Explore Your Options  |  SEP 2004

Explore Your Options by Tom Gentile

V. 22:9 (76): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. SPLIT STRIKE CONVERSION Q: I am interested in information on implementing a split strike conversion strategy to hedge/stabilize an existing portfolio. I understand the basic strategy of buying at-the-money puts and writing out-of-the-money calls, but which contracts should I be concentrating on? One month, three months, six months out? Any help would be appreciated — sunseeker A: The strategy you describe is known as a collar: It’s a combination of a protective put and a covered call. The strategist is placing a floor on the potential losses of a stock by purchasing a put. The sale of the call helps offset the cost. However, the sale of the call will also limit the potential gains, because if the price of the underlying stock moves higher, the call may be assigned. The chance of assignment will increase as the stock moves higher above the strike price of the option and the expiration date approaches.

by Tom Gentile