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.
jer_vic – I am a risk-taker, too. Sometimes I get caught up in the game-playing nature of investing, and give no thought to money being part of this game. I do really enjoy playing all sorts of games. Whether I win or lose doesn’t much matter to me. So, how do I feel about expiration May 17? Even though I’m not cautious, I do strive to play a good game. So I’ll think it through.
How many days? Today’s the 9th. Monday’s the 12th; and that is the start of expiration week. You would want to sell the contracts by early afternoon Thursday, I think. So basically 4 or 5 days to run. Maybe those days could give returns similar to gains/losses of May 2 to May 8…2.00, 2.85, 2.70, 3.70, 3.30. In total, a gain of 65%. WOW! That’s how I feel.
jer_v, it seems to me you and Margaret know plenty about options. Remind me if either of you posted the lesson about looking for a delta of ~.8, that would give you a high probability of success. I’ve studied the Greeks in the past but it’s just TMI for me. I just want it boiled down to 1or 2 truisms./correlations to guide me. Well market’s closed now and I didn’t act, … not ready oh well, I have a nice stake in the actual stock. Thanks to all who share here
Oh no, not me! The DRTX option trade was my very first one ever. ACRX was my 2nd. I saw the link posted somewhere above to online courses via The OIC (Options Industry Council) and I intend to take some of them. Don Barret, high, high up, explains Delta, and that’s all I know so far about the greeks. I think you have a good idea about boiling it down to a few truisms/guiding principles that encapsulate your knowledge and level of risk – a strategy. I think Margaret has a very good point about including in ones strategy how and when to exit when things go south.
It looks like everybody is putting in market orders on these options. There is a large percentage difference between bid and ask; all to the benefit of the market maker. I use the last price as a guideline and submit a limit order, expiring that day, either at that price or 5 or 10 cents above/below. Sometimes they do expire, unfilled. I realize for the fantasy portfolio, you would be using the ask price.
Thanks, tanglewood, for that great reminder. Until recently I wasn’t even aware limit orders were possible for options (true confessions…) but especially in the stocks we’re dealing with, there really is a big difference in the b/a. So a great reminder . Feel free to share more wisdom as often as you like.
tanglewood and JB – Subject: market orders/limit orders
Most option gurus recommend placing only limit orders. In most cases, the limit order is placed for the current share-price, so a bit lower than the ask-price. The investor could also try to buy option shares at a bargain price by making a low-bid (for a price well below the current share-price of the option). A low-bid price waits for a drop in the share-price. The price may not drop for several days, so the investor places the order as “good until cancelled.” Limit orders can lower the price of an option contract.
Limit orders have a down-side, though. They might not be filled, ever.
Here is an example: I wanted to buy option contracts on stock XYZ, and placed a limit order for its last price of 0.45 (the bid price). My order was not filled. So I increased the amount of my limit order to the new bid price of 0.55 (+22.22%), that also did not get filled. I kept “chasing the price” of the option, but my limit-orders all sat unfilled. Those options were up 60%. And I missed out on that gain.
Every day some option contracts are moving rapidly to a gain of 300% in just that one day. Many more are in the fast-track, and will end the day up 150%. As their price rapidly rises all day, it would be unlikely that a limit order could catch a ride on any of these.
Here is my thinking. Every order that I place represents my time, plus a dollop of hope. During my hunt for a good option play, I screened many stocks. I then chose 12 to evaluate. I drew their charts, analyzed their trend-lines. I checked each for volume, recent gains, earnings, and news. When I chose one or two to be the underlying stock for an option, that moment was a bit of a thrill to me. I want to be sure that my order is filled. Therefore, I do not choose to place a limit-order.
Margaret,
See if this site might be useful in identifying hottest sectors from which to pick options; it shows hottest sectors by various time periods by showing top ETF in that sector.
http://www.etfscreen.com/s_sectors.php?wl=ca&s=Rtn-1yr%7Cdesc&t=6&d=e&ftS=no&ftL=no&vFf=dolVol21&vFl=gt&vFv=100&udc=default&d=e&rs=0
Don – So you remembered that I look for sector first (when choosing both stocks and options). This site will be helpful to me. Thank-you.
Now I would like to know how to find the “delta” for an option. The higher delta scores move faster, you said. So it would be helpful to know.
You might also be able to tell us about puzzling option prices for our Puts on P. P’s stock price went up two days running. Our put-options for June, strike 24.00 went UP, and not just a little. Up 20.88%. This seems so unlikely that I now am thinking that I must have really messed up when I looked up the option’s share price. Our put-options for September were both down (Sept strike 23 down 6.75%, and your strike 29 down 4.96%)
Well, most sites that list strike prices with bid and ask spreads, etc. also list the
Greeks, which includes of course the Delta of the option’s nvarious strike prices.
