 - Buy things first and then notify your carrier that wants to launch an option over its shares, the mean operative quickly.
3 - What exercise exercise price of choice? Here I recommend to start with exercise prices or bases close to the quoted price action. For example, if PAMP trading at $ 1.50 per share, choose from the available bases close to that value (the bases are determined, one should choose between those available). For our example is 1.54 and the choice is PAMC1.54AG where
PAM: option on the shares of Pampa Holding
C: type of choice for our case C Purchase.
1.54: AG
exercise price, expiration month of the option, August.
4 - Time, date, month of expiration or exercise. The options that we will launch, have an associated date, which represents the time to which we can exercise the right. In our market maturities occur third Friday of even months. For our example, AG in August, the deadline is 15 August. It is recommended to release op about 60 days before maturity, to lessen the impact of the associated committees.
have sold the right to be exercised when the stock market is trading above the strike price and expiration dates very close to. Should the right be exercised, must tender their shares and otherwise may sell in the market to complete the transaction or perform the release process again but no stock. How
won or lost in each case? What are the returns of the operation?
If the right be exercised, the investment was the purchase of stock less the money that was given for the sale of the option and the expiration date will be withdrawn and shares will remain with the premium. Therefore,
Rend. Operation = 100 x Price Premium / (Initial Price Action - Price Prima)
The second possibility, the right is not exercised because the share price in the market is less than the strike or exercise price. In this case they can keep or sell shares at market price. Therefore,
Rend. Operation = 100 x [Price Prima + (Final Price Action - Price Action MI)] / (Price Action Initial - Price Prima)
In this second option is where the risk of losing money, because when the variation of the action in the negative is greater than the premium price start to lose money.
To clarify the operation, we will analyze an example of Pampa Holding shares for data at the end of June 27, 2008.
of contribution: $ 1.5 per share.
Expiration Option: if we are to late June, the pair is next August. Missing 49 days to maturity. Strike Prices available
August: 1.44, 1.54, 1.64, 1.74 and others.
As explained, the best price is 1.54.
Operation: PAMP to 1.54 purchase and sale of PAMPC1, 54AG to 0.12 (as closures).
The simulations below show results for different stock quotes at maturity
File
http://www.leiod.com.ar/Lanzamiento/OperacionEjemploPAMP.xls
Here it is worth stopping at two important results . The first is that if the stock price remains or increases, our annualized return is maintained in the order of 65% annually. The second important result is given in the event of a price of $ 1.4 per share, which diminishes its value action vs 7%. original value and yet we do not lose money (hedge effect). For price drops lose over 7% but still less than if we had bought the stock directly.
Finally, we consider that the fees associated with lower expected returns but not significantly so long as the startup operation is not carried out very close to the expiration date of the option.
