Yong-Long Lai

This is an interesting one, i’ve heard about this in seminar but never thought I would have an opportunity to try it.

AAPL – Traded 23rd July 2007
Options/Contract = 100
Buy 100 AAPL @ $141.90 ($14,190)
Sell 1 AAPL 145 Calls @ $7.30 ($730)
Time Value: $7.30
Intrinsic Value: $0

Net Cost/Breakeven Point: $134.6
Premium: 5.03% ($7.30/$145)

The Trade – 25th July 2007
Buy 1 AAPL 145 Call @ $4.25 (425)
Sell 1 AAPL 135 Call @ $8.4 ($840)

This effectively moves my breakeven point to 130.45

Buy Price: $141.90
Original Call Premium: $7.3
Original Breakeven: $134.6
Profit From Buying Back Original Call: $3.05 ($7.3 – $4.25)
Adjusted Buy Price: $138.85
New Call Premium: $8.4
Adjusted Breakeven Price: $130.45

I reduced the risk by $4.15 (Lowered breakeven point from $134.6 to $130.45) at the cost of $2.75 ($7.3 – $4.55) of Call Premium. I also get $3.05 worth of profit today and the other $1.5 in a months time.

My adjusted return is 3.21% ($4.55/$141.90)