Lux Investing - What do you call this investing strategy?

What do you call this investing strategy?

This seems to be a fool proof way to make 15-30% a year with no risk of principle...show me the error of my ways! What would you call it if an investor buys 1000 shares of company XYZ at $75 and at the same time shorts 1000 shares of XYZ at $75 while writing 10 of the nearest out-of-the-money calls and pockets the money on the calls with no risk to his principle? How could there be any possible downside to this transaction? If the stock goes up or down, the investor cannot gain or lose money on the common stock because his net position (both long and short 1000 shares) is neutral. How could the possible profit be less than the gain on writing the calls minus the combined commissions on the sale and purchase of the 1000 shares of common stock and the commission for the selling (writing) of the 10 calls? Am I missing something here? Why isn't everyone doing this...other than they might not have $150,000 to purchase and short 1000 shares of a $75 stock?

Public Comments

There are actually two drawbacks to your strategy: 1) The return you'd likely make on your $150,000 investment is likely to be significantly less than 15-30%. For example January '09 options for LabCorp (an $81.05 stock) with a strike price of $85 currently have a bid (what you get paid) of $8.60. That's $8,600, or a 5.3% return between now and 2009 on $162,100. The second drawback is that if the stock goes up substantially you could actually lose money. For example assume the company goes to $100 by Jan 2009. Having shorted 1,000 shares of the stock at $81.05 you'd have lost $18,950 on your short position. Unfortunately you'd have also have to sell your 1,000 shares long shares at $85, so you'd only make $3,950 on your long position. Unfortunately $8,600+$3,950-$18,950= ($6,400) Now for the record I actually like selling calls on stock I own-- I just hold them on long positions. Find stocks you like and sell short term, out of the money calls and you can significantly augment your regular stock returns.
When you buy 100 shares and at the same time sell the same 100 shares you sit there with nothing. they cancel each other out. so you have 0 shares and you sit there with a naked call. option trading is not that simple
I you could lose a great deal of money (theoretically an unlimited amount) if the stock rapidly goes up above $75. Since you sold calls at $75, you won't profit from any move in the stock above $75 (it would be called away at $75, no matter how high it went). However, the value of your short position could go down infinitely as the stock price goes up. In effect, you aren't much better off than you would be in a naked short position.
Instead of being risk free, this is an EXTREMELY DANGEROUS approach which you can lose everything. Long stock + short stock = 0 Short call = lose an unlimited amount of money if the stock stages a rally. You need to polish up on your option trading fundamentals... please RUSH DOWN TO http://www.optiontradingpedia.com NOW! .