. . . more than just covered calls . . .
OPTION SWITCHING
MANAGING MULTIPLE POSITION: This strategy is only applicable for portfolios with multiple positions using the same stock. Specifically, a situation where multiple purchases of stock are covering more than one strike price option position. This situation occurs when Initial Positions are executed at various stock prices, but with the same stock. The second purchase could be at a higher strike price, or at a lower price. The key would be that for one reason or another, there are two different strike prices in the same portfolio.
THE PURPOSE: The purpose of this strategy is to maximize the gain on a position that is being closed, by switching the option that the stock is covering. Keep in mind that as far as the brokerage firm is concerned the stock holdings and the option holdings are separate entities. Yes, for many accounts, you can not hold a short call position unless you also have the long stock position, but which stock is covering which option, when there is more than one, is irrelevant. So . . . a writer wants to go back to cash with part of a position, and when all is said and done, the desire is for that 'cash' to be as large a sum as possible.
WHEN: More often than not, this strategy is going to be most appropriate when a stock is depressed in value and there are multiple positions with strike prices above the current trading price of the stock. Say stock position A and option position A are in the same portfolio with stock position B and option position B. The stock is the same, just the cost basises are different. The options are different. They may be the same expiration month with different strikes, or the same strike, but different expiration.
THE PLAN: If for some reason there is a need for cash, always realize that just because a given option was established with a particular stock purchase, does not mean one always has to maintain that relation ship. The options can be switched. The reason for doing this is 'just math'. The stock is going to sell for whatever the current price is at the time. A call option having a higher strike price is always going to cost less to close than a call option with a lower strike price.
By switching the option, the writer can minimize the cash used to close the option, while receiving the proceeds from the sale of the stock. This is a simple strategy that attempts to maximize the cash available when a position is closed.
Comments, questions and opinions are always welcome . . . rlcoveru@wavecable.com
The Covered Writer
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SYSTEMATIC COVERED WRITING
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Revised: 02/05/07