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.
Margaret. In #39, you said “We had our assignment of analyzing 4 stocks. I noticed….No one dared set forth here their analysis.”.
For what it’s worth, I did actually describe something of my process (possibly missing a step or two) for looking at MSFT, under the comments for #22. Either it was really bad, or you missed it. I vote for the former, but that could just be the lack of coffee talking.:)
Frank – I looked again at the chart for ARNA. The trend-line plunged from the high of $7.72, then rose to about $7.00 in late January. From $7.00, ARNA zig-zagged in a downward trend-line to the current price of $5.90. But that trend-line did flatten out some.
With ads just beginning and sales continuing to increase, ARNA will sometime break through the resistance point of $8.00. Many anticipate that it will reach $20.00. Actually, they predicted that it would reach $20.00 within months of FDA acceptance years ago now.
During trials, it was learned that the weight-loss product benefits diabetics (and does so regardless of whether the individual lost any weight, or lost only several pounds). Widespread use for treating diabetics would greatly increase sales.
So I’m guessing that some bit of good news will be the catalyst for a jump in ARNA’s price.
The Blind DayTrader – If lack of coffee was talking, then go grab a cup.
EVERYONE – HEAD BACK TO #22
YOU WILL FIND A REALLY FINE ANALYSIS OF MSFT BY THE BLIND DAYTRADER.
Your opening comment referred to “moving averages.” So I think that they are the first thing that you check when analyzing a stock. But I do not know what moving averages are. So I need your instruction.
I really enjoyed the manner in which you get a sense of a stock. Much of your focus is on this current time. (1) How quickly is it moving NOW? (2) What is the daily volatility? [Again, Blind DayTrader, I need instruction, please.] (3) Is there news to move the stock-price? (4) Are earnings better than expected? [Where do you find information about earnings?]
I sensed that you experience pleasure in the process of analyzing a stock. I value, for myself, the playfulness of investing. There is a quality similar to playing a challenging game. From your description of stock analysis, and your other comments, I think that you also bring aspects of game-playing into your investing.
I like that you have set challenges for yourself, and have tried many techniques with options. You are a good example for me to follow.
Thank-you, Blind DayTrader, for your contributions to the rest of us here. I appreciate you.
DRTX is the other stock for us to analyze. Durata Therapeutics is another that Dr. KSS likes.
Basically, I am unable to analyze DRTX using my preferred method of evaluating the trend-line. I can see that volume fell from 468K to 296.5K…not a positive indicator. DRTX’s rise of 4% YTD is not negative, but not very positive either.
DRTX’s trend-line is a muted stepladder pattern. In September 2013, the stock-price was $10.00 that it held for about a month. It then stepped up to $13.00 that it held for a month. It stepped up to $14.00 and stayed on that rung for several weeks. It then reached high and climbed onto the roof. But it was scared, maybe, at $26.99, and immediately came back to $14.00, then to $13.00. DRTX was at $13.41 on Friday (4/25).
Without the help of Dr. KSS, I would not know about the positive factors of DRTX. So on my own, its chart would not have propelled me to buy it (which I did). So for me with this stock, the reason I bought it was its super-antibiotic, that seems likely to become stocked by all hospitals.
Maybe I missed something about the trend-line that indicates some strength or some promise for its future action. And I forgot to consider whether it might be a good underlying stock for an option. I didn’t even look to see whether there are options for DRTX. So this one needs additional analysis from someone, please.
Meg; DRTX is optionable . I recently bought July 2014 $12.50 call & sold July 2014 $15 covered call spread. I expect DRTX to rise on coming announcement but not much. Do see my logic?
Sly like a fox you are, Frank. And clever.
Ah!! You think ‘Frank’ is an alias for Yoda too!!
Alan; May the farce be with you.
Margaret and Frank very clever are!
Frank: and may the farts be with you.
Alan; Be watching me you must. Today home cooked ham & beans I ate. Levitating I am.
Chewbaca bedroll outside moved.
Frank, so what is the window of profitability? Is it a max of $250 if DRTX goes to $15.00?
To continue what i have previously stated & we are now talking selling,,For any transaction you must have a willing buyer & a willing seller. Presumably both may gain. Although horses don’t wager on people there are a lot of horse tracks,,,,not because of beauty of running horses I think. Different opinion/different motive is why we have options,,, where you are dealing with an uncertain future. If you hold a stock you may sell the option at a price you do not think it will reach in a certain time frame or at a price you are willing to sell the underlying stock. If you are correct you may gain extra income from your stock holding while waiting for new development or or whatever. There are other reasons too complicated to go into & which I am not able to simply explain.
