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I bot 200 shares of MRO for $86. The Feb 85 call is selling for $4.30. If I sell 2 contracts I get $860 right? This means I will make minimum $660 regardless where the stock goes at expiration. Do I have the correct understanding here ?
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<<If I sell 2 contracts I get $860 right?>>

Ignoring commissions, you are correct. Option prices are quoted on a per-share basis, and each contract represents 100 shares, so the actual price of each contract is 100*$4.30 = $430.

<<This means I will make a minimum $660 regardless where the stock goes at expiration. Do I have the correct understanding here?>>

No. You will make $860 from selling the calls, but you can lose a lot of money if the stock declines. Covered calls provide little protection from a stock decline.

Your downside breakeven on the buy-write trade is $81.70 (86.00-4.30). Below $81.70 you lose money.

Your upside breakeven on the buy-write trade is $89.30 (85.00+4.30). Above $89.30 you would have been better off buying the stock without selling any calls against it.


Jim



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Your downside breakeven on the buy-write trade is $81.70 (86.00-4.30). Below $81.70 you lose money.

Your upside breakeven on the buy-write trade is $89.30 (85.00+4.30). Above $89.30 you would have been better off buying the stock without selling any calls against it.
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So, if you sell 2 puts at $80 (the closest strike to $81.70) you have covered yourself on the down side. Is this called a straddle?

Also, wouldn't it be better to sell the put then to do a covered call? If you are long the stock protecting the downside is more important. And, if you wanted to sell a "long" option why not sell a leap?

MZ4 - who is finally (he thinks) getting it......I can run a $1M cardiac cath xray machine and fix hearts but can't get options...go figure.
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<<So, if you sell 2 puts at $80 (the closest strike to $81.70) you have covered yourself on the down side.>>

No, buying puts is a bearish bet that covers you on the downside. Selling puts is a bullish bet that does not.

<<Is this called a straddle?>>

No. The buy write is identical to a short put. If you sell more puts on top of the buy write, you just have more short puts. A straddle is the combination of a long/short call and a long/short put at the same strike price. A strangle is the combination of a long/short call at a higher strike price than a long/short put.

<<wouldn't it be better to sell the put then to do a covered call?>>

Yes. Fewer commissions and lower margin requirement.

<<if you wanted to sell a "long" option why not sell a leap?>>

Time decay is not linear but accelerates near expiration. LEAPs have very little time decay so they are not good short call candidates. Sure, you bring in more premium, but you won't make much money until expiration draws near. Better in my opinion to sell near-term calls over and over again and make money sooner due to accelerated time decay. Of course, this strategy only works if the stock stays neutral; if the stock immediately tanks you would have been better off selling a LEAP or, even better, selling the stock in the first place.

Jim


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