OptionsBoxTrading.com

I found this video really helpful in understanding Options.

https://youtu.be/jwh2u_MSs7I

Case  Study : Microsoft

Snap Shot of MSFT Stock and Option Prices on 06^th 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