Hell, since the $29 put went down and the $23 went up, and mine supposedly had the higher delta, perhaps I am all wet about Delta after all; sorry, can’t explain the disparity in the prices you quote.
I will have to get on Ameritrade and seed if mine really went down LOL, so much for high deltas!!!
Don
Don – The September 23 DID go down. I typed _6.75 instead of – 6.75. So don’t try to figure how you figured wrong. You did fine. My mistake.
So now I will look for the Delta when I research option possibilities.
Hello Margaret! I have found the answer to my question to you.. re how to put on an option trade…
In Australia go to Commsec and apply for an online options account.
Then one has an option trading platform set to go. Everything listed and dead simple.
Janet – I’m glad that you found your answer! If you are all set up, you are ready to have some fun with a sort of investment that can move quickly (to the down-side, too, of course!).
Hello Margaret,
Do you ever sell puts on. ETF’s (SPY or IWM ) ?
Gordon – One of my goals for our option class is to learn about selling both calls and puts.
I don’t know how. I don’t know what the advantages are. But many seem to prefer doing this.
Hey, everyone! We need a teacher, please.
When you buy an option you incur no obligation,,,When you sell you do. Therefore you should be comfortable with selling the underlying stock in the case of calls or buying the underlying in the case of calls. That occurs if you are at the price plus $0.01 for calls or minus $0.01 for puts. You run the risk of this happening before settlement day if the other party to the transaction exercises the option. If I plan on building a position I sell puts [contract to buy the underlying] to in effect buy on the dip if I enter a below the money option,,,or if at the money entry to get a small discount[the premium]. I see no reason to not use that idea for ETF’s tho I have never done so. For selling calls if the underlying has not been moving I can get a little income extra while I am trying to decide holding for some event to happen. Be aware that a spike up can sell you out at less than what it costs to re-buy. Hope this is some help. fa
should have been ‘buying the underlying in the case of PUTS. I must learn to proofread…..
Great thread about options! I thought I would mention some options pitfalls that I’ve encountered, some of which has already been touched on. First, look for volume and open interest on whatever option you might want to buy or sell. If there’s little of either or both, there will typically be huge spreads between bid and ask prices, which will generally work to your disadvantage by reducing your profit (or increasing your loss). The other thing to note is implied volatility (IV). For example, we know all about the DRTX FDA decision scheduled for May 26 (so does everyone else in the world, of course). Well, as a result, the implied volatility for 30, 60 and 90 day options are all in excess of 100%! The option price is including a huge premium for that, so the underlying stock price is going to have to make a really big move for you to make any money on those. I prefer options with lower IVs, and in this market, they are few and far between. But patience sometimes pays off. The idea, at least for me, is what some call “risk management”.
Reasonable Guy – Thank-you for your comments about volume, that bear lots of repeating!
Could you help us understand ‘implied volatility? How do we identify it?
You used the example of DRTX. Is the implied volatility stated on the chart somewhere? Or do you have a method of deriving the number?
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR FRIDAY MAY 9
ARNA (M 6.00, 0.58)….0.58…0.84…0.80…0.89…0.95…0.97…1.10…1.30 (18.18%)
DRTX (J 12.50, 2.08)…2.08…2.35…2.00…2.85…2.75…3.70…3.30…3.50 (6.06%)
DRTX (J 15.00, 1.85)………………………………………..1.75…2.10…2.10…2.15 (2.38%)
GILD (M 75.00, 3.19..3.19…4.70…3.65…5.15…3.85…4.40…4.20…5.00 (19.04%)
GILD (M 77.50, 2.90)…………2.90…2.13…3.20…2.11…2.45…2.25…2.79 (24.00%)
GILD (M 79.00, 2.57)……………………………..2.87…2.11…2.40…2.24…1.69 (-24.55%)
GGB (J 6.00, 0.40)………………………..0.40…0.35…0.40…0.60…0.60…0.60 ( – )
MXWL (J 15.00, 2.00)………………….2.00…1.75…1.25…1.45…1.25…1.30 (-3.70%)
P (PUT J 24.00, 2.41)..2.41…2.51…1.92……….2.71…2.95…2.10…2.72 ((20.88) ??
P (PUT S 23.00, 3.70)…………………………………………………………3.70…3.45 (_6.75%)
P (PUT S 29.00, 8.05)………………………………………………………….8.05…7.65 (-4.96%)
_________________________________________________________________________________
OUR NEW OPTIONS:
MNTA (J 10.00, 1.50)……………………………………………………………………..1.50
MDVN (J 65.00, 3.70)……………………………………………………………………..3.70
MDVN (S 65.00, 7.15)…………………………………………………………………….7.15
WPRT (JLY 15.00, 1.40)……………………………………………………………………1.40
BWEN (J 12.50, 1.75)……………………………………………………………………….1.75
Hi Margaret,
I get my information from my online broker, Fidelity. They have a lot of great learning tools about options you can use even if you don’t have an account set up with them. I will let them explain about IV, since they have already done a pretty good job of it:
https://www.fidelity.com/learning-center/tools-demos/research-tools/analyzing-volatility-IV-index-video
For more tutorials on options, you can go to their main page, click Research > Learning Tools and then click on Investment Products > Options. There are a bunch of videos there that I think you’ll find pretty informative.
