The fact that you are creating the covered call strategy (buy-write)
for commodities options trading
, by doing the vertical spread
is very important to note. For margin purposes, the vertical
spread will be margined at a much more favorable rate than the
traditional buy-write because you do not own the actual stock
for the commodities options trading and therefore do not have
as much to lose. This is especially important to investors/traders
who trade on margin.
This scenario includes another significant value added benefit
that you receive. When you purchase a spread, the most you can
lose is the amount you paid for the spread, which in this case
As you already know, the biggest risk in a covered call/buy-write
strategy is a large downward move in the stock from commodities
options trading. If you had done this trade with the actual
stock from commodities options trading and the stock from traded
all the way down to $20.00 from $60.00 (although unlikely) we
would stand to lose almost $40,000.
However, if you did the trade with the 47.5 calls in place of
the stock via the vertical call spread above, the maximum loss
is what you spent on the commodities options trading. Remember,
you purchased the vertical call spread for $10.15. If you traded
the spread an equivalent amount of times to equal 1000 shares,
you would have bought a total of 10 spreads.
The total dollar amount of your investment would be $10,150.00,
as opposed to $58,900 had you bought 1000 shares of Amgen outright.
Your loss will be maximized at $10,150 if the commodities options
trading ventures traded down to $20.00 as opposed to a $38,900.00
loss in the case of outright stock ownership. Even if the stock
were to trade down to $0, your maximum possible loss would still
This is because once the commodities options trading goes below
$47.50, the December 47.5 calls become worthless thus the calls
can not lose any more money no matter how much more commodities
options trading ventures trades down.
In order to continue or roll this position, you will have
to roll two options into the next month instead of one. In a
traditionally structured covered call strategy (long stock,
short call), you are dealing with only one option series.
However, in the commodities options trading replacement strategy,
you have a second option series (the call you purchased to replace
the losses during your commodities options trading) to roll
into the next month. This may incur an additional commission
but the commodities options trading
is obviously well worth
it when you look at the previously stated risk/reward scenario
and the size of the capital outlay needed to initiate the position.
Conclusion: As we detailed here, the stock replacement version
of the covered call/buy-write strategy is an example of the
proper use of option leverage. It offers the investor a bigger
percentage return, less risk and less capital requirement than
the traditional covered call/buy-write strategy.
Anytime you are interested in a high dollar stock, first look
to see if there are any deep in-the-money calls that fit this
replacement scenario and evaluate if this might be a better