I forgot to add that while buying an option entails no obligation to complete,,,SELLING DOES.
If you are selling a put or a call and the stock finishes above (put) or below (call) strike, you don’t have any obligation to complete, it will expire “worthless” and you will keep the premium you sold…
I very much enjoy the things people are posting. Thank-you, all contributors.
When I return later in the day, I would like to see a few stocks that people want us to analyze. Our methods of analysis are not the same, but maybe we arrive at the same decision as to whether any given stock might be a good one to buy.
Also find us some stocks that might be a good underlying stocks for options. We will then paper-trade them, and track them to see how they perform.
Are any of you identifying a sector of the market that appears to be trending up?
I got this today so it could be worth the paper trade.
After delivering a substantial loss, a weak outlook, and announcing it would raise subscription prices, Pandora (P) shares suffered a a 23% drop in the past two trading days. The charts show there’s likely to be more bloodshed in the weeks ahead for the streaming music provider.
Alan; I think you may have found a good paper trade. I normally buy very few Puts But this looks to me that it may drop to $20 in a month or three. It would be interesting to buy a
Jun 34, Jun24 or even a ladder of more prices & check in a month how it is doing . On paper of course. I normally would buy close to the money but in some ways putting a larger price away from the money [altho you are putting more money at risk] in some ways lowers the overall risk and opens way to greater profit. Can’t quite see how to explain simply.
I should have added$ sign,,,,,Jun$34 Jun$24 puts
If you’re buying OTM (out of the money) puts, they will be cheaper, because there is less potential to hit their strikes. They are all extrinsic value (time value plus volatility), and no intrinsic value.
If you buy ITM puts, however, you can buy less, because they are more costly. They have the intrinsic value of how far they are in the money, and also the extrinsic value of time and volatility. The nice thing about in the money puts [for buying, that is], is that if the stock stays flat, they will still have that intrinsic value when you’re near expiration. They will lose their extrinsic value, but retain the intrinsic. Since the OTM puts are only extrinsic value, you will lose much more with them (I.E. they will go to zero on expiration, and often very close to it in the week before, since time value degrades much faster the closer you are to expiration).
Example… XYZ is trading at $100. The $100 puts are trading at $5, and the $95 puts are trading at $2.
Buying 2 contracts of the $100s, and 5 contracts of the $95s, you will spend $1,000 on each transaction.
If XYZ drops to $99 by the Monday before expiration, you might see something like this. The $95 puts are now worth $0.20. You could sell them for $100–a $900 loss! But the ITM $100 puts, are now worth $5.80 or so, and you can sell those for $1,160–a $160 profit! Yeah, not much, but worlds better than a $900 loss.
If XYZ goes up to $100.50, and you hold until that same time, you might see the $95 put priced at $0.01, and the $100 put priced at $1.00, which is still a $500 loss, but even still better than a $999.99 one.
Thus my case for ITM options, when going long with no short legs to offset the cost.
People sometimes buy large lots of OTM calls, on the off chance that a stock will go up. I forget the stats, but this loses a huge percentage of the time. Whereas just buying the stock and selling covered calls against it, while a profit limited strategy, is much more likely to succeed in providing income. Of course, if you can aford to buy OTM stuff “on the off chance”, then go for it, I’m just saying that if you do a lot of it, you’re more likely to lose than not, at least according to people way smarter than I.
Margaret, Thanks you so much for this thread! I am still learning and I will be doing a mock run of a couple options. I do not feel comfortable yet but I am still learning.
Thanks Frank and Blind eye!
Justirr; That is very good idea, if you get feel of how things work & develop your own strategies that you understand you do not need to understand all the confusing language advisers use. My best advice is do not take advice,,,,,follow your own thinking.
Margaret, I am quite interested in your ARNA play (#40 and others). Not so much for your straddles, as I rarely have made money with those (and in fact you have to be a really great stock picker and market timer to do so consistently, so my congratulations for making it work), but your riding it up and riding it back down play. I have run that one before on various things (especially AAPL, which I’m not trading currently, although I will post-split), but I have not had much time for very short term trading lately, so haven’t recently been in the riding game.
However, you have inspired me to consider that again. I had looked at ARNA last year during some of the newsletter hype for it, but it was one of those that I decided “nothing” was the best action on. I think I will look at it again, given your method, and perhaps have some fun with it.
