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The Coverd Call and Maried Put

Objectives, Risks and rewards of the strategies

Felipe Hage

on 7 April 2011

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Transcript of The Coverd Call and Maried Put

The Covered Call and Married Put The Covered Call I'll explain what they are and their objectives Their Reward! ..And their risks!, what is it? Lets remember the call first The buyer of the call option has the right to buy an agreed quantity of a particular commodity from the seller of the option at a certain time (the expiration date) for a certain price (the strike price)

The buyer pays a fee (called a premium) for this right The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. Is when you buy a stock long and write a call option of the same underlying security And what does it do? An example The invester that holds 100 shares of XYZ @ 50$/share, he sells the XYZ six-month 50 call for a net premium of $5 per share ($500 per contract) Break-Even now becomes 45$ the call reduces the risk of holding the shares. but doesn't eliminate it The idea behind this strategy is to provide the seller of the option with some income over the short term which lowers their net cost The real benefit of selling covered calls is the month over month income that can result if the stock does not get called away.

You can basically write options every month as long as the stock does not close above the call option strike price. That will continue to lower the net cost of your purchase price of the stock itself. The idea is to sell premium with a strike price high enough that it won’t be hit during the option duration. The Married Put what is it? Lets remember what a put is It allows the buyer to have the option, but not the obligation, to sell a commodity (financial instrument such as a stock) to the other party (the seller of the put) at future date and at a predetermined price (the strike price) lower than the current market price Like with a call, this right comes with a premium this means that... A married put is when you purchase a put while at the same time purchasing an equivalent number of shares of the underlying stock The investor employing the married put strategy wants the benefits of stock ownership (dividends, voting rights, etc.), but has concerns about unknown, near-term, downside market risks. Purchasing puts with the purchase of shares of the underlying stock is a directional and bullish strategy. The primary motivation of this investor is to protect his shares of the underlying security from a decrease in market price. So... The premium paid for the put option is equivalent to the premium paid for an insurance policy. The benefit here is, no matter how much the underlying stock decreases in value during the option's lifetime, the investor has a guaranteed selling price for the shares at the put's strike price. An example The strategy : you buy XYZ at $100.00 and one XYZ February 100 put at $9.00, your total investment would be $109 per share. Now think about this trade in terms of risk and reward. With the put protecting the stock position, your downside is limited. The most you can lose on this trade is the premium -$9 per share. If the stock declines to $50 per share, you would simply exercise the put option and force the put writer to buy your shares at $100. On the other hand, your potential upside is unlimited, once the stock goes above $109 per share. In short then, unlimited upside potential, limited downside risk. And that's what it's all about!

Thank you!
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