Ds Diagonal Income Gne

Dan Sheridan
Income Generation Series: The Covered Write
Sep 15, 2011

Sheridan Options Mentoring, Inc. www.SheridanMentoring.com
Disclaimer
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at www.theocc.com. The information in this presentation is provided solely for general education and information purposes. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions and other transaction costs have not been included in the examples used in this presentation. Such costs will impact the outcome of the stock and options transactions and should be considered. Multiple leg strategies involve multiple commission charges. Investors should consult their tax advisor about any potential tax consequences. No statement within the presentation should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, statistics, or other technical data is available from Sheridan Options Mentoring at www.sheridanoptionsmentoring.com. Chicago Board Options Exchange, Incorporated (CBOE) is not affiliated with Sheridan Options Mentoring or OptionNet. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation.
@ Copyright 2010. All rights reserved.
Page 2
Download The Presentation Slides!

Download these slides at http://www.sheridanmentoring.com/x/391
Page 3
Outline: Covered Write with all Options

What is the proper name? Whats a good vehicle to use? Assignment problems on the upside? Adjustments on the downside?
Page 4
AAPL Price Chart

Date: 9/13/2011 AAPL Price: $384.62
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Diagonal Example
Date: 9/13/2011 AAPL Price: $379.94
OCT(38)
Options 380 Calls 315 Calls Price IV Delta Trade 52.5 -2 $74.08 44.7% 82.7 +2 Price $18.73 38.3%
DEC(94)
IV Delta Trade
Delta Gamma Theta Vega Debit
60.4 -1.1 25.6 1.1 11,070
Page 6
Diagonal Example
Date: 9/13/2011 AAPL Price: $379.94
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Diagonal Example 20 Days in Future

OCT Expiration
20 Days in the future (Oct 3)
Page 8
What is the Proper Name?

Covered write with all options Synthetic covered write Long Diagonal Diagonal
Page 9
Whats a Good Vehicle to Use?

Stocks you would buy in your retirement account Stocks with lower beta than the market Stocks with Implied Volatility under 30 Stocks over $50 Good liquidity in the options
Page 10
Assignment Problems on the Upside

Really isnt a problem! If you do get assigned on short , just sell out long call and buy in short stock, DO NOT EXERCISE LONG CALL!! Monitor time premium of short option Time premium goes under .30 , be on alert! Dividends?
Page 11
AAPL Price Chart

Date: 5/31/2011 AAPL Price: $347.83
Page 12
Diagonal Example for Adjustments

Date: 5/31/2011 AAPL Price: $347.83
JUL(45)
Options 350 Calls 305 Calls Price $9.08 IV 20.6% Delta Trade 48.2 -2 $48.38 28.1% 82.7 +2 Price
SEP(108)
IV Delta Trade
Delta Gamma Theta Vega Debit
69.0 -2.2 9.6 -0.4 7,860
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Diagonal Example for Adjustments

Date: 5/31/2011 AAPL Price: $347.83
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Plan
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Why Adjust?
Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls Price Entry Pr $7.60 $9.08 IV 22.4% Trade -2 $45.23 $48.38 29.4% +2
AAPL Price: $343.44

Starting Price: $347.83
SEP(105)
Price Entry Pr IV Trade
Delta Gamma Theta Vega Debit Loss Loss
76.2 -2.0 9.7 12.5 7,860 335 4.26%
Page 16
Why Adjust?
Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 17
Adjust #1
Date: 6/3/2011
3 Days in Trade
Roll Down Short Strike

AAPL Price: $343.44
SEP(105)
Price Entry Trade Adj Net +1 -1 -1 -1 $45.23 $48.38 +2 +2
JUL(42)
Options 350 Calls 345 Calls 305 Calls Price $7.60 $9.88 Entry Trade Adj Net $9.08 -2
Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
After Adjusting Delta 68.6 Gamma -2.0 Theta 10.2 Vega 11.5 Debit 7,632 Loss 335 Loss 4.26%
Page 18
NOTE: Loss % based on highest Margin Used
Adjust #1
Date: 6/3/2011
3 Days in Trade
Roll Down Short Strike

AAPL Price: $343.44
Page 19
Adjust #2 Roll Down all of Short Strike

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 345 Calls 305 Calls Price $7.60 $9.88 Entry Trade Adj Net $9.08 -2 +2 -2 -2 $45.23 $48.38 +2 +2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 335 Loss Loss 4.26%
After Adjusting Delta 61.1 Gamma -2.0 Theta 10.6 Vega 10.6 Debit 7,404 335 Loss Loss 4.26%
Page 20
Adjust #2 Roll Down all of Short Strike

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 21
Adjust #3 Turn into Collar ( Buy Put)

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls 320 Puts Price $7.60 $3.20 Entry Trade Adj Net $9.08 -2 $45.23 $48.38 +2 +2 +2 +2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
After Adjusting Delta 38.0 Gamma -0.1 Theta -9.2 Vega 75.8 Debit 8,500 Loss 335 Loss 3.94%
Page 22
Adjust #3 Turn into Collar ( Buy Put)

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 23
Adjustment #4 Buy Put Debit Spread

