LogFAQs > #951935871

Sunroof posted...

Can you lay out this math for me?

Ok to keep it simple i'ma just nice numbers.

Stock A is trading at $100.
I'm starting with 10,000

Selling Put Strategy
-I sell a $95 put two weeks out for $5 in premium.
-I get paid 500 dollars. I now have 10,500 dollars. (9,500 is being used to secure the put)

Scenario A: Stock goes nowhere
-Put expires worthless.
-I now have 10,500 dollars
-I can now sell another put

Scenario B: Stock goes up a bit to $103
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $98 strike this time)

Scenario C: Stock goes way up to $110
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $105 strike this time)

Scenario D: Stock goes down a bit to $97
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $92 strike this time)

Scenario E: Stock goes way down to $90
-Put expires and you get assigned
-You now have 100 shares worth $9,000 and $1,000
-You technically broke even here. You just lost time
-Alternate: You can roll your position here. I will go over this another time.

Selling Call Strategy
-I buy 100 shares for 10,000 dollars
-I sell a $105 call two weeks out for $3 in premium.
-I get paid 300 dollars. I now have 300 dollars and 100 shares worth $10,000

Scenario A: Stock goes nowhere
-call expires worthless.
-I now have 300 dollars and 100 shares worth $10,000
-I can now sell another call

Scenario B: Stock goes up a bit to $103
-call expires worthless
-I now have 300 dollars and 100 shares worth $10,300 (10,600 net worth)
-I can now sell another call (perhaps at the $103 strike this time)

Scenario C: Stock goes way up to $110
-call expires and you get assigned, forcing you to sell your shares for 10,500
-I now have 10,800 dollars
-Alternate: You can roll your position here. I will go over this another time.

Scenario D: Stock goes down a bit to $97
-call expires worthless
-I now have 300 dollars and 100 shares worth $9,700 (10,000 net worth)
-I can now sell another call(perhaps at the $103 strike this time)

Scenario E: Stock goes way down to $90
-call expires worthless
-You now have 100 shares worth $9,000 and $300
-You can now sell another call. (You won't get as much if you do a strike over 100 so you might want to just wait as well until it recovers)

Comparison
I will compare how the put, call, and owning raw shares evaluate in each scenario
Scenario A: put(10,500) > call(10,300) > owning shares(10,000)
Scenario B: call(10,600) > put(10,500) > owning shares(10,000)
Scenario C: owning shares(11,000) > call(10,800) > put(10,500)
Scenario D: put(10,500) > call(10,000) > owning shares(9,700)
Scenario E: put(10,000)>call(9,300)>owning shares(9,000)

As you can see the put strategy has by far the lowest downside but also caps the profit at $500.

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DPOblivion beat us all.