# Just want to know will this work?



## Banenarr (24 August 2006)

*Just want to know will this work ?*

Im Very new to the market and i am currently looking at option trading.

I just want to know if this will work out ?

eg : 
i have 100 stocks of BHP at 27.00 = 2700
I then sell a covered call at 19.00 which pays = 8.535  << true figure
I now have the premium of $853
I also buy a put at 26 which costs 0.475  << true figure

If the price goes up my shares get exercised at 19 that gives me a profit because the real cost of the shares are ( 18.465) i rebuy the shares at their price then sell them with the put option i still own
If the price stays the same  _ same scenario
IF the price goes down i win 
If price goes below 18.465 i lose

Am i not taking something into consideration when calculating ?


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## wayneL (24 August 2006)

Banenarr

If you only have 100 shares of BHP your call contract will not be covered. You will need 1000 shares.

But presumimg that you have 1000 shares, what you have here is a synthetic bear vertical spread.

1/ Unless BHP absolutely tanks, your shares WILL be assigned.

2/ At expiry you will lose if the sp is > ~ 26.60

3/ At expity tyou will win if the sp is < ~ 26.50 with maximum profit at $19 *or lower*

4/ Use a modelling software, it will help you.


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## GreatPig (24 August 2006)

Wayne,

Just curious, how can you work out figures like that without knowing the expiry dates of the options and the volatilities? Even if you use current volatilities, don't you need to know the expiry dates?

I tried putting those figures into pricing software and can't get figures like yours. In fact, I can't easily get the option prices originally mentioned either - the call price is okay with a reasonable expiry date and volatility, but the put needed both a significantly shorter expiry date and lower volatility to get that price.

Just trying to figure this out.

Cheers,
GP


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## wayneL (25 August 2006)

GreatPig said:
			
		

> Wayne,
> 
> Just curious, how can you work out figures like that without knowing the expiry dates of the options and the volatilities? Even if you use current volatilities, don't you need to know the expiry dates?
> 
> ...




Hey GP,

With Sept expiry and with BHP at todays closing price od 29.50ish the option prices make reasonable sense. 

However it is not that important to show the general idea of the payoff diagram, which is all I really wanted to do, so exact prices don't matter. It was just to show Banenarr basically what he/she is looking at with that strategy.


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## GreatPig (25 August 2006)

Wayne,

Okay, thanks.

I can get similar prices and the same curves, but just wasn't sure how you were getting the actual numbers you mentioned.

Also tried it with your 1000 shares, and the 100 of each option barely made a dent in the price curve (or line) of that spread.

Cheers,
GP


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## NettAssets (25 August 2006)

Hi GP

Wayne was using 1000 shares because that is the no traded in one options contract I think.
John


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## wayneL (25 August 2006)

NettAssets said:
			
		

> Hi GP
> 
> Wayne was using 1000 shares because that is the no traded in one options contract I think.
> John




Yes Correct


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## Banenarr (27 August 2006)

This may be a bit hard to follow but -

Ok lets say i bought some shares at 16 , i take a call out on 17 and the share price goes to 20 , the stock will be exercised at the call of 17. Do i have to pay out anything else after that becuase the share went very well?

I would also like to know if i bought a share at 16 , i take a call out on 17 and the price during that month fluctuates from 16 to 20 and closes at 15. 
Is the person that bought the premium allowed to sell my shares at any time of the month or only on the close date. ? 

Sorry if these seem like straight forward questions but im getting mixed responses ranging from books to people.

Also if i bought at 16 , put a call on 17 and then used the premium to purchase a put option 1 -2 dollars below buy price to cover me if things go bad. If the call is a month exp will the put have to have 2 months or is it fine to just have the month.

Sorry if this is all over the place . Tell me if it dont make sense


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## NettAssets (27 August 2006)

Hi Banenarr,

Better to have a read of the options introduction on ASX for a start and the other books and ebooks recomended in this derivatives forum.
http://www.asx.com.au/markets/pdf/OptionsSimpleGuide.pdf

Before you question can be answered there are a couple of starting points to consider.

It will help if you will use the right terminology.

are you buying or selling the calls.
You say take a call which means to buy it but your question sounds more like a covered call question where you are selling the call.

just to help get the question right .. you say 


> Is the person that bought the premium allowed to sell my shares



no one actually buys or sells "the premium" the premium is the price the option trades for. 
so if the question is:
_Is the person that bought the calls allowed to sell my shares at any time of the month or only on the close date. ?_ 
The answer is that they are allowed to execise their option to purchase 1000 shares at any time ip to and including the expiry day of the option. This does not neccesarily mean that your shares will get sold though. Whose shares get sold is up to the ASX lottery not the call taker.
John


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## wayneL (27 August 2006)

Banenarr said:
			
		

> This may be a bit hard to follow but -
> 
> Ok lets say i bought some shares at 16 , i take a call out on 17 and the share price goes to 20 , the stock will be exercised at the call of 17. Do i have to pay out anything else after that becuase the share went very well?
> 
> ...




Cheers


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