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