Options, understandings and tacticsAlan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
$1100 on 18.7k in 3 wks if it gets called away. Excellent !
…and no losses unless it drops below $ 164. Don’t need to be as worried about a minor correction.
HN or anyone else who might be able to advise, do you have any thoughts on purchase of a GILD Jan 2017 100 call? I want to get back 100 shares which I sold from my holding a few weeks ago (for a bit of a profit but just before the price really shot up, of course!) and have come to the conclusion that if I do it this way I can probably make more than I would if I simply bought the stock now. I’m looking at it very simplistically and not really paying attention to technicals such as volatility etc ie on the basis of picking a call which has a strike price which is unlikely (famous last words) to be higher than the share price at expiry, and has a purchase price -around $31-$32 which leaves me with sufficient funds to make a better return over the next 18 months than the dividends which I would receive on the shares. Any advice would be much appreciated, thanks
My opinion on GILD is nothing more than direct reflection of Doc’s recommendation. Otherwise I really have no independent opinion on this stock.
But since we are both bullish in sentiment regarding GILD, I do feel I can offer an independent opinion on your option question. My overall experience BUYING options, is that I lose way more often than I win. Since you are already long, but looking to acquire more, I would suggest SELLING calls for income, or SELLING puts to acquire more GILD at favorable entry price.
There are many expirations dates and strike prices, but for the sake of illustration
let’s look at short-term, at-the-money options. GILD closed at $120.23 today.
SELLING THE PUT to acquire more shares or improve entry: You can sell a 24th July $ 120 PUT option. Since you are taking on the possibility of being required to buy at $ 120, you’ll need to hold free cash of $ 12,000. The closing bid/ask on the put options was 2.80/3.05, so you could expect to realize say $ 2.90 per share, so bingo $ 290 cash goes to you on sale of the option. Here’s what can happen:
If GILD stays above $ 120 between now and July 24th, the option will expire worthless and you pocket the $ 290. That is a 2.4% return in one month on the $ 12,000 you had to keep inactive. Not bad.
If GILD drops below $ 120 between now and July 24th, you may be assigned the stock and have to pay $ 120 per share. But you have $ 2.90 in hand from selling the put, so your effective cost of acquisition is $ 120-2.90= $ 117.10. You must decide whether acquiring more GILD at $ 117.10 between now and July 24 is a satisfactory outcome for you.
The possible distress with the strategy: If GILD drops way down before July 24, your short put will be a loser, you will have to cover it or accept assignment. But you were going to lose on GILD anyway as a straight long, and the put premium will cut your loss by 2.90 per share.
SELLING GILD CALLS for income: GILD July 24 $ 120 calls closed $ 3 bid, $ 4 ask. Let’s suppose you can get 3.50 and sell a call against your stock.
You get $ 350 right away, which is 2.9% of your stock value. This seems OK.
If GILD stays over $120, your stock will be called at $120. But you have the $3.50 premium. You miss out on any GILD appreciation over $ 123.50.
If GILD drops below $ 120, you have the 3.50 to console yourself. Essentially you are insured against a drop in GILD value, down to 116.50. Any losses on your GILD stock are cushioned by $ 3.50 per share.
These two actions are really different. Whether you employ one or both of them depends on your outlook, objectives, and short-term opinions, if you have them. From what you have said, I think that selling a put is a good way for you to try acquire more GILD, as it will help you get a better entry. Selling a covered call will generate dividend-like income from your existing position. If you have the stock and sufficient capital, there is no reason you cannot use both strategies at the same time…Your stock covers the call,
and your cash covers the put.
Hi Cyndy,
I did take a look at the January 100 calls, they closed 22.50 bid 22.80 ask.
The time premium does seem low for a stock that we like. We are getting six months’ possible price appreciation for less than $ 3.00. So I might be tempted to buy such a call for the ability to acquire more GILD or to speculate. It is a reasonable strategy, but of course it will have a more dramatic loss if there is a market correction and GILD drops.
Thanks for the suggestions HN, they all make sense to me. I’m a bit betwix and between just now as my GILD shares were in my TDD account, which doesn’t offer options but I’ve just sold them and intend to transfer the cash to IB as soon as the sale settles, then buy them back and look at selling covered calls. Im still thinking about buying a longer term call to add more Gild to my holding , for me at the moment that’s preferable to selling puts or buying the stock just now as I’ve just been assigned on an ESPR put and expect possibly to be assigned on another next month. I also need to have a further think about where it might be reasonable to expect GILD to be in another year to 18 months
If you’ve been assigned, you can sell covered calls against the new stock.
If you feel some indigestion with the stock, sell in-the-money or near-the-money calls, you will get time premium profit if the stock is called away. Otherwise you are super-long ESPR,
which might not be a bad thing.
