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Writing covered calls is an excellent way to use options in a low risk way, to generate additional income on your existing portfolio of shares. If you buy shares at the same time that you write the calls then the transaction is known as a buy-write. If you write calls on shares

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

you already hold then it is called an over-write. The covered aspect comes from the fact that you own the underlying stock or share. If the contract is exercised then you have the underlying goods to fulfil the contract ( like the car in our first example). There is another ty

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

e of call writing called naked. NEVER, EVER write naked calls - you are exposing yourself to UNLIMITED RISK.

The first technique is called over writing, so let's take a look see how it works. Before we start there is one difference between UK equity options and US equity optio

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

s. In the UK one option contract relates to 1000 shares, but in the US one option contract relates to 100 shares of stock.

Imagine you have a portfolio of shares that you have held for some time and these are mainly UK 'blue chip' companies. One of your shares is British Airwa

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

s which you have held for some time, and you have 1500 shares bought at 200p. The market price at the moment is 365p per share. It is June and you decide to look at the current option chain for the next expiry period which is September. The option expires on the 15th September.

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

You look at all the strike prices available and see that there are contracts at 330p, 360p, and 390p. You check the premium of the contract at 390p and see that the premium is currently 16p. You decide to sell ONE contract for which you receive a premium of 1000 x 16p = ?160.

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

the premium is multiplied by the number of shares for one contract i.e. 1000). Please note - you still have 500 shares left in your portfolio as you do not have enough to write a second contract. You have now sold 1 contract which obligates you to supply 1000 BA shares at 390

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

p on or before the 15th September (Amercian Style Contract) to the owner of the contract if exercised in the period. In return for this you have been paid a premium of ?160 which is yours to keep whatever the outcome of the contract. OK - lets look at the possible outcomes of

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

his contract as follows:

Outcome A - the company becomes a takeover target and shares jump to 520p

In agreeing to the contract at 390p per share, you have lost out on the takeover news and have missed the opportunity of 'making' 1300 (130 x 1000) on your share holding. This i

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

the downside of writing a call option on your shares, that you could miss out on a rise in prices during the contract period. This is undoubtedly true, however there is no guarantee that you would sell your shares at this point, in other words it is only a paper profit had you

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

kept them. The ?1300 lost 'opportunity' profits are offset by the premium you have received to ?1140.

Outcome B - the share price falls to 295p as competition increases in the industry

The price has fallen during the period, and the contract expires. Whilst the price has decl

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

ned by 65p, this is partly offset by the premium you have received, reducing your 'paper loss' to 49p per share. You still retain your shares and any future dividends.

Outcome C - the market is quiet and the share price closes at 390p

You have made a small 'paper profit' here

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

and a real profit of ?160.You have kept your shares and any future dividends. The reason you would probably keep your shares is that with dealing costs etc it would not be worthwhile for someone to exercise, although you can never be sure. I have been exercised when the strike

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

and market price close at the same price, but I have also been left unexercised with prices very slightly above the strike. It depends how your broker closes out positions and reconciles their contracts - sometimes you may be lucky, other times not.

Now, with B and C, you stil

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

l retain your shares so what might you do? - write another call to earn some more income. You look to the next series (probably Dec) and write another option earning more income. With B, where the share is now trading at 295, you might look for a strike at 320 - 340, and with C

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

probably around 430 - 440. And so on, until on one contract you will be exercised. The most options I have written on the same block of shares is 4! Finally on the 5th contract the price went up and I was exercised. Please remember it is possible to write a contract so that yo

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

have built in a loss. Suppose you purchased some shares for 250p which then declined in price , and you wrote a contract at 225p with a premium of 10p. If it was exercised you would be receiving 235p (225+10) for shares you had paid 250p. Now, on occasion I have done this deli

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

erately where I wanted to get rid of the stock for some reason. PLEASE DON'T DO THIS BY ACCIDENT. There are lots of packages around that will give you a graphical display of the breakeven point - most of these are free.

Finally, I mentioned dividends a couple of times above. N

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

turally, whilst you hold the shares you receive any dividend payments from the company. You should be aware when dividend payments are due for two important reasons. Firstly you may decide not to write an option as a dividend is payable in the next few weeks and you decide to w

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

it. Secondly If you do write a call and a dividend is due shortly, the likelihood of exercise is much higher right before a dividend payment. The perfect outcome of course is where you keep your shares, your premium, and a dividend is paid during the contract ! - it does happen

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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