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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.

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Download The Presentation Slides!


Download these slides at http://www.sheridanmentoring.com/x/391

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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?

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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

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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)

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What is the Proper Name?


Covered write with all options Synthetic covered write Long Diagonal Diagonal

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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

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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?

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AAPL Price Chart


Date: 5/31/2011 AAPL Price: $347.83

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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%

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Why Adjust?
Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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Adjust #1
Date: 6/3/2011
3 Days in Trade

Roll Down Short Strike


AAPL Price: $343.44
Starting Price: $347.83
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%
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After Adjusting Delta 68.6 Gamma -2.0 Theta 10.2 Vega 11.5 Debit 7,632 Loss 335 Loss 4.26%
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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
Starting Price: $347.83

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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


Starting Price: $347.83
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%
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After Adjusting Delta 61.1 Gamma -2.0 Theta 10.6 Vega 10.6 Debit 7,404 335 Loss Loss 4.26%
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NOTE: Loss % based on highest Margin Used

Adjust #2 Roll Down all of Short Strike


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 38.0 Gamma -0.1 Theta -9.2 Vega 75.8 Debit 8,500 Loss 335 Loss 3.94%
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NOTE: Loss % based on highest Margin Used

Adjust #3 Turn into Collar ( Buy Put)


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 34.2 Gamma -0.8 Theta 2.3 Vega 45.2 Debit 8,770 Loss 335 Loss 3.82%
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NOTE: Loss % based on highest Margin Used

Adjustment #4 Buy Put Debit Spread


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 60.7 Gamma -3.0 Theta 14.0 Vega 66.5 Debit 9,354 Loss 335 Loss 3.82%
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NOTE: Loss % based on highest Margin Used

Adjustment #5 Add Put Calendar OTM


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 35.8 Gamma -2.2 Theta 10.1 Vega 64.7 Debit 9,884 Loss 335 Loss 3.39%
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NOTE: Loss % based on highest Margin Used

Adjustment #6 Add Put Diagonal


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 58.2 Gamma -1.7 Theta 7.3 Vega 35.3 Debit 5,594 Loss 335 Loss 4.26%
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NOTE: Loss % based on highest Margin Used

Adjustment #7 Narrow the Diagonal


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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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


Starting Price: $347.83
AUG(77)
Price $13.13 Adj Net -2 -2 $45.23 +2 +2 Price

SEP(105)
Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 67.7 Gamma -0.9 Theta 6.1 Vega -21.7 Debit 6,754 Loss 335 Loss 4.26%
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NOTE: Loss % based on highest Margin Used

Adjustment #8 Roll Out to Next Month


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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#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


Starting Price: $347.83
SEP(105)
Entry Trade Adj Net

Before Adjusting Delta 76.2 Gamma -2.0 Theta 9.7 Vega 12.5 Debit 7,860 Loss 335 Loss 4.26%
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After Adjusting Delta 0.0 Gamma 0.0 Theta 0.0 Vega 0.0 Debit 0 Loss 335 Loss 4.26%

NOTE: Loss % based on highest Margin Used


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#9 Take Off Spread


Date: 6/3/2011
3 Days in Trade

AAPL Price: $343.44


Starting Price: $347.83

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2-Week Free Trial See Whats on the Other Side


Take the risk out of joining our mentoring by trying it for 2-weeks for free! Dan pioneered option mentoring and has the most robust program with the best support to help you learn and continue to grow as a trader. See for yourself how we can help take your option trading to the next level.

Sign up for your 2-Week Free Trial Call 800-288-9341 to get started!

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Upcoming Seminars
Real Trading with Dan Sheridan 9/29 Chicago, IL Join Dan Sheridan, Jim Bittman, Marty Kearney, Peter Lusk or Russell Rhoads, Instructors at CBOE's Options Institute, when they explore ways to realize consistent income from your "off-floor" options trading. To register: Call Barb Kalicki at 312-786-7819 Mention this webcast and receive a $150 discount!

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Dan Sheridan
+1-800-288-9341 info@SheridanMentoring.com

Sheridan Options Mentoring, Inc.


http://www.SheridanMentoring.com/

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