Hi HN et anyone:
I’m options curious, and your explanations are very v helpful and easy to follow. I am somewhat beginning to understand but not really……May I indulge you or anyone who has the time as I would be very grateful for your guidance if you are so able.
Much appreciated!!
In hoping there are other Gummeri in the green on HALO call options (15Jan 16 @15 are mine)…..and wondering how to protect my profits without actually taking them.
Im presenting a scenario continuing with the 15Jan16 options chart…
I paid $3.40 for the option to buy $HALO at $15 now bid at $8 = $4.60 profit X 100
If I sell (write) a 15Jan16 $25 Call at the bid of 2.20 = $2.20 profit X 100
If Halo goes up I have $6.80 per share now. If Halo goes down I still keep the $2.20 which brings my call cots down to $1.20
Worst case scenario is if HALO is over $25 I may have to sell them the shares at $25 which means I might have to purchase them at $15 through the call option I own, yes?
Cost me $15 to buy 100 shares = 1500
plus cost of Call + 341
less Call sold – 220
plus $25 per share 2500
= 100 shares of HALO $16.21 per share
Worst case: If HALO is trading above $25 per share, and although I paid $16.21 for the shares I am getting $25 so I would stand to gain $9.79 per share less trading costs?
Put scenario:
Sell 15Jan16 $25 put at bid for 4.50 = profit of $4.50 less call option bought cost of $3.40 = $1.10 X 100 ( almost the same profit)
Worst case I have to buy shares at $25…..does my original Call option help? Why wud I want to risk buying shares at $25 when I can buy at $15 with original call option purchase?
It would seem that selling a Put makes more sense when the outlook for $HALO is positive Lterm……but not if you already own an in the money call option, it would make more sense to sell a call.
Am I out to lunch or getting it somewhat? I feel I better eat some cooling watermelon as the brain is steaming and needs a rest. perhaps a fresh apple cider.
Conclusion: Options can be tricky when not so schmardt!
Hopefully: No one is shaking their head in dismay or LTAO.
Thank you for your patience!!
Lulu
Long $HALO option
Hi Lulu,
I’m not exactly sure what your position is, sounds like you are just long the call..if so then yes, you have purchased the right, but not the obligation, to buy Halo at $ 15 anytime between now and Jan 16, and your cost is what you paid for the option. If you exercise you have to put up the strike price of the stock. So sounds like your cost basis if you exercise is $ 18.40 ($15 +3.40) plus commission.
If you are long the Halo Jan $15 call and like the profit because it is now worth $ 8, just sell the call. Since you are deep in the money and bullish on the stock, I suggest you pick your own price, maybe by splitting the bid/ask. You don’t have to accept the $ 8 bid price, since it doesn’t sound like you are under pressure to sell. Of course you can also let the option ride if you think Halo is going to continue to go up…then you’ll have a home run.
If you want to insure some profit still keep some upside on Halo, you can use a portion of the proceeds from your sale to buy another, cheaper call. So some cash stays with you, and you have rolled forward your bullish long call position.
On selling Halo puts, I suggest you not confuse this transaction with your existing position on the long stock and covered call. Just keep them separate in your mind, you’ll start going batty otherwise. I suggest you consider the sale of Halo puts to generate income, if you think Halo is going up and you think the puts will expire worthless; or sell short-term near-the money puts to try to acquire more Halo at advantageous prices.
Don’t sell the put unless you are really prepared to have the stock put to you at the strike price. Remember, the buyer you sold to is the one holding the put option, it is his right to sell to you AT ANY TIME PRIOR TO EXPIRATION DATE. So if you sell a put with a strike above the current stock price, the next day you might be subject to an exercise !
Let me know if this answers your question. I’m glad you are profitable on the naked call, but be careful, you can get blown out pretty fast if the stock goes down.
Long $HALO
Hi Lulu, just a gentle reminder that I my recommended strategy is mainly to sell covered calls on mid-cap, volatile stocks. It is very exciting to sell naked options, and people do profit, but most of the options sold expire worthless. This means that, on the whole, selling options is a more consistent profit strategy than buying them.
