Case Study : Microsoft
Snap Shot of MSFT Stock and Option Prices on 06th April 2018 (IB TWS Screen)
MSFT: On 06 April 2018, Stock Price = $ 90.00 , Volatility Index= VIX = 21.5,Earnings 26 Apr 2018
Scenario 1: Cash Account:
Buy MSFT 100 Shares at $ 90 = $9000.00 (Invested Capital)
Sell MSFT May04’18 $90 Call 1 contract = 3.40*100= $ 340.00 ( expiry time 1 Month )
Monthly Premium $340 at strike ATM ( At The Money) No Intrinsic Value and All time money.
Cash Flow % = $ 340 / $9000 = 3.7% per month = 45% Annual Return
Scenario: 2 : Margin Account ( 30% Your Money and 70% Broker Money at 2.5% Interest)
Buy MSFT 100 Shares at $ 90 = $9000.00 ( Your Invested Capital 30% = $ 2700.00)
( Borrowed Capital 70% = $ 6300) Interest= $13.13}
Sell MSFT May04’ 18 90 Call 1 contract = 3.40*100= $ 340.00 ( expiry time 1 Month )
Monthly Premium $ 340 at strike ATM ( At The Money) No Intrinsic Value and All time money.
Monthly Cash Flow = $ 340 – interest $ 13.13 = $ 326. 87 Net
Cash Flow % = $326.87 / $ 2700 = 12.1 % Per month = 145 % Annual Return
Scenario: 3 Option Account ( Buy LEAP and sell Covered Call )
Buy MSFT Jan 18’19 90 Call 1 contract = 8.75*100 = $ 875 ( Invested Capital for 9 Months )
Sell MSFT May 04’ 18 90 Call 1 contract = 3.40*100= $ 340.00 (expiry time 1 Month )
Monthly Premium $340 at strike ATM ( At The Money) No Intrinsic Value and All time money.
Monthly erosion of LEAP premium = $ 875/ 9 Months = $ 97.22
Monthly Cash Flow = $ 340 – $ 97.22 = $ 242.78 Net
Cash Flow % = $ 242.78 / $ 875 = 27.74 % Per month = 332.88 % Annual Return