Ds Diagonal Income Gne

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Sheridan Options Mentoring, Inc.www.SheridanMentoring.com

Income Generation Series:Income Generation Series:

The Covered WriteThe Covered Write

Sep 15, 2011Sep 15, 2011

Dan SheridanDan Sheridan



Page 2Page 2@ Copyright 2010. All rights reserved.

Options involve risk and are not suitable for all investors. Prior to buying or selling anoption, 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 forillustrative 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.

DisclaimerDisclaimer




Download The Presentation Slides!Download The Presentation Slides!

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Outline: Covered Write with all OptionsOutline: Covered Write with all Options

What is the proper name?

What’s a good vehicle to use?

Assignment problems on the upside?

Adjustments on the downside?




AAPL Price ChartAAPL Price Chart

Date: 9/13/2011Date: 9/13/2011 AAPL Price: $384.62AAPL Price: $384.62




Diagonal ExampleDiagonal Example


Options Price IV Delta Trade Price IV Delta Trade380 Calls $18.73 38.3% 52.5 -2

315 Calls $74.08 44.7% 82.7 +2

OCT(38) DEC(94)

Delta 60.4

Gamma -1.1

Theta 25.6

Vega 1.1Debit 11,070






Diagonal Example 20 Days in FutureDiagonal Example 20 Days in Future

20 Days in thefuture (Oct3)

OCT Expiration




What is the Proper Name?What is the Proper Name?

Covered write with all options

Synthetic covered write

Long Diagonal

Diagonal




WhatWhat’’s a Good Vehicle to Use?s 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




Assignment Problems on the UpsideAssignment Problems on the Upside

Really isn’t 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?




AAPL Price ChartAAPL Price Chart





Diagonal Example for AdjustmentsDiagonal Example for Adjustments


Options Price IV Delta Trade Price IV Delta Trade350 Calls $9.08 20.6% 48.2 -2

305 Calls $48.38 28.1% 82.7 +2

JUL(45) SEP(108)

Delta 69.0

Gamma -2.2

Theta 9.6

Vega -0.4Debit 7,860




Diagonal Example for AdjustmentsDiagonal Example for Adjustments





PlanPlan




Why Adjust?Why Adjust?

Date: 6/3/2011Date: 6/3/2011

AAPL Price: $343.44AAPL Price: $343.44Starting Price: $347.833 Days in Trade

Options Price Entry Pr IV Trade Price Entry P IV Trade

350 Calls $7.60 $9.08 22.4% -2

305 Calls $45.23 $48.38 29.4% +2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7

Vega 12.5

Debit 7,860Loss 335

Loss 4.26%




Why Adjust?Why Adjust?

Date: 6/3/2011Date: 6/3/2011





Adjust #1 Roll DownAdjust #1 Roll Down ½½ Short StrikeShort Strike

Date: 6/3/2011Date: 6/3/2011


Options Price Entry Trade Adj Net Price Entry Trade Adj Net

350 Calls $7.60 $9.08 -2 +1 -1

345 Calls $9.88 -1 -1

305 Calls $45.23 $48.38 +2 +2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7

Vega 12.5

Debit 7,860

Loss 335

Loss 4.26%

Before AdjustingDelta 68.6

Gamma -2.0

Theta 10.2

Vega 11.5

Debit 7,632

Loss 335

Loss 4.26%

After Adjusting

NOTE: Loss % based on highest Margin Used




Adjust #1 Roll DownAdjust #1 Roll Down ½½ Short StrikeShort Strike

Date: 6/3/2011Date: 6/3/2011





Adjust #2 Roll Down all of Short StrikeAdjust #2 Roll Down all of Short StrikeDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44

Starting Price: $347.833 Days in Trade


350 Calls $7.60 $9.08 -2 +2

345 Calls $9.88 -2 -2

305 Calls $45.23 $48.38 +2 +2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -2.0

Theta 10.6


Loss 335

Loss 4.26%

After Adjusting





Adjust #2 Roll Down all of Short StrikeAdjust #2 Roll Down all of Short StrikeDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44







Adjust #3 Turn into Collar ( Buy Put)Adjust #3 Turn into Collar ( Buy Put)Date: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44





Adjustment #4 Buy Put Debit SpreadAdjustment #4 Buy Put Debit SpreadDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44



350 Calls $7.60 $9.08 -2 -2

305 Calls $45.23 $48.38 +2 +2

335 Puts $7.00 +2 +2

315 Puts $2.45 -2 -2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -0.8

Theta 2.3


Loss 335

Loss 3.82%

After Adjusting





Adjustment #4 Buy Put Debit SpreadAdjustment #4 Buy Put Debit SpreadDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


Adj Add P C l d OTM




Adjustment #5 Add Put Calendar OTMAdjustment #5 Add Put Calendar OTMDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44



350 Calls $7.60 $9.08 -2 -2

305 Calls $45.23 $48.38 +2 +2

330 Puts $5.40 -3 -3 $10.38 +3 +3

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -3.0

Theta 14.0


Loss 335

Loss 3.82%

After Adjusting


Adj Add P C l d OTMAdj t t #5 Add P t C l d OTM




Adjustment #5 Add Put Calendar OTMAdjustment #5 Add Put Calendar OTMDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


Adj t t #6 Add P t Di lAdj t t #6 Add P t Di l




Adjustment #6 Add Put DiagonalAdjustment #6 Add Put DiagonalDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44



350 Calls $7.60 $9.08 -2 -2

305 Calls $45.23 $48.38 +2 +2

340 Puts $14.30 +2 +2

325 Puts $2.45 -2 -2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -2.2

Theta 10.1


Loss 335

Loss 3.39%

After Adjusting


Adj t t #6 Add P t Di lAdj t t #6 Add P t Di l




Adjustment #6 Add Put DiagonalAdjustment #6 Add Put DiagonalDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


Adj t t #7 N th Di lAdj stment #7 Narro the Diagonal




Adjustment #7 Narrow the DiagonalAdjustment #7 Narrow the DiagonalDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44



350 Calls $7.60 $9.08 -2 -2

320 Calls $33.90 +2 +2

305 Calls $45.23 $48.38 +2 -2

JUL(42) SEP(105)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -1.7

Theta 7.3


Loss 335

Loss 4.26%

After Adjusting


Adj stment #7 Narro the DiagonalAdjustment #7 Narrow the Diagonal




Adjustment #7 Narrow the DiagonalAdjustment #7 Narrow the DiagonalDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


Adjustment #8 Roll Out to Next MonthAdjustment #8 Roll Out to Next Month




Adjustment #8 Roll Out to Next MonthAdjustment #8 Roll Out to Next MonthDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


Options Price Trade Adj Net Price Adj Net Price Trade Adj Net

350 Calls $7.60 -2 +2 $13.13 -2 -2

305 Calls $45.23 +2 +2

JUL(42) SEP(105)AUG(77)

Delta 76.2

Gamma -2.0

Theta 9.7


Loss 335

Loss 4.26%


Gamma -0.9

Theta 6.1

Vega -21.7Debit 6,754

Loss 335

Loss 4.26%

After Adjusting


Adjustment #8 Roll Out to Next MonthAdjustment #8 Roll Out to Next Month




Adjustment #8 Roll Out to Next MonthAdjustment #8 Roll Out to Next MonthDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44




#9 Take Off Spread#9 Take Off Spread




#9 Take Off Spread#9 Take Off SpreadDate: 6/3/2011Date: 6/3/2011 AAPL Price: $343.44AAPL Price: $343.44


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Ds Diagonal Income Gne