Hello, Lulu, I don’t think you’re out to lunch atall, though coming from me that’s not a ringing endorsement! It sounds as though we’re both at the same stage in the options learning curve, working from 1st principles in trying to apply what we’ve learnt and needing reassurance that the solutions we come up with are not totally daft. Funnily enough, you’ve touched on something I’ve just started to think about in the last few days , in relation to selling calls. I’ve really just assumed that you would always want the call to be covered by actual stock which is why I’ve been going through hoops to get my US stock holdings transferred from my present broker, who doesn’t do options, to IB, who do. Its turning in to a marathon though and I’ve been thinking I would have to buy more stock through IB to let me sell covered calls in the meantime. This seemed a bit counter-intuitive to me though as I thought one of the benefits of options was not needing to tie up as much capital as buying the actual stock would entail. My lightbulb moment came when I came across a short article called “Bull Call Spread: An Alternative to the Covered Call” which basically talks about buying a call instead of the stock itself. I see from the fact that you’re looking at the possibility of having to exercise the call you own to cover the call you’re thinking of selling that you had already figured this out .Here’s the link to the article though , just in case its of any use to you – http://www.theoptionsguide.com/bull-call-spread-instead-of-covered-call.aspx (sorry , I can’t get it to work as a hyperlink).
All the best, Cyndy
Oh, I did get the hyper-link to work!
Cyndy: This sounds v interesting. Is it available for all stock or just the optionable ones. Sorry, I dont understand it yet.
Hi gang,
couple things I would pay attention.
First liquidity rules with options play, make sure the options traded there is enough volume. You may get stuck, beyond repair, if the volume is low. I personally wouldn’t touch underlying where less than 500,000 are traded daily, Personally stick with 50 most liquid underlying.
Second, spread should be penny wide. As retail investor we can’t fight the spread, can’t afford to hold inventory, too capital intensive.
Third, keep eye on implied volatility. Around 70% of the time actual is lover than implied.
Forth, remember about 2/3 of the options expire worthless. So there is time to sell and time to buy. Particularly sell the premium is when IV is high, above 50%.
Look earnings seasons it provide plenty of opportunities to sell premium.
Cheers.
You’re right on liquidity. I’ve had options in the money that could not be closed out at a decent price, had to exercise and then sell the underlying stock to realize the intrinsic value.
As far as expirations…I read some time ago that an even higher percentage than 2/3
of options expire worthless. I suppose this percentage can vary quite a bit by stock and over time. . But it changed my thinking, because if most options expire worthless it means that the profitable trade is to SELL options, since the writer of the option gains when the option expires worthless. This relatively little known fact is not promoted by newsletter pundits or the vast majority of advisory services. I am reminded of the Wall Street adage, “Those who know, don’t tell. Those who tell, don’t know.”
The relative silence on this strategy is one reason I am convinced it is correct. The crowd
buys calls and puts for speculative leveraged gains; but it is a losing game on average.
The smart money grinds out the profit with low risk, month after month, with covered calls. Not very exciting, but it wins. It’s like a football team that moves the ball down the field four yards at a time, versus the exciting big play offense that makes a big gainer for the highlight reels once a while, but has lots of incompletions and interceptions.
Hello,Taito,thanks. At the moment I feel as if I’m wading through treacle, trying to understand premium, the importance of volatility (or even just exactly what it is) and so on.
Hi Benny, see post 10 above. If you still are a little foggy the process
I’ll be happy to clarify best I can.
Not all stocks are optionable, and fewer have options that are suitably priced, and even fewer have reasonable bid/ask spreads. So the situations where I would use them are pretty limited.
Also for basics see post 44 on May 30th.
Cyndy has just zoomed past me with bull call spreads. She’ll be jabbering with
Larry pretty soon. I just do covered calls and cash secured puts.
Benny,HN I stumbled across the article about bull call spreads (they could have called them pig shout spreads and I would have believed them), the only thing I managed to grasp was that in their simplest form – buy a call (cheap) at the right price instead of stock ( expensive) ,then sell a call at the right price- they SEEM to be a more cost -effective equivalent (just about) to selling covered calls. That’s the sum total of my knowledge, I don’t know any of the detail but I’m going to try to find out more.In my mind I have them down just now as selling covered calls without owning the stock but no doubt it won’t be that simple! Another article I’ve just come across called ” Trade The Covered Call – Without The Stock” – http://www.investopedia.com/articles/optioninvestor/10/covered-call-no-stock.asp – talks about a variation (different expiration dates) on the same theme but I haven’t been able to get to grips with that yet either
Hi Cyndy, to sell naked calls (uncovered) you will need an extra level of options approval from your broker. The potential losses are high if the stock spikes upwards. This outcome is
not a problem if you are long the stock, you are “covered”.
I find I am able to lose enough money on the one-legged options.
Pefer to sell the covered ones.
Hi Cyndy, to sell naked calls (uncovered) you will need an extra level of options approval from your broker. The potential losses are high if the stock spikes upwards. This outcome is
not a problem if you are long the stock, you are “covered”.
I find I am able to lose enough money on the one-legged options.
Prefer to sell the covered ones.
