Options Forum: Know Your Strategy

The minimum initial requirement for a covered call is:

1. 50% of the stock price less the proceeds from the call sold, or
2. 30% of the strike price.

So a buy-write position in ABC Corp. in which you bought shares and sold the January $30 call on a 1:1 basis would require ($30 x 0.50) - $3.50 = $11.50, or $1,150 per 100 shares covered. (Again, because the latter formula results in just a $900 requirement, the first formula applies.)

The maximum return on investment for this bullish position is 30%.

You also could sell the January $30 put for $3.60, which would have an initial margin requirement of $960 a contract and a potential return on investment of 37%.

Clearly, in this example, selling puts offers a better ROI.

In choosing a strategy, it is important to choose not only which position will produce the maximum gain under a given scenario but which strategy offers the best yield based on the associated costs and risks.

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