Osho - for the uninitiated, what you have is an "At The Money Covered Call" on the "cubes", an exchange traded fund that mimics the Nasdaq. You have bought 100 shares at 37.17 and sold a call for 0.79 with a strike price of 37 which has therefore bought in $79.
You get to keep the premium taken in under all circumstances, and the price for this is that you do not participate in any rise in QQQ above 37 (37.17 at the time of purchase).
If the price of QQQ falls, you keep the premium but lose on the shares, but until expiry in 16 days you have a buffer of 0.79, so you are still in profit (dealing costs excepted) at all levels above 36.38 ( i.e. 37.17 - 0.79).
Maximum profit is $62 (less dealing costs) because if expiry takes place at any level above $37 you will lose on the short call $ for $ for the increase in the shares. So if QQQ doesn't move from the purchase price of 37.17, then the call option will expire 0.17 in the money, so (0.79 - 0.17) = 0.62 x100 = $62.
Dealing costs with IB will set you back $4, so max net profit is $58, which annualises at 36% based on capital at risk of $3638 (i.e. 3717 - 79). Admittedly QQQ can't go bust or issue a profits warning, and it can only go to zero if the Nasdaq becomes worthless, in which case we shall other things to worry about.
If the stock falls, you will lose on the stock below 37, but you'll be able to buy back the option for a reduced figure, or leave it naked to expire worthless (hopefully). As this is a quasi index, that wouldn't bother me.
The same result would come from selling a 37 put naked. i.e. profit limited to the premium taken in, but unlimited loss potential below 37.
The payoff diagram looks as follows.
HTH
You get to keep the premium taken in under all circumstances, and the price for this is that you do not participate in any rise in QQQ above 37 (37.17 at the time of purchase).
If the price of QQQ falls, you keep the premium but lose on the shares, but until expiry in 16 days you have a buffer of 0.79, so you are still in profit (dealing costs excepted) at all levels above 36.38 ( i.e. 37.17 - 0.79).
Maximum profit is $62 (less dealing costs) because if expiry takes place at any level above $37 you will lose on the short call $ for $ for the increase in the shares. So if QQQ doesn't move from the purchase price of 37.17, then the call option will expire 0.17 in the money, so (0.79 - 0.17) = 0.62 x100 = $62.
Dealing costs with IB will set you back $4, so max net profit is $58, which annualises at 36% based on capital at risk of $3638 (i.e. 3717 - 79). Admittedly QQQ can't go bust or issue a profits warning, and it can only go to zero if the Nasdaq becomes worthless, in which case we shall other things to worry about.
If the stock falls, you will lose on the stock below 37, but you'll be able to buy back the option for a reduced figure, or leave it naked to expire worthless (hopefully). As this is a quasi index, that wouldn't bother me.
The same result would come from selling a 37 put naked. i.e. profit limited to the premium taken in, but unlimited loss potential below 37.
The payoff diagram looks as follows.
HTH
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Dear Roger
Thanks very much for your pm as well as informative reply on the board. The income and expenditure were after taking costs into account. I hope nothing drastic will happen to Nasdaq in a short period of 3 weeks. I cant follow this strategy in UK because of the dealing costs and stamp duty. I have only paid $1 each for buying qqq and sell of option.I will experiment and go to 5 to 10 contracts expiring every month. Thanks again
Thanks very much for your pm as well as informative reply on the board. The income and expenditure were after taking costs into account. I hope nothing drastic will happen to Nasdaq in a short period of 3 weeks. I cant follow this strategy in UK because of the dealing costs and stamp duty. I have only paid $1 each for buying qqq and sell of option.I will experiment and go to 5 to 10 contracts expiring every month. Thanks again