You said “I sensed that you experience pleasure in the process of analyzing a stock” (#43). Actually, not so much. It is a tedius necessity when my mind is screaming “trade now, trade now!”. But it is a necessity, of course, and what I really take pleasure in, is when my review of price action and such leads me to conclude that my initial idea has some validity.
But yes, I do like the “game” type aspect. It’s why I gravitate in the direction of day and swing trading, although lately I’ve only had time to do multi week plays.
I appreciate your style of leading this thread, and trying to keep it educational. I will write something up on moving averages and the other things you mentioned, if someone doesn’t beat me to it.
Oh, and I see that Hi Pockets did beat me to it, in #22. Those articles are a comprehensive explanation of moving averages. Most brokers will provide moving average info for you (mine does so in standard detailed stock quotes), and of course every charting package can do them. They are not the only thing to base a trade on, but I find that usually, unless some big news is happening, if the shorter moving averages say “no”, so should I.
Hi Pockets, you said “It appears to me that moving averages work best for mid- and long-term investors, and that they are not useful for low-priced speculative stocks.” (#22). That has not been my experience, but as you said earlier in that post, it may be the kind of stocks you follow. It also may depend on the MAs you’re using (three day, ten day, 20 or 21 day, 50 day, etc.), and how you’re using them. Those articles you posted explain crosses and such, which can be helpful, but YMMV. I don’t really trade penny stocks (I may buy and hold things like CIM, TWO, CYS, and others, but I don’t tend to trade in and out of them rapidly, or use options on them, other than selling puts as synthetic limit orders), and so I don’t tend to analyse them in the same way.
The Blind DayTrader — POST 49
I chart 20, 50, and 200 day MAs. I have never seen a rationale for what time frames are best. The thought has occurred to me that 19, 49, and 199 might be advantageous because the lines should cross (if they cross) a day sooner which would put you a tad ahead of the 20, 50, and 200 day crowd. I never got around to trying it. Did I mention that I procrastinate, which is the best way of standing there and doing nothing? :>)
I have seen 10 days used, but it never occurred to me to look at 3 days. I will add that to my charts. Thanks!
Hi Pockets, I’ve seen the 10-3 cross used alot among system trader guys. Not sure how often it’s used in the wild, but short term computational traders have talked about it often. I have never tried it myself, although have used the 10-day off and on in the past on the SPY (but not recently).
Hi Pockets, I’m not sure if they would cross a day sooner, at least not if it was a current moving average. If you’re talking about a historical MA (I.E. one which has an end date before the last trading period), then maybe so. On a current one, the missing day would be at the tail of the MA, and therefore you would just be decreasing your sample size. I believe they would still cross at exactly the same place.
Unless I misunderstood you.
The Blind DayTrader –
You understood my thinking, and you are 100 % right – they would cross on the same day. I must have been having a senior moment when the idea occurred. :>)
From Samir Elias book “Generate Thousands” he uses 10, 20 and 30 avgs. His rationale is too complicated to explain but that book is THE resource on selling puts and calls.
Blind DayTrader – I was not even aware that I did a straddle trade. I still do not know which it is.
Do add your take on moving averages, please.
Margaret, this is a straddle. I believe you were the one who described doing that, although you didn’t call it that.
Thank-you for the link, Blind DayTrader. Okay, now I know. So I do a straddle whenever I buy both call and put options as a play on a specific event (usually an FDA event).
I noticed as I wrote information today about CTIX that the stock-price did not move significantly after getting a positive FDA Advisory vote (4/1). So there was an FDA event when I might have bought both calls and puts. Today I made a guess that there must also be ample interest in this event…and was not for CTIX.
Are any FDA events coming up soon, do you know?
Check out this FDA Calendar, Margaret: http://www.biopharmcatalyst.com/fda-calendar/
Not sure where now (others may know) but we have a calendar for this. I get notification on my phone calendar automatically each time an event is due. For instance: NVO Q1 report 1 may 2014.
Lawrence, thank-you for the link to FDA bio calendar.
This morning (at 10:25, CST Minneapolis), I noted gains made by my CSIQ- stock and CSIQ- options. I have 69 shares CSIQ. I have 5 options that control 500 shares CSIQ. At that time, CSIQ was up 0.25%.
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My 69 shares had gained $22.43.
My 5 options (with June expiration and strike of $30.00) had gained $125.00.
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The power of leverage.
