Episode 22 - Plain shares vs combo with options

In "Episode 22 - Plain Shares vs Combo with Options," Koen Hoorelbeke and Peter Siks explore a practical use case comparing the benefits of buying plain shares versus combining shares with selling options premiums. This episode is essential for traders looking to optimize their investment strategies by leveraging the advantages of both shares and options.

Understanding the use case:

• Comparison setup: Evaluating the outcome of buying 300 shares of a stock versus buying 200 shares and selling a straddle.
• Focus: Stocks with high option premiums due to high volatility.

Key definitions:

• Straddle: Selling both a call and a put option with the same expiry date and strike price.
• Bullish view: Assuming the stock price will increase.

Scenarios and outcomes:

• Scenario 1 - Stock increases to $25:
  • Buying 300 shares: Higher profit due to direct stock ownership.
  • Combo strategy: Slightly less profit but involves less initial investment.
• Scenario 2 - Stock stays at $20:
  • Buying 300 shares: No profit or loss.
  • Combo strategy: Profit from the premium received by selling the straddle.
• Scenario 3 - Stock drops to $15:
  • Buying 300 shares: Significant loss.
  • Combo strategy: Reduced loss due to the premium buffer from selling the straddle.
• Break-even scenario: Calculated at $17.34, where the combo strategy neither gains nor loses.

Extreme scenarios:

• Stock doubles to $40: Buying 300 shares is more profitable.
• Stock halves to $10: Combo strategy results in a lower loss compared to owning the stock outright.

Conclusion:

• Advantages of combo strategy:
  • Provides a buffer against losses with the premium received.
  • Profitable in sideways or slightly downward moving markets.
  • Requires lower initial investment compared to buying all shares.
• Advantages of buying shares:
  • Higher profit potential in a strongly bullish scenario.

Practical advice:

• Consider using options: Enhance returns and manage risk by incorporating options into your strategy.
• Evaluate volatility and premiums: Assess the stock's volatility and option premiums before deciding on a strategy.
• Benefit in uncertain markets: The combo strategy is particularly beneficial in uncertain or moderately bullish markets.

In "Episode 22 - Plain Shares vs Combo with Options," Koen and Peter provide valuable insights and practical advice for traders to effectively use a combination of shares and options to optimize their investment strategies. Tune in to enhance your understanding and improve your trading performance with these expert strategies.