How to compute current value of the portfolio?

A lot of you have asked about how I intend to compute value of the portfolio at any given time. I will use a very simple method to determine that.

Let me explain:

At any point of time, the portfolio has some free cash and a list of currently open trades. The value of the free cash stays the same for determination :). Now, each trade is of the following nature:

1. Buy XYZ stock
2. Sell equivalent number of calls on XYZ stock.

The value of this trade would be the cost incurred to close it (at the current time) Closing this trade would mean:

1. Selling XYZ stock
2. Buying an equivalent number of calls for XYZ stock
   

As usual, I will consider conservative points of the bid-ask spreads for both of these legs. In reality, a better price point may be reached by appropriately placing limits on the orders.

Does this sound good? Do you have any better ideas to measure the value? I would love to hear from you. Please either leave a comment or send me an email in case you have any further suggestions.

About this blog & Disclaimer

This blog is intended to serve as a journal for my experimentation with options (derivatives) based trading. I am new to this and want to learn more about this fascinating financial instrument. In my opinion, the best approach for this is to do it yourself, but with hypothetical money

So, for this blog I will assume

1. Initial capital of $1,000,000.
   
2. My experimentation will only involve selling (writing) short term, deep in the money covered calls.
   
3. No individual position will exceed $25000.
   
4. To keep things simple, I will assume no transaction costs. In reality, these costs are a function of your brokerage house and/or number of traded options/shares.

At the end of every month (or possibly 2 weeks), I will write about performance of this portfolio and compare it with standard indexes for evaluation. I will also make all trades available (at some point in the future) in a much nicer format (like a spreadsheet).

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options trading is inherently risky and can have weird tax implications. Be sure to consult your tax advisor for the same. You may want to find more information about options trading using various search engines like Google, Yahoo etc.

Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.