Is the risk not the same as in a covered call HN? I’ve not fully got my head round it yet but if I buy a call at a lower strike price than I sell at does that not mean that if the call which I’ve sold is exercised I can always exercise the call option which I bought ie is it not that there is just an extra step in the process, exercising the call?
Cyndy: Not that I know much about options, but it sounds a bit like your trying yto run before youve learned to walk.
Cyndy, the risk is quite a bit lower for a bull call spread than for covered call selling — if by risk you mean the amount of money you might lose, because you don’t own the stock so you don’t suffer as much if it takes a 40% fall overnight. Assuming, of course, that you keep the exposure to the same number of shares — so you buy one call instead of buying 100 shares, then sell one call, you make a smaller capital commitment because you don’t buy the underlying stock. The income will also be less, because you’re buying premium (time value) as well as selling it, and if it happens to be a dividend paying stock you’ll miss out on the dividends. It would take more work to win consistently with bull spreads than with “blue chip” type covered call selling, in my estimation, and the volatility in your portfolio would be much higher — in my experience, the risk in options trading is for folks who get used to winning and keep upping their bets, you need discipline and consistency to make it work because the individual gains are fairly low but the losses, though usually rare, can be more substantial — one or two big stinkers that you might hit in selling options can wipe out dozens of solid winners.
You should probably use bull calls when the stock is on a slow steady rise,buying a call at the in the money price and selling a call one or two notches higher hoping the price will go to somewhere between the two,preferably just under the sell price You can be in trouble if the price drops.
Volatility and change are two different words for the same bird, Volatility is a little more flighty. If a stock neither rises or falls for extended periods it is zero volatile.
The more it see saws up and down the more volatile,,,,good for swing trading but makes premiums wider in price and more costly..
Frank and Travis, I’ve taken on board what you’ve both said said and I really appreciate the input. Benny, at the moment everything to do with options feels like running! I’ve discovered the hard way – by selling ESPR puts hours before the price collapsed and then being assigned -that its really easy to come a cropper and that you have to expect the unexpected. I’m really just trying at the moment to find out as much as I can about the basics and I’m definitely not going to be throwing piles of money at anything, that’s actually why the thought of buying a call rather than the underlying stock intrigued me , as it limits my risk to the cost of the call , and the percentage (as opposed to actual) returns are far greater because of the much smaller initial outlay.
Cyndy and BH Trading options should, on balance, be less risky than buying stocks,,,with the caveat of you need to pay attention to how the stock tends to trade ie mostly flat or with wild swings and choose options accordingly. You also must pay attention closely especially as to settlement dates. Although the standard is third Friday some trade quarterly or even weekly. Be aware too that brokers often will only deal with minimum price of $0.05 so if the price shows 0 in the price of a sell for example you still must pay
$5.00 for a round lot transaction plus the standard brokers fee . In my view you are most likely to make a little by selling puts or covered calls carries the same risk in my estimation as owning stock. Hn is correct in that as most options expire worthless,75% perhaps,,, you should then have a 75% chance of gain in retaining the premium received when you sold. Travis is also correct in saying that bull calls, if chosen correctly are less risky than owning the stock Of course, as in gambling several small winners may convince you that you are a wizard,, just in time for you to go all in and lose it all. Remember also that very often it is to your advantage to close a trade as soon as it hits your target, for by settlement day it could easily reverse. On occasion you may double or triple money invested in two or three days The trick is in finding such,,,,binary events,,,bottom fishing bounce etc. Also most penny stocks do not have options unless they have had a major drop from when they were not penny stocks. frank
Here is a buy-write idea that I executed yesterday on $RDUS. The stock has been on quite a run recently but it experienced a mini flash crash on Wednesday – $84 to $74 in the blink off an eye. News after the bell was seemingly positive regarding anti tumor activity in preclinical breast cancer models.
Buy $ RDUS stock @ $77.29
Sell Aug80 Call @ $5.56
Admittadly I don’t know the reason for that rapid drop in share price but it seems to have stabilized and is now resuming an upward march.
Opinions?
Nice catch, King. With the rapid recovery in RDUS share price (if sustained) you should realize about a 12% profit if the shares are called. A great return in 35 days (120%+ annualized).
Yes, I like the buy/write startegy on RDUS also, I’ve been looking at it. The only thing missing is Doc’s unqualified “BUY” recommendation on RDUS. For me, there’s too many on his “A” list that I don’t own to start chasing other biotechs.