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 305 335 315 Calls Calls Puts Puts Price $7.60 $7.00 $2.45 Entry Trade Adj Net $9.08 -2 +2 -2 -2 $45.23 $48.38 +2 -2 +2 +2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Page 24
Adjustment #4 Buy Put Debit Spread

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 25
Adjustment #5 Add Put Calendar OTM

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls 330 Puts Price $7.60 $5.40 Entry Trade Adj Net $9.08 -2 -3 -2 -3 $45.23 $48.38 $10.38 +2 +3 +2 +3 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Page 26
Adjustment #5 Add Put Calendar OTM

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 27
Adjustment #6 Add Put Diagonal

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls 340 Puts 325 Puts Price $7.60 Entry Trade Adj Net $9.08 -2 -2 $45.23 $48.38 $14.30 $2.45 -2 -2 +2 +2 +2 +2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Page 28
Adjustment #6 Add Put Diagonal

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 29
Adjustment #7 Narrow the Diagonal

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 320 Calls 305 Calls Price $7.60 Entry Trade Adj Net $9.08 -2 -2 $33.90 $45.23 $48.38 +2 +2 -2 +2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Page 30
Adjustment #7 Narrow the Diagonal

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 31
Adjustment #8 Roll Out to Next Month

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls Price Trade Adj Net $7.60 -2 +2
AAPL Price: $343.44

AUG(77)
Price $13.13 Adj Net -2 -2 $45.23 +2 +2 Price
SEP(105)
Trade Adj Net
After Adjusting Delta 67.7 Gamma -0.9 Theta 6.1 Vega -21.7 Debit 6,754 Loss 335 Loss 4.26%
Page 32
Adjustment #8 Roll Out to Next Month

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 33
#9 Take Off Spread

Date: 6/3/2011
3 Days in Trade
JUL(42)
Options 350 Calls 305 Calls Price $7.60 Entry Trade Adj Net $9.08 -2 +2 $45.23 $48.38 +2 -2 Price
AAPL Price: $343.44

SEP(105)
Entry Trade Adj Net
Page 34
After Adjusting Delta 0.0 Gamma 0.0 Theta 0.0 Vega 0.0 Debit 0 Loss 335 Loss 4.26%

#9 Take Off Spread

Date: 6/3/2011
3 Days in Trade
AAPL Price: $343.44

Page 35
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Page 36
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Page 37
Dan Sheridan
+1-800-288-9341 info@SheridanMentoring.com
Sheridan Options Mentoring, Inc.

http://www.SheridanMentoring.com/
Page 38

Ds Diagonal Income Gne

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Dan Sheridan

Income Generation Series: The Covered Write

Sep 15, 2011

@ Copyright 2010. All rights reserved.

Download The Presentation Slides!

@ Copyright 2010. All rights reserved.

Outline: Covered Write with all Options

@ Copyright 2010. All rights reserved.

AAPL Price Chart

@ Copyright 2010. All rights reserved.

Delta Gamma Theta Vega Debit

60.4 -1.1 25.6 1.1 11,070

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

Diagonal Example 20 Days in Future

20 Days in the future (Oct 3)

@ Copyright 2010. All rights reserved.

What is the Proper Name?

@ Copyright 2010. All rights reserved.

Whats a Good Vehicle to Use?

@ Copyright 2010. All rights reserved.

Assignment Problems on the Upside

@ Copyright 2010. All rights reserved.

AAPL Price Chart

@ Copyright 2010. All rights reserved.

Diagonal Example for Adjustments

Delta Gamma Theta Vega Debit

69.0 -2.2 9.6 -0.4 7,860

@ Copyright 2010. All rights reserved.

Diagonal Example for Adjustments

@ Copyright 2010. All rights reserved.

@ Copyright 2010. All rights reserved.

AAPL Price: $343.44

Delta Gamma Theta Vega Debit Loss Loss

76.2 -2.0 9.7 12.5 7,860 335 4.26%

@ Copyright 2010. All rights reserved.

AAPL Price: $343.44

@ Copyright 2010. All rights reserved.

Roll Down Short Strike

NOTE: Loss % based on highest Margin Used

Roll Down Short Strike

@ Copyright 2010. All rights reserved.

Adjust #2 Roll Down all of Short Strike

AAPL Price: $343.44

NOTE: Loss % based on highest Margin Used

Adjust #2 Roll Down all of Short Strike

AAPL Price: $343.44

@ Copyright 2010. All rights reserved.

Adjust #3 Turn into Collar ( Buy Put)

AAPL Price: $343.44

NOTE: Loss % based on highest Margin Used

Adjust #3 Turn into Collar ( Buy Put)

AAPL Price: $343.44

@ Copyright 2010. All rights reserved.

Adjustment #4 Buy Put Debit Spread

AAPL Price: $343.44

NOTE: Loss % based on highest Margin Used

Adjustment #4 Buy Put Debit Spread

AAPL Price: $343.44

@ Copyright 2010. All rights reserved.

Adjustment #5 Add Put Calendar OTM

AAPL Price: $343.44

NOTE: Loss % based on highest Margin Used