Reasonable Guy – Thank-you! So when I can use the words “implied volatility” in a sentence, people will think that I am sophisticated and knowledgable. And I will like knowing how to utilize the knowledge if it helps me make better decisions when choosing and managing option trades.
Hi Margaret; Are you familiar with Investors Business Daily? It’s in a newspaper format. That might help in identifying hot sectors. They also have the IBD 50 published Monday and Wednesday of their top 50 stocks based on several factors, relative strength being one of them. They probably don’t call them this, but I call them ‘momentum’ stocks. When the market is going up, they do great; it’s almost like a self-fulfilling prophecy. There is quite a bit of turnover, of the 50 stocks in the list of 1/29/2014, there are only 19 remaining in the list of 4/30/2014. Besides subscribing, you may be able to pick one up at your local supermarket or view it at your library.
tanglewood – Thank-you for mentioning IBD. I did subscribe years ago, and appreciated their focus on trend-lines. I’d quite forgotten about the good experience I had with that publication.
Let me tell you about our new option plays, and recommend a stock for you, too.
MNTA has an interesting chart. That is the reason I opened option contracts on it April 16 (May expiration, strike 11.00…still needing a surge in order to make money). This biotech has treatment for MS. From its high of $20, it dropped to 10.50 (down 47.50%). When it rose to $11.55, I bought options on it. But it re-tested its bottom, and did not turn up again until Friday (5/9) on increased volume (another positive indicator). If it continues to rise, there is a lot of “energy” after such a big drop. So it could do very well as an option play.
MDVN – Medivation has treatments for prostrate cancer, and breast cancer. It has the same sort of trend-line as MNTA…up, hold the high only briefly, down. MDVN’s drop was 37.50%, so that is the percentage gain that the stock will make if it returns to its previous high of $88.19. Since May 2, it is up from $59.59 to $64.34 (that appears to be a break-out).
WPRT – a company with fuel systems for natural gas in vehicles – has a chart showing a down-trend lasting 6 months and falling 44.44%. Last week, volume was up X7 to 7.1M. I did not allow enough time for a back-test of the rise off its bottom price. So if you open an option trade on WPRT, be prepared to close the options if the stock price drops to $14.80.
BWEN – Broadwind (wind power turbines) has a trend-line the reverse of WPRT’s. Instead of a long, steady down-trend, BWEN’s trend-line is a long, steady up-trend (from $7.00 in November to Friday’s $13.09). It is up 41.21% YTD. Held as either stock or options, BWEN will not have the energy that propels the stock-price after a steep down-trend. But it may move more steadily.
When placing my orders on this Saturday (possible when you have a Fantasy Portfolio, you know), I stayed with the $1,300 amount of our other buys. The exception was MDVN September contracts, that were so expensive I could buy only 1 contract…so “borrowed” in order to buy 2 contracts.
MNTA – $10.69 5/9. Expiration June, strike 10.00 @ 1.50 (per option share). Volume was 204, open interest was 105. We bought 8 contracts (at 1.50X100= $150 each) = $1,200, with $100 remaining.
MDVN – $64.59 5/9. June, strike 65.00 @ 3.70. Volume – 92, open interest – 208. We bought 3 contracts ($140X3) = $1,110.
MDVN – $64.59 5/9. September, strike 65.00 @ 7.15. Vol – 21, op int – 101. We bought 2 contracts for $1,430.
WPRT – $15.65 5/9. July, strike 15.00 @ 1.40. Vol- 19, OI-1,144. We bought 9 contracts for $1,260, with $40 remaining.
BWEN – $13.09 5/9. June s$12.50 @ 1.75. Vol-20, OI-563. I divided $1,300 by 175 to learn how many contracts we could buy. We bought 7 contracts for $1,225, with $75 remaining.
______________________________________________________________________________________
While I was analyzing possibilities for our options, I came on 1 that you might consider for a stock purchase (it has no options, but I read that it will soon have them).
RGDO – A biotech liked by Dr. KSS. RGDO has a crazy trend-line. It went up a sheer mountain-face, rising X3 to $14.10. At the top of the mountain, it created a half-moon shaped indentation (I think to give it security while it slept). I also think that it brought a parachute up to that mountain-peak, because it just jumped straight down, bounced a bit, and has been recovering during the past month from its fall of 150.44%. On Friday, it rose 6.83%. I mentioned energy that can rapidly propel a stock…and RGDO could really fly. In just one month’s time, it chugged up the mountain, took a brief rest at the top, and fell down the mountain. So it could rise X3 in just 2 weeks, possibly.