Margaret: Earlier you said you were waiting for an entry point in ARNA & then closing out near $7.50. When do you buy Puts? at same time you close calls or wait for clear signal Arna is on down leg?
Frank – Smack me on the forehead! I can’t figure how I never even once thought to buy put options for ARNA as it started its dependable move down.
This ARNA pattern is more striking to see when you pull up a 1 year chart (or a longer span than that, too). At some point the pattern is going to break. But it has been easy to pick a buy point (NOW!) and a sell point (a tight stop-loss as ARNA reaches the top of its range).
Thanks to you, I will be adding put-options, that I will buy at the same time I close the calls. I close the calls following a drop of about 6% when it occurs near the top of ARNA’s range. That drop has reliably signaled the start of the leg down, since the trend-line is range-bound.
I’m buying ARNA calls, June expiration, tomorrow (even though there has not been a rise in volume along with the rise in the stock-price).
Meg/Margaret (which is best?), would you be willing to post a few of your entry/exit dates and prices from ARNA trades you have been successful on, using this pattern that you have identified? I’d like to go back and look at price action, and maybe run some of my own functions on it.
Blind DayTrader – Two weeks ago, I went through my records of the last 5 years. I jotted down the names of some holdings, intending to learn how they’ve done recently. Then I pitched all the records. So I cannot identify entry/exit dates and prices for ARNA trades.
When ARNA was in the FDA process with the weight-loss drug, I did not think to use options. And the decision of the AdCom went against my stock shares and my call options. That was a big loss. And I never wanted to experience that again. Yet, I did know that an investor could do very well at exactly that point in the FDA process. So ARNA’s FDA process became the impetus for playing FDA events with both call options and put options.
I started playing ARNA’s run up to a peak as soon as it got FDA approval. The zoom up ended abruptly. After ARNA’s stock price reversed direction, I sold my call options. I bought call options again when ARNA entered a second up-trend. That didn’t last long, either. But I had twice made good money on those up-trends. Since then, I’ve missed noticing the start of some of them. But it has been a good return each time I’ve caught the ride up.
Interesting thread – a long term investor that doesn’t know squat about options. Commenting to receive followups.
Welcome ScorpioRising!
I’ve enjoyed this thread, too. You’ll find some basic information about options at the start of the thread. And various people have suggested resources for learning, too.
I have thought that there are periods of time in the market when my options are all doing well…and periods of time when none of my options does well, and I sell each one off at a loss. Likely there is a lesson to me in this recognition. Maybe it is that there is wisdom in not buying into a market that is not tracking up decisively.
My preference is to identify a sector that is tracking up, and to choose all my call-options from this sector. For that reason, I asked people whether they had noticed any sector doing well just now. So far, no answers.
I view the current market as uncertain, so not a good one for buying options. Yet, some options will certainly do very well, anyway. The trick is to identify which stocks will be a good underlying-stock for the option play.
As a long-term investor, you have skills of stock analysis that will serve you well in identifying good underlying stocks. You also have skills for tracking the performance of your options, so that you can sell out of them with no hesitation when they move against you. Cutting losses is vital.
To start using options, you need clearance from your broker. So submit a request, if you don’t yet have it. Then you will be ready to move when the market is favorable.
The mechanics of buying options vary from brokerage to brokerage. I use Scottrade usually, also Ameritrade. The method of finding option research is different with each of them. Scottrade’s makes no sense. I have to click Trade, then Options, then Option Chains. A bit of trial and error, and you will be up and running for looking at available options and finding the volume for each (you NEED plenty of volume for good movement of the option), and the strike prices, plus the cost of each option-share.
When purchasing my first options, I did not realize that I needed to multiply the cost of the option-share by 100. There are 100 shares in each option. Therefore, if the cost of the option share is shown to be $3.00, then each option costs $300. I have $1,400 to invest. So I divide 1,400 by 300, learning that I can buy 4 options with plenty left to cover commission and fees.
At Scottrade, I just make sure that I have at least $25.00 cash available for fees. I earlier tried to figure the added cost, but have not done that for years. If your online brokerage is charging much for trading options, you will be needlessly paying them more than you would elsewhere. In such a case, I recommend that you open another account with a brokerage that has low fees.
Also important to me is to use a brokerage that swiftly processes my transactions. With options, the price can move rapidly. So I want my order to go through quickly.
I’m glad that you are here.