This is my first attempt at discussing stock warrants, and I am a complete newbie. That said, I have interest in Oculus warrants (OCLSW). I think the stock was discussed on a Dr. KSS, but my memory fails me as to when. If there is any interest here, I will post further information.
jk
Unexpected things have come up and I will be out of pocket for a while so, here’s information on OCLSW: http://secfilings.com/News.aspx?title=oculus_innovative_sciences:_the_cheapest_stock_available_in_an_active_dermatology_sector&naid=1092
jk
If $RCPT will be at least $232, then easy money can be made by selling puts at strike 230. It seems to be too easy to be true. What mistakes do I make?
Yen LIN Timing . No one knows when price reaches target,,,may be long time. You might get assigned and have to buy 100 shares for each position entered if price is at or below on settlement Friday. fa
Yen, you said it yourself…”If RCPT sells for more than $232…”
The answer to your question is the word “If”. There is a remote chance the deal will not be completed. The odds are that the deal will be done, but think of the losses if the deal fell apart and RCPT fell 20 or 30 points.
In this case the risk seems very small…both sides have huge fees to pay the other if one party decides to pull out. The risk is small chance-wise, but pretty devastating if it happens.
I’m sure you have also noticed, the stock price is below the deal price of $ 232.
This reflect carrying costs to the date of completion, but it could also reflect the perception that there is a small risk the deal will not go through.
This perception of this risk is also visible in the stock price.
Arch1s point is correct, you may get the stock put to you at 230, when the market price is lower.
The people buying the put from you are guaranteed the ability to sell at $ 230.
The stock is selling at $227 or so. What happens if there is a dramatic increase in interest rates before the merger is completed ?
HN and Arch,
Many thanks for reply. Now the news is out that RCPT is almost definitely worth $232. See below for related information. Seems good to hold RCPT at its current price.
Celgene Corporation Commences Tender Offer for Receptos, Inc.
SUMMIT, N.J.–(BUSINESS WIRE)– Celgene Corporation (NASDAQ:CELG) today announced that its direct wholly-owned subsidiary, Strix Corporation, has commenced its previously announced tender offer for all outstanding shares of common stock of Receptos, Inc. (NASDAQ: RCPT) at a price of $232.00 per share, net to the seller in cash, without interest and less required withholding taxes. The tender offer is being made in connection with the Agreement and Plan of Merger, dated July 14, 2015, by and among Celgene, Strix Corporation and Receptos, Inc.
The board of directors of Receptos has unanimously determined that the offer is fair, advisable and in the best interests of Receptos and its stockholders and recommends that the stockholders of Receptos accept the offer and tender their shares.
The tender offer is scheduled to expire at midnight EDT on Monday, August 24, 2015, unless extended.
Complete terms and conditions of the tender offer can be found in the Offer to Purchase, Letter of Transmittal and other related materials that will be filed by Celgene and Strix Corporation with the SEC on July 28, 2015. In addition, on July 28, 2015, Receptos will file a Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC relating to the offer.
Copies of the Offer to Purchase, Letter of Transmittal and other related materials are available free of charge by contacting Morrow & Co., LLC the information agent for the tender offer, toll-free at (855) 201-1081 (or at +1 203 658-9400 collect if you are located outside the U.S. and Canada), or by email to Receptos.info@morrowco.com, and, when they become available, at the website maintained by the SEC at http://www.sec.gov. American Stock Transfer & Trust Company, LLC is acting as depositary for the tender offer.
$ESPR For you long-term bulls on ESPR:
Today bought 100 at 64.10 and sold Sept 70 call for 6.50.
Will make $ 12.40 on 64.10 if the stock is called away at $ 70; if the call expires worthless
I am in for 64.10-6.50= 57.60.
I also sold a Sept $ 60 put for $ 6.50. I am obligated to buy 100 shares at $ 60 anytime between now and expiration Sept 18th and must keep enough cash for that possibility.
If ESPR falls below $ 60, the stock will be put to me at $60. But my cost of acquisition is $ 60-6.50 cash in hand from the put sale, = $ 53.50. I think I can live with that.
If the stock stays north of $ 60, I don’t acquire any more ESPR but I have $ 6.50 per share to console myself.
Hendrix,
Thanks for posting your option buys/sells. I’m a real novice at options, but several days ago bought Mar 16, $50 calls at $28.27. A pure bull strategy buying as much time as I could, thinking ESPR will hit mid to high $90s or more between now and March. Admittedly no down side protection or income from selling offsetting options. Now considering buying some March $45s. Any thought s you may have on my actions would be greatly appreciated. Thanks.
Hi Tom, your trade may work out fine, although it is not one that appeals to me.
It’s not that I don’t believe ESPR will go up, it’s that the time premium value in this trade is
$ 14 on a stock priced at $ 64 or so. The stock must rise to about $ 78 for you to break even.
