Launch Covered with TS - Covered Call covered: an interesting strategy in times of volatility
you ever thought of a fixed-term risk? That is what a large extent, the operation of covered writing, by which one acquires shares and sell the right to buy them at a specified price. Today, with highs hovering volatility around the world, this strategy offers returns greater than 100% per annum if the asset is maintained at its current value.
you ever thought of a fixed-term risk? This is undoubtedly a good definition for the startup operation covered. This strategy is very common in the market and consists of two steps: buy a stock and launch or sell a call option on that same action.
How is it done? How much can you win or lose? Can it be done at any time? Try to answer these and other frequently asked questions in the following paragraphs.
Quite possibly the most know what it is buying a stock but not what it means to launch a call or option to purchase. It basically involves selling to another investor a right for us to buy the shares referred to in the call at a certain price, which will be renamed the "strike price" or "strike price". For the assignment of that right we will charge a premium.
In short, we will be buying shares while selling a right to a third party we buy them at a specified price.
At this point, it is worth dwelling on some important clarifications:
1 - As with stocks, bonds and other financial assets, the options listed on the Bolsa de Comercio de Buenos Aires, but its liquidity is less than of these instruments. Among the options are more liquid Tenaris, Grupo Financiero Galicia, Pampa Holding, Petrobras Energía.
2 - To carry a pitch covered, you must first purchase the shares and then give the order to the operator to set an option on those shares. Thus, to have in your portfolio of stocks that could eventually buy, the investor will be "covered" and must leave the market to find them.
3 - How to choose exercise price for the sale of rights? My advice is to start with exercise prices (base) near the market price action. For example, Tenaris (TS) traded at 31 pesos, choose one of the bases available closer to that value (The bases are predetermined and should be chosen from those available). In this case, the choice would be "TS.C31.10DI" where "TS" is an option on the shares of Tenaris, "C" is "buying" the type of option is the 31.10 strike price, and "DI "December is the month of expiration of the option.
4 - The options that we will launch with an associated date representing the time to which we can exercise the right sold. In our market maturities occur the third Friday of each month par. Therefore, it is recommended that the launch about 60 days before maturity to reduce the impact of the fees that we our operator charged.
The right one is sold only exercised when the stock market price is trading above strike and in close proximity to the expiration dates. If it is exercised, the shares must be delivered. Should not be because the stock price fell or remained the same value and the exercise period expired, they may be selling to close the position, keep waiting for a boost or launch a new shopping option Based on the new market price.
How we will have won or lost in each case? What have been the returns of the operation?
If exercised the right, the capital invested will have been equal to the cost of stock less the money that was given by choice, while at the maturity of the option we will have sold the shares at a price "strike."
Here, the formula: Performance
Operation = 100 x [Price Prima + (Strike Price - Price Initial Action)] / (Initial Price Action - Price Prima)
If not exercised the right, the formula would : Performance
Operation = 100 x [Price Prima + (Final Price Action - Price Action MI)] / (Initial Price Action - Price Prima)
This second alternative can result in losing money. That will always happen to end up selling the shares at a price lower than the initially invested capital (purchase of shares unless selling the option).
To clarify the operation, we will analyze an example with Data Company's shares at the close of October 24, 2008.
Prices: 31 pesos per share.
Expiration option in December (56 days remaining to maturity). Exercise prices
available: 28.10 / 31.10 / 34.10 / 37.10 and more.
The best price is 31.10.
Operation: TS stock at $ 31 and sales to 5.05 TS.C31.10DI (As of October 24 closures).
The simulations below show results for different stock quotes on maturity,
www.leiod.com.ar / Released / OperacionEjemploTS.xls
Let us consider two important results:
1. If the stock price remains or increases, our annualized return will be in the order of 129% annually.
2. If the stock falls to 27 pesos (-13%), we have not lost since the low capital does not exceed the income from the sale of the option (13% vs. 15%). Remove the brackets
Finally, we know that the associated fees, charged by the operator us-decrease expected returns, especially if the startup operation is performed very close to the expiration date of the option.
The very high returns offered by this strategy today respond to the extreme volatility being experienced by markets around the world. Values \u200b\u200bshould be contrasted with those of early 2008, when annualized returns of similar operations were around 45%.
* Diego www.leiod.com.ar Rebissoni is the creator of a site that seeks to improve trading options in the area of \u200b\u200bthe Bolsa de Comercio de Buenos Aires.