Thanks Margaret (or perhaps our ‘M’, as in Bond’s M). I believe I have the ability to buy and sell options – I have 3 Etrade accounts (rollover IRA, Roth IRA, and a regular non-IRA securities). I’ll have to check my rollover IRA account, as that is where I would like to play. As others have said, I do my own taxes and don’t really want the added hassle of reporting options gains/losses. Actually, that’s why I’m more of a long term investor – preferring long term capital gains and sheer laziness for prepping taxes. Plus, it’s really hard to find the time for day-to-day investing.
I’m a techy guy (28+ years SW Engineer), so I mostly concentrate on what I know. I don’t know biotech, though trying to learn through Dr. KSS’s threads. I can tell you a small tech sector that has been trending down after a long period of trending up – 3D printing, especially 3D systems (DDD).
ScorpioRising – Thank-you for pointing out the fall of 3D printing. I had noticed SSYS going don. So DDD, too.
If you open an option play with puts on DDD, and it trends down for just a few days, you can have gains of 50%, 100%, or 200% each day you hold those put-options. I tend to hold put options for shorter times than call options, and find them profitable if I just catch a stock price falling two days in a row.
ScorpioRising – Tax preparation does include listing capital gains. Years ago, I entered these by hand on the tax forms. Now, it is done for me by Scottrade, and I can quickly print out the material from their website. My tax-preparer simply includes those pages in the booklet that he makes for me. Cost of his work this year: $225.00. I happily pay.
This is a bit OT, but since you mentioned just making sure you have $25 for fees: that seems like a lot to me. I’m with OptionsHouse, which is $8.50 plus $0.15 per contract. So, if I wanted to trade ten contracts, to control 1000 shares, the cost would be $10.
If you always trade five contracts or less, they have a selection to charge only $5.
I’m not here to promote them–they have their issues just like any broker does–but if you check them out, I do have an affiliate link for them since I’m a client. (Hopefully it’s okay to post that; I looked and couldn’t find any forum rules in the FAQ or anywhere else) You can open an unfunded account, to examine their platform.
Okay, end of advertisement. I just didn’t like seeing you spend $25 for something that could be cheaper.:) I think IB is cheaper as well, but I hear bad things about their customer support.
FWIW I also use Options House for reasons you cite.
I recall that Scottrade’s are $7.50 plus something per option contract. I mentioned wanting $25 in cash as a cushion.
I am almost always fully invested, and use that “$25 rule” to make sure that I don’t move into the red. But the account that I use mostly for options has a large amount available for margin, that I sometimes take advantage of when in a market trending up. So I actually wouldn’t need to pay attention to the arbitrary cushion allowance.
IB is very cheap, about $1 per trade. But yes their customer service is very suspect and takes a long time. They are usually pretty nice once you get them. Chat works better than phone imo.
Quivering Hope… the biotech sector at this time. More rising than falling, some up a lot.
For our basket of options, I propose:
ARNA…BCRX…CTIX…GILD…DRTX…CBST… and put-options on P
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BCRX – treatments for flu, gout, hepatitis C. Volume 705.8K, and no notable increase. The 6-month chart for BioCryst Pharm shows a trend-line maybe in an inverse head and shoulders pattern: A swoop from $8.00 to $12.00. Then a dip and rise to $13.00, followed by a slow glide to $8.00. Stock price rise of 8.93% 4/29 to $8.42 (break-out?).
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CTIX – novel antibiotics, also cancer treatment. Had positive FDA advisory vote on 4/1, that did not move the stock price…indicating, I think, that it is not generating much interest. But volume recently rose from 149.7K to 225.8K. CTIX’s 6-month trend-line : It rose to $2.42, and bumped down a long hill to $1.65 on 4/4. Here are recent stock prices: 4/8-$1.62…4/16-$1.57…4/22-$1.60…4/24-$1.59…4/29-$1.88 (+11.9%).
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GILD – Some of us have enjoyed using GILD for an option play. GILD continues to rise, up about 3% 4/29. A steady gainer, and dependable…not flashy.
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DRTX – much liked by Dr. KSS for its super-antibiotic. Will be propelled by news. My analysis of its chart is that it is not trending.
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CBST – antibiotics. Also liked by Dr. KSS. See #39 for analysis. CBST’s stock-price rose 12.52% 4/29.
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Alan – You already have the P put options, so can be our tracker of this one.
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I am buying ARNA options, and will track them.
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Freely add any others to the basket of options. And we do need to have someone keeping track of our paper-trades for us.
Regrets re P but I do not have an options account, do not have access to info, nor do I understand the process well enough.