Your stated strategy was to “buy as much time as you could” and March 2016 is a long way off, and a lot of people think the price might go to 120 or higher….you might triple your money. So as I say, maybe it will work out great.
On the other hand, think about the guy who sold you the contract. If he bought the stock today at $ 64 and sold you the March 2016 $ 50 call, he has your $27, and the stock.
If you exercise between now and March, he gets $ 50 for the stock, and he has your $ 27.
In effect he has sold out at $77 for a stock he bought today at $ 64.
His net profit will be 13/64= 20%, and he will not lose money on the transaction unless ESPR drops below $ 64-27= $ 37.
Again, the trade may work for you. For me the time premium is too big to make me enthusiatic. You are paying someone $ 14 per share to own a $ 64 stock for you.
Hi Tom, most of my examples in the options thread have been based on SELLING covered calls and cash-covered puts. I tend to want to sell calls and puts to open, rather than
to buy calls and puts to open. Again I emphasize, your trade may work out fine.
It’s just not the type of trade that I am looking for.
Hendrix,
Very much appreciate your time and comments. I’m novice enough that it will take me a day or 2 to think through and confirm my understanding of them as part of my options learning process. One of the reasons I did the call purchase strategy was because it allowed me to buy more ESPR for less cash than an outright purchase of shares. At this point It appears your strategy will allow me to buy more for even less, but with a limited upside. If so, that might be a better way for me to purchase and additional tranche of ESPR. In addition, to the ESPR options I also own 200 shares outright. The existing shares and options might be enough, but given ZKSS’s high level of optimism on this company and its apparently very unique and promising product, I’m tempted to invest a little larger percentage of my overall portfolio than I might normally risk on one security. Thanks again for your time and comments.
Hi Tom,
Here is a point that may help with sorting our your covered call strategy. As you may already know, the covered call is often set up in two steps – e.g.
(1) Purchase 100 shares of ESPR on Day 1
(2) Subsequently (e.g., Day 20) sell 1 covered call contract on ESPR.
Assuming that you had purchased 100 shares of ESPR on DAY 1 at $85.00 or less, you could now (Day 20) sell a September $85 call for approximately $400 ($4 per share). Effect:
(a) You immediately pocket $400 cash. (For $400, you are basically selling to a third party your right to collect any “excess” profit if the SP upon termination is >$85.00.
(b) If the ESPR SP on 9-18 is $85 or less, you keep the 100 shares and the $400 premium that you collected on Day 20.
(c) If the ESPR SP on 9-18 is more than $85, your 100 shares may be called and you will receive $8,500 on top of the $400 premium collected on Day 20.
(d) At any time prior to termination, you can close out the covered call by buying a September $85 call. Once that buy order is filled, the sold and bought $85 calls (in effect) immediately cancel each other out.
Hope this helps
I like it – Admittedly I’ve never had the stomach to short anything, but I like the idea of selling the put a little better than the buy/write. Nevertheless, I executed a similar buy/write today (I don’t considered covered as short). : buy $ESPR @ $61.48 – Sell AUG65 @ $3.30.
I shortened the expiration so the upside isn’t as high ($68.30-$61.48 = $6.82) but the return is still quite good at 11% should the stock gets called.
My motivation for shortening the expiration is simply that I see less opportunity for bad news in the next 2.5 weeks, then I do in the next 6.5 weeks. I’m in at a slightly higher price should it expire worthless ($61.48-$3.30 = $58.18).
Hi Travis-Please lock the thread. Good morning gumnunity. Bulls-eye OM, way to go! Thx ZKSS! Glenn, I hope your having the time of your life 🙂 Have a lovely weekend ALL!-Ben
Hi All,
I am hoping a more seasoned person here can straighten me out about Open Interest. If the numberss in an Open Interest column all say 0, does that mean no contracts are available or does the market have to respond to your “buy to open” regardless of the OpInt listing?
Thanks very much for any info.
Appreciatively,
Don
Don My understanding is that for many brokers that Opint only refers to that broker. Other brokers may have contracts that do not show on your brokers list. There is a consolidated
list to access from another source. If I am mis-informed please correct. fa
Thank you Frank. Since I only use one broker at the moment, I guess zero means zero.
