Stocks & Commodities V. 26:11 (52): Q&A by Don Bright

Stocks & Commodities V. 26:11 (52): Q&A by Don Bright
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Q&A by Don Bright


I’ve been trading options for about 10 years. One strategy I enjoy but seldom use is a “ratio write” — for example, buy 100 shares of a stock, sell a covered call (near the market), and sell a second call near the market: 2-to-1 ratio write. (Assume call premiums are at $6.) This gives good downside protection of $12 and an upside profit range. Occasionally, I go long on a parity call (deep-in-the- money) in place of the stock.

My question applies to either strategy. I’ve had good success in a falling market or a flat market. Sometimes I will buy a “protective put” at the foot of the protective range ($12 below market) — if the price is right. My thinking is unclear when it comes to adjusting for a rising market. Certainly, if the option closing is near and the market has reached the call strike price, I can buy another 100 shares of stock and have two safe covered calls. How’s that sound to you? —Jim TaV

First off, a ratio covered-call write can be pretty risky, but let’s take a step back before getting into your specific trades. Option pricing is determined by historical volatility, interest rates, and days until expiration.

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