An options strategy covered in the ASX Booklet "Options: Understanding Options Strategies" is the Stock Repair Strategy.
Requirements for CML: A mildly bullish forecast. At least 1,000 shares that you are prepared to sell. Say, bought at $7.00. One bought call option at-the-money per 1,000 shares held. Say Nov 6.00 Calls at 16c. Two sold call options out-of-the-money per 1,000 shares held. Say Nov 6.50 Calls at 4c.
In exchange for having a ceiling to the maximum profit from the strategy, there is an upward kink in the payoff diagram... it speeds the profit (or less of a loss) up to the profit limit. There is no downside protection on the physical-holding side, but there is no exposure to theoretically unlimited risk on the written calls.
There is an ex-dividend date between now and expiry which could upset things a little if the sold calls go deep in the money (CML above $7.25) and are exercised. Disregarding this...
Total Cost: Bought 1,000 CML @ $7.00 = -$7,000 Buy one Nov 6.00 Call @ 16c = -$160 Sell two Nov 6.50 Calls @ 4c = +$80 Total Cost = -$7,080
If at expiry CML is $6.25: Loss on 1,000 CML = -$750 Dividend = +$120 Profit on Nov 6.00 Call = (25c - 16c) * 1,000 = +$90 Profit on Nov 6.50 Calls = +$80 Total Loss = -$460
... compared to a loss of (-$750 + $120) = -$630 without the strategy.
You are $170 better off with the strategy in place.
If at expiry CML is $6.50: Loss on 1,000 CML = -$500 Dividend = +$120 Profit on Nov 6.00 Call = (50c - 16c) * 1,000 = +$340 Profit on Nov 6.50 Calls = +$80 Total Profit = +$40
... compared to a loss of (-$500 + $120) = -$380 without the strategy.
You are $420 better off with the strategy in place.
If CML exceeds $6.50, the sold calls could be exercised... for one of the options, the shareholding of 1,000 CML could be sold at $6.50 each. The other written option would need to be closed out.
The maximum profit is $40.
GK
CML Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held