Don
Hello everyone,
I have a question that someone might be able to answer for me. On 27th July on the second day of ESPR’s plummet, I sold 3 x $100 ESPR August puts for $26.90 a piece. At the same time I bought 3 x $85 ESPR August calls for $3.20 a piece. Today being expiration day, and things not having played out as I had anticipated, the puts are wildly and deeply in-the-money, the calls deeply out-of-the-money. My broker confirms that in order not to be assigned the puts at $100 I simply need to have an equal amount of in-the-money calls. I have just bought 3 x $55 ESPR August calls for $1.50. So even after having been obliged to buy a second set of calls, I am still miles ahead. It would appear from this example that selling in-the-money puts can become a real cash cow just as long as you have corresponding in-the-money calls on expiration day. This seems too good to be true. Is there a risk here that I am not anticipating? I know you can be assigned at any time, but I have the impression (maybe it’s an illusion) that holding a corresponding number of even out-of-the-money calls protects you from that. Is that the case?
fritzy Bad news. Unless you buy three $100 puts you will be assigned those 3 lots of $100puts you sold,,$30,000 price. Buying calls only gives you the right to purchase the stock at $55. 3 lots at $55.00 equals $15,500 so your average price on the 600 new shares you will own will be roughly $76/77. $85calls expire worthless. fa
Sounds like your broker needs to go back to training class. The point of put options is for someone to buy downside protection or bet on a downward move — you’re the one who sold the downside protection to them by selling a put option contract, so you will be forced to fulfill that contract and buy ESPR at $100 (300 shares if it was three contracts). The only way to get out of those puts being exercised to you, with your broker putting 300 shares of ESPR into your portfolio and charging you $100 each for them, is to buy back the put contract to close them, at probably about the same cost.
For Fritzy, when (if) you buy back the puts on expiration day, you can get an estimated cost per put by subtracting the current (market) share price (now approximately $55.50) from the strike price of the put ($100) x 100 shares for each put bought to close. If my rough calculation is close to the mark, you can expect to shell out about $13,500 ($4500 x 3). Not much time left until the market closes. Good luck.
Fritzy,
I fully concur with Frank’s assessment re what needs to be done to close out the $100 short puts – and it needs to be done quickly to avoid assignment.
Frank is also right about the $85 Aug 2015 calls expiring worthless.
Re the $55 Aug 2015 call that you bought today, you should give strong (and quick) consideration to selling those calls NOW (probable worth about $130 each IF ESPR share price stays at or near $56.42). If the options have value at expiration, some brokers will exercise the options on your behalf to prevent loss of value (and debit your account approximately $16,500 – if funds or available margin permit such action). Talk to your broker right away.
Oh boy…am I ever glad I never learned about options. Im already too good at losing money on simple shocks and scares.
Thank you arch, Travis and Laurence for your timely, oh so clear and precise answers. It’s great to know that there is such real community spirit here in Gummieland.
And it’s logical that if something appears too good to be true in options, it must be. What threw me was that I rang my broker last Wednesday, and the person who answered my call and claimed to be in the know concerning options was adamant that the puts and the calls cancelled each other out just as long they were all in-the-money and the same number.
Unfortunately on Friday I got distracted looking for answers elsewhere in vain after posting and surveilling whether my calls would remain in the money that it was too late when I read your posts. All part of the apprenticeship.
Hi Benny,
The winning strategy is to SELL the options.
ARCH1 paid money to a guy holding the stock to BUY a call option.
The guy who sold ARCH1 the option has the money and the stock,
the ARCH1, who bought the call, takes a loss.
Fritzy,
A call and a put have NOTHING TO DO WITH EACH OTHER. They are sometimes used as hedges
against each other, since their value will move in opposite directions, but they do not “cancel each other out”. They are completely different securities with different obligations and risks.
Hey friends. Here’s a good way to think about it:
1. All who BOUGHT an August ESPR call priced $60 or above LOST ALL THEIR MONEY.
2. Everyone who SOLD an August ESPR call at $ 60 or above, kept all the money lost by the group who bought. And they still have the stock.
Hi Benny, did you not mention at one point that you had traded in CFDs? I don’t know anything about them but they sound much scarier than options!
I cant really compare coz I dont understand options well enough. Seems to me that options play longer term prospects, whereas CFD’s play short term trends, so if your gut feeling is that youre on loser, you can minimise the loss. And the big gain is monitoring the trend; its always my friend…….until the bend. A flash crash is the real enemy of CFD’s…….probably less so with options as your losses are limited. Im taking next year out to research options….then Ill let you know.
If you sell an in-the-money put, it is a cash cow IF YOU DON’T GET ASSIGNED.
You have to hold the free cash to meet the obligation of the assignment, in case the stock price goes down.
You must be prepared to BUY THE STOCK AT THE STRIKE PRICE.
Therefore you never sell a Put on a stock you don’t want to own or on a stock you don’t have good reason to believe will go back up in value, and preferably the stock should have a dividend, which, if you get to collect it, lessens the net price you paid for the stock. So if I sell a stock with a strike price of 50.0 and a premium of 2.00, I’ve only paid 48.00 if I am Put the stock. If I then collect a 1.00 dividend while I wait for prices to go back up, the stock only cost 47.00 per share.
