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December 8th, 2017 at 4:34 am
Following yesterday’s T question by ztennis I did have a closer look at the scenario of his Jan 19 30/37 BCS against an armchair trade.
Looking at the stock’s performance over the last year Dec. 15 / Jan. 16 of 30$ Nov 17 32.75 and today Dec. 17 36.17. Taking in to consideration that we could have a drop over the next year between 10 and 20%. So we looking at 32.55 and 28.93.
Here I do not even wish to look at the 20% drop only at the 10% drop.
Looking at Jan. 19 at a stock price of 37$ or above the BCS will return 7$
Let us say the man has to sell 500 shares and receives at today’s value 18,058.00 with that he can buy say 42 (rounded) BCS. 18,058.00 / cost of BCS 4.35/100 = 41.57 so we say 42 BCS.
At Jan 19 stock at 37 or above you will receive 7.00 x 4200 = 29,400.00 less your capital outlay of 4.35 x 4200 = 18,270.00, so you pocketing 11,130.00. Do not forget your total cash return at 37 is 29,400.00 for my calculation below!!!
Looking at the worse situation at Jan 19 the stock has dropped to 34.30, to my oracle calculation you have lost all of your capital outlay of 18,270.00 and you still further down 200.00.
The gain would be great the loss is disastrous.
Now to my armchair trade.
Again I now hold 500 shares at 36.17 = 18,085.00. Not hiding much behind the bush being Jan19 at 34.30 my shares are worth 17,150.00, against the BCS of nothing! With other words my capital loss is 935.00.
However here my armchair trade. I sell against my 500 shares 5 Jan 19 37 call options at 2.10.
The combined monthly income div. plus call option is .32 cents per month / 30 days x 409 days x 500 shares giving me combined a nicery 2,181.00.
My question Jan 19 the stock being at 34.30, sitting in my armchair, what do I hold in my hand?
Stock at 17,150.00 plus combined div. and call option value 2,181.00 = 19,331.00 against the BCS of nothing. I can even still buy a Cuban cigar and smoke it!
You might still say well at Jan 19 my 30 call still has value. Yes you paid 6.45 look at Jan 17 30 call 2.20, not even taking the difference between now 36.17 and possible 34.30 estimated in to consideration, plus you got from your Jan 19 37 caller 2.10 so you hold 4.30 against your pay out of 6.45 a loss of 2.15 x 42 x100 = 9,030.00
Please correct me if I am wrong or I can blow circles with my cigar.
I hate to tell you I still would stick my neck out and sell a Jan 19 33 put for 2.14 giving me a combined return of .48 cents a month or 3.272.00.