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Return to Option Strategies

Who should consider this strategy?

• An investor that is moderately bullish on a XYZ Stock.
• An investor that has some stocks, and would like to enhance its returns.
• An investor that likes XYZ stock, even if XYZ loses some value from here.

This is a strategy that allows an investor to receive premium income and at the same time agreeing to double his stock position in the event of a price drop on the XYZ stock.

Strategy; this is a covered combination and involves three 3 steps:

1. First thing is to buy the XYZ Stock lets assume 100 shares at 40.00

2. Write 1contract out of the money Call no more the 2 strike prices, I chose 45.00 at 2.00

3. Write 1contract out of the money Put no more then 2 strike prices, I chose 35.00 at 2.00

We bought XYZ stock at 40.00 and received 4.00 in premium for writing the Call and the Put, now we own the ZYX stock for the price of 36.00 ( 40.00-4.00= 36.00)

By writing the Call at 45.00 we are agreeing to provide XYZ to the call buyer at 45.00 if the XYZ is above45.00 by option expiration. If this was what happen we would receive 45.00 for XYZ and keep the premium from writing the call and the put a total profit of 9.00 per share of XYZ stock.

If the XYZ stock stays below the 45.00 and above the 35.00 by expiration date we keep the XYZ stock and the 4.00 premium, the total profit would depend of the XYZ stock price at the expiration date.

If XYZ loses value and it is trading below the 35.00 (Lets say 33.00) level by expiration date, then 100 shares (we wrote 1 put contract this is 100 shares) of XYZ stock would be put to us at 35.00.

These 100 shares at 35.00, the original 100 shares at 40.00, now we own 200 shares of XYZ stock at an average of 35.00 + 40.00=75.00 divided by 2 = 37.50 miners the writing call and put premium of 4.00 we now own each share at 33.50 XYZ stock is trading at 33.00 in this case we are losing .50 cents per share.

We could sell the XYZ share at the market and lose 100.00 or we could do the same strategy again using different strike prices or do a covered call strategy.