Margaret. I don’t believe CTIX has had an ADCOMM meeting yet. What “positive FDA advisory vote on 4/1” are you referring to? The only thing I can find is an article about them commenting on the positive ADCOMM vote for DRTX and CBST.
I bought 4 calls on DRTX last week, strike price of $12.50, expires June, 2014. 2 @ $2.10 and 2 @ $2.05.
My first options trade.
jer_vic – I had the 4/1 notation in my notes. I don’t know why I wrote it. So I did not know what I was talking about.
This correction that you have made gives me a MUCH more positive view of CTIX as an investment, and as an underlying stock for options. When I thought that good news did not move the stock-price, I did view that as a negative. Negative cancelled now.
Congratulations, jer_vic, on making your first options trade.
You chose a strike price lower than the current stock-price…not the choice of a typical first-time option buyer!! Well-done.
I hope that you also have an agreement with yourself to sell the 4 calls if the underlying stock drops in price 8% from its high since you opened the option play. Some on this thread sell at 5% drop, some at 10% drop. Anyway, somewhere in that 5% to 10% range, stop the losses. Up until now, I’ve watched only the price of the options, and sold at a 30% drop in order to preserve my investment capital. Cutting losses is vital when you hold options.
Enjoy the experience with your options. May the trend be with them.
follow
READY to buy options.
We are going with call-options on BCRX…CTIX…GILD…DRTX…CBST…ARNA.
We are adding put-options on P…DDD.
Let’s put $1,300.00 on each underlying stock.
If you choose one of these, then record here the number of options, expiration date, strike price, cost per option share.
So pick a stock, any stock, and do the research to get us up on the board with our starting figures!
The moody market may punish these brave options for daring to stride out onto such a wobbly stage. But we will lose no sleep over our money-free trades.
Margaret and anyone interested,
I am testing out a paper trade on GILD:
In the money call option expires May 23rd
Strike Price 75 .00
Premium 3.19
Break Even Price 78.19
Break Even Price inc fee 78.27
(I hope I make an “A”) 🙂
Great, Linda. So you can keep track of performance on the GILD option. You also chose a strike price that experienced users of options tend to prefer.
If someone wants to track a 2nd GILD option – with the same expiration date, but a different strike price – that would give us all a useful comparison of performance.
Something that I wrote out got lost, I think. And I think that this posting included my saying that I decided not to buy ARNA call options yet. I have always bought when volume as well as share price rises, and volume was flat both Monday and Tuesday. So I wait and watch.
Another candidate for option testing expecting it to go down would be KO Coka Cola that is trading in a range and is now back at the top of it’s range trading at $40.82 within a slightly downward trend over a two year period. I would look at Selling a BEAR CALL SPREAD, Sell June $41 Strike and Buy June $43 Strike (subject to suitable volume and volitality). When selling options my understanding is that the ideal period to sell is 56 days so that the Premium received has a good amount of Time Premium in it, yet as the time goes down the Loss in the Time Aspect becomes greater and greater. My maximum Risk would be $2 per share if Price goes above $43, which would be a price increase of 5.34% over current price, but I would look to manage that risk if it happens by Rolling the Option over to July for additional Premium.
The June 20 $41 strike Call I could sell now for 60 cents and Buy the June 20 $43 strike Call for 10 cents, a Net Cash Premium receive of 50 cents and a maximum risk of $2 – if doing the trade I would try for a premium of 52 cents being the mid points between the current spread
Whoops – I would not go ahead with that KO plan as checking on the next Dividend period the Entitlement date is June 16 so there may be a further run up in price towards that 3% dividend date. Further I would want to Sell the Option when Implied Volitility is high but right now it is 12.335% compared to Historical Implied Volitility of 14.766% – anyway I decided to post the suggestion as to my thought process and will monitor the result based on the above prices just to do my bit.
Correction to KO Option risk it is $1.50 not $2 as I had not deducted the premium received.
Ken: Where do you get you IV figures from? I am trying to gather as much info as possible about selling options but I am not sure where you find things like IV.
I got it from my Interactive Broker TWS software. They now have a new system that I have not had time to look at, it also gives Delta, which is the percentage chance that price will be above $43 by June 20 expiration. If you looked at the YouTube on the Million Dollar Option Trader, she would only sell the $43 strike if the Delta was more than 85%.
If you are in USA then you should open a free demo account with Sink or Swim as it has the very best option software, but their brokerage is higher then IB.