Wednesday, March 02, 2011 5:32:18 AM
you can pick up some extra income in sideways markets but if the market moves in a big way, you could be sitting on stock with a big loss because you can't or won't sell since you have the option written against it. Not always but you can get in some weird situations.
Does that weirdness still apply if you align your AIM trades/amounts with the options trades though?
If you had an AIM set up something like the above and have a look and see that it trades 865 shares at the next sell price level, but decide to align that to 9 option contracts (900 shares) and use that setting instead, then
that just moves the sell price up from 1.161 to 1.170
Armed with that knowledge you sell 9 call options at a 1.17 strike price and leave 900 shares in the Options account to cover that should the shares be called.
Repeat a similar exercise for the buy side and sell 9 put options at ....whatever price, leaving ....$1000 or whatever the capital value of the stock purchase would be in the Options account to cover that should the shares be put to you.
I guess you'd also need to set a one cancels the other limit order after each actual trade and reset/start again using the next AIM indicated buy and sell values.
This way I suspect you could use shorter dated Options which tend to lose their premiums quicker, bearing in mind the trade trade costs involved.
This way you could near enough continually have both Put and Call Option premiums being generated from all of your AIM's (assuming they have options associated to them). Not much different than having limit orders set for each of your AIM buy and sell price levels, but that generates some additional income.
Whether the time/effort for doing this however is justifiable? Seems a maybe/maybe-not to me.
On the 'not' side - say you have 5 AIM's with $10K stock value, $10K cash each, $100K total fund. Assuming 10% of stock value type trade amounts = $1K of stock value to be bought, $1K of stock value to be sold - waiting in each AIM. If in combination the put and call options against those trade amounts generates 5% each year (as per my earlier example based on recent prices) premium then that in effect amounts to 5% x $1000 = $50 x 5 AIM's = $250 or around 0.25% relative to the total fund value. Which is little different to earning 5% income on the cash sitting in each account in lieu of each potential next AIM buy trade. Hardly worth the bother when compared to perhaps just investing all of cash in something else (and less intense), and just settling AIM trades in the normal T+3 manner.
On the 'maybe' side, that 5% against a 7 month Option might be a relatively low premium. In more volatile times and using shorter dated Options traded more frequently that might perhaps be raised to 10% or maybe even 20% type amounts (just guessing here). If so then earning 10 or 20% against 5% of your total fund value would be better than what that cash would earn elsewhere. But again its a relatively little amount compared to the whole (maybe uplifting total fund value by 0.5% to 1% type amounts).
Does that weirdness still apply if you align your AIM trades/amounts with the options trades though?
If you had an AIM set up something like the above and have a look and see that it trades 865 shares at the next sell price level, but decide to align that to 9 option contracts (900 shares) and use that setting instead, then
that just moves the sell price up from 1.161 to 1.170
Armed with that knowledge you sell 9 call options at a 1.17 strike price and leave 900 shares in the Options account to cover that should the shares be called.
Repeat a similar exercise for the buy side and sell 9 put options at ....whatever price, leaving ....$1000 or whatever the capital value of the stock purchase would be in the Options account to cover that should the shares be put to you.
I guess you'd also need to set a one cancels the other limit order after each actual trade and reset/start again using the next AIM indicated buy and sell values.
This way I suspect you could use shorter dated Options which tend to lose their premiums quicker, bearing in mind the trade trade costs involved.
This way you could near enough continually have both Put and Call Option premiums being generated from all of your AIM's (assuming they have options associated to them). Not much different than having limit orders set for each of your AIM buy and sell price levels, but that generates some additional income.
Whether the time/effort for doing this however is justifiable? Seems a maybe/maybe-not to me.
On the 'not' side - say you have 5 AIM's with $10K stock value, $10K cash each, $100K total fund. Assuming 10% of stock value type trade amounts = $1K of stock value to be bought, $1K of stock value to be sold - waiting in each AIM. If in combination the put and call options against those trade amounts generates 5% each year (as per my earlier example based on recent prices) premium then that in effect amounts to 5% x $1000 = $50 x 5 AIM's = $250 or around 0.25% relative to the total fund value. Which is little different to earning 5% income on the cash sitting in each account in lieu of each potential next AIM buy trade. Hardly worth the bother when compared to perhaps just investing all of cash in something else (and less intense), and just settling AIM trades in the normal T+3 manner.
On the 'maybe' side, that 5% against a 7 month Option might be a relatively low premium. In more volatile times and using shorter dated Options traded more frequently that might perhaps be raised to 10% or maybe even 20% type amounts (just guessing here). If so then earning 10 or 20% against 5% of your total fund value would be better than what that cash would earn elsewhere. But again its a relatively little amount compared to the whole (maybe uplifting total fund value by 0.5% to 1% type amounts).
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