Sell-Writes & Unwinds

Of the kinds of multi-legged orders that can be placed ‘as a package’ using this feature, sell-writes and unwinds are unique in that one leg of the trade is for an option, the other is for an equity. Because the option leg trades on an option exchange and the equity leg on a separate, equity exchange, the circumstances in which the ‘Net’ price indication will be better than the prices for the separate legs combined will be uncommon. (Please note the indicative prices are not firm quotes and may not be available when an order is sent for execution.)

Sell-Write

In a Sell/Write, an investor sells a stock short, and simultaneously writes puts against it. If the puts expire out of the money, the investor will have collected the premium of the option – he is effectively generating income against his short position. Additionally, the investor will participate in any drop in the security down to the strike price of the option. If the option expires in-the-money, it will be exercised and the investor will have to buy back his shares at the option strike price. On the upside, the underlying security has to rise further than the collected premium before money is lost, so the written put also provides a limited amount of upside protection.

This strategy is different from covered put writing only in that the investor does not have a short position in the security prior to selling the option contracts; rather they are done at the same time.

For use when investor anticipates:

• Flat to Slowly dropping market

Financial Characteristics:

• Maximum Loss: Stock price – premium for written put. In addition, investor has opportunity cost of stock dropping below the strike price of the put
• Maximum Gain: Put premium plus stock decline down to the strike price of the put
• Cash credit from put premium

Objectives:

• Modest risk mitigation and income generation

EXAMPLE (Sell-Write)

Currently, XYZ trades at $25/share. An investor would like to participate in some of the downside movement in the stock and generate additional income at the same time. Using the Sell-Write strategy, the investor sells the stock (100 shares) and sells one out-of-the-money put ($20 strike price) for $3.00 per contract, for a total cash credit of $300.00. If the stock declines below $20.00/share, the total gain is capped at $800.00. The stock must rise above $28 (the breakeven price) before the investor loses money, so the short put provides limited upside protection.

Unwinds

Unwind is the term used to refer to the order that closes out the positions opened in a buy-write or sell-write strategy. The unwind for the example in sell-writes above would be to buy XYZ and to ‘buy to close’ the $20 short put. Unwinds should be viewed more as a closing transaction than as a true option trading strategy.

Commissions, taxes, and transaction costs are not included in any of these strategy discussions, but can affect final outcome and should be considered. Please contact a tax advisor to discuss the tax implications of these strategies. Many of the strategies described herein require the use of a margin account. With long options, investors may lose 100% of funds invested. In-the-money long puts need to be closed out prior to expiration, since exercising them could create short stock positions.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg options strategies will involve multiple commissions. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Member SIPC