Fritzybloch, I’m new to options I got caught out too, when ESPR sank after I wrote a put @ $95 (net $88 ) and one @ $80 (net $70). As the cost of buying the puts back plus the cost of buying the shares at current price was going to be about the same as the cost of being assigned (about $79 net per share) I decided, rightly or wrongly, to let myself be assigned. I’m now thinking that I should possibly/probably have bought the puts back as that would have kept my options open (no pun intended) in case the stock price goes even lower in the short term. I’m reminding myself though that when I sold the puts I took the view that, if I was assigned, I would be happy to pay $79 per share, based on ESPR’s fundamentals and the anticipated (NOT guaranteed) eventual return on my investment. The fundamentals haven’t changed nor has the possible eventual return,so although I’m saying this through gritted teeth just now and would much rather I hadn’t had to pay way over the current odds per share, I’m not regarding it as a disaster. I would welcome any advice though on how I should have handled the assignment. Have I got it wrong(which wouldn’t surprise me)?
Cyndy You win some you lose some. I bought calls expecting a bounce ,,which did not happen. They expired worthless,so that is a clear loss. You have a very good chance that your shares will be profitable,so you did better than I. frank
I think you were right to take the assignment because you squeezed out the non-intrinsic time value in the option, and kept 100% of the premium you got for writing the put.
You have to go back to the idea that you were willing to buy at these prices…when the stock
went down, your losses were less than if you had not sold the puts. So your risk was reduced by the amount you collected.
If you are now long, you can write covered calls at the prices you wrote the puts (85 and 90). You will either be called, making a profit over your cost of acquisition, or you will pocket the premium as income if ESPR stays at depressed prices. Better than a dividend, you don’t need to wait.
I am currently short one September 55 put.
I closed out a covered 60 call, and I am straight long one round lot.
Thanks Hendrixnuzzles, that’s what I’ll do, I’ll sell the Sept calls I think
Hi Cyndy,
We’ve seen how volatile ESPR can be. There is still a monster short interest and there
my be some good spikes; even on Friday the stock was up.
My point is, that if you wait for a big spike up, you will get a better price when you sell the calls. And if you sell them at the strikes where yo sold the puts, you have the confidence that if the stock zooms up, you are out with a profit; and if it stays down, you are reducing your losses when the calls expire, and can repeat the process.
That makes complete sense HN, I’m wondering , should I just wait to see what happens to the price or maybe put in limit orders now. I don’t suppose it would do any harm to put in silly limit orders and sit back, I’m with IB and I don’t think they charge anything to modify the price later
HN Right on all points. I bought calls because i had less money at risk but I lost it all.In retrospect the best strategy would have been in buying puts but it seemed unlikely that the price would be below $75/80 at settlement day, so more risky The shorts won this time,,,long range they generally lose. Selling a put is actually a mild long. Selling a covered call is a mild short. Both less risk than buying calls or puts. IMHO fa
Thanks for the encouragement Frank
Hi Cyndy,
I don’t think you should be discouraged at all. If you had gone straight long on ESPR at 85 and 90, your losses would be much greater. Since we are long-term bullish on ESPR,
I think you will eventually be pretty happy to have acquired it around 79 net.
And you can sell covered calls against your position in the meantime.
Yes that’s the way I’m looking at it HN, it’s reassuring
to know though that I’m thinking along the right lines
Hello HN,
With BLUE having the Blues these days and currently not having e desire to hold any BLUE, one would like to look elsewhere to consider covered call .
Having bought CLVS @ $92.17 I sold the October 16 100 call @ $6 last week. Currently trading around $103 .
Do you have any other covered call considerations at this time?
Thanks in advance.
Yes, on BLUE I was debating selling the position, or selling a call against it.
With the stock at 129, I decided to sell an October 16 $ 135 call, which brought $ 9.50.
So I will either (A) get called at 135, making the total proceeds 13500+950=14,450; or (B) if the stock stays under 135, I will pocket $ 950 and have the stock.
In (A) I will make 14450-12900=$ 1550, $ 1550/12900= 12% return in one month;
in (B) I make a return of 950/12900= 7.4 %, in the same period.
I am heavy long on ESPR and would like to sell calls against the position but I am waiting for a price move upwards to do this. I really don’t want my stock to be called away so I will sell some calls out-of-the-money when the prices are higher.
I also noticed there are now ZFGN options, but they are thinly traded with bad bid/ask
spreads, so I will wait a while.
QURE and RARE are attractive options, big premiums, but I am not in the stocks yet.
I also liked CLVS. RARE has Doc’s approval, QURE he has spoken favorably but stopped short of recommending long.