Margaret, I don’t want to be a nit picker, but you said:
“MDVN’s drop was 37.50%, so that is the percentage gain that the stock will make if it returns to its previous high of $88.19”
88.19 – 37.50% = 55.11875
55.11875 + 37.50% = 75.788281
🙂
Always remember: if a stock loses 50%, it requires a 100% rise to re-reach the same price. Using a brute-force method in this case, to get from 55.12 back to 88.19, I figured out that you would need a rise of approx. 60.003%.
Better than my math, however, is this article about dealing with reversing percentage moves, which tells us that the formula would be something like:
current_price + (current_price * (37.5 / (1-37.5/100) / 100))(Okay, they don’t tell us that exactly, but I used their formula and adapted it to our circumstances using a scientific calculator program.:))
The Blind DayTrader – I welcome nit-picking, especially on my math. And I want to comprehend the point that you made.
Let’s see if the situation with MDVN can serve as an example of this statement: “If a stock loses 50%, it requires a 100% rise to reach the same price.” But the example must be realistic, with the investor NOT getting back into MDVN at its absolute low ($55.11). After MDVN fell 37.50% from $88.19, the investor waited for a rise off the low as a signal to buy. The investor noted several stock-price increases, then bought on 5/9 when MDVN was $64.34 (our buy point for the Fantasy Portfolio). So I’m using $64.34 for the start of the ride back to the high of $88.19. It would be a rise of $23.85 (37.06%, as I figured it).
The need for a 100% rise is aimed, I think, at the investor who held a stock at its height, and did not sell out as the stock-price fell. So I’ll change the example. Let’s say that I held MDVN when it was $88.19. The stock-price fell. I did not sell out of the position. Down. Down. Down. Still I held. I held for a loss of 37.50% from the high. You bought into MDVN after a rise off its low, entering the position when the stock-price was $64.34.
Now, if MDVN returns to its high of $88.19, you will have a gain of $23.85 (37.06%). During the run-up back to $88.19, I will have NO GAIN. All I will do is make up for my loss. In order for me to make the same gain that you did, MDVN must not only return to its previous high, but must continue to rise a full 37.06% above $88.19 to $120.87. And I can never match your gain, anyway (assuming that you hold MDVN throughout its rise).
So this example demonstrates the problematic nature of the buy-and-hold tactic. It seems to me that the buy-and-hold investor is the intended audience for the statement: “If a stock loses 50%, it requires a 100% rise to reach the same price”? [I’m inclined to alter the statement to say: If an investor holds a stock as it loses 50%, it requires a 100% rise to reach a 50% gain.] Maybe I went off track here. Correct me if I did. No, better yet…give me an example that would help me comprehend.
I was responding strictly to your statement of:
“MDVN’s drop was 37.50%, so that is the percentage gain that the stock will make if it returns to its previous high of $88.19.”
In my head, that expanded as follows.
“MDVN’s drop from $88.19 was 37.50%, leading to a price of $55.12, so 37.50% is the percentage gain that the stock will make if it returns to its previous high of $88.19.”
I agree that the advice I quoted is usually applied in B&H situations, but I was using it more generally.
It doesn’t matter if you were buying and holding that stock through a decline and retracement, jumping in and out of various options plays on it, etc.: I was talking only about the stock’s price action, and what you said exactly.
From your second message, I think I understand that what you were actually saying was:
“MDVN’s drop from $88.19 was 37.50%, leading to a price of $55.12. It then recovered to $64.34, where we bought back in. So 37.07% is the percentage gain that the stock will make if it returns to its previous high of $88.19.”
In short: I misunderstood what you were applying the second 37.50% to. Although I guess you meant 37.06%, which is actually probably 37.07%, depending on your preferred rounding rules.:)
That said, buy and hold is not really at issue. Any time you have a target price, and say “ticker fell from X to Y, but we are expecting/hoping that it will return to X”, as you know, the percentage is significantly higher on the up than it was on the down.
I.E. 20% of 100 is 80, so 100 – 20% = 80. But 20% of 80 is only 16. So 80 + 20% = 96.
But, I think we already understand each other, it was a question of application.
My apology for the misunderstanding!
Blind DayTrader – Hey! You are not the one misunderstanding here. But I think that I’m just on the edge of grasping this 50% drop becoming a 100% rise to re-reach the same price. I do welcome the challenge of trying to move toward your level of understanding. Then, if I did understand, my next challenge would be in the application!
A $10 stock that falls to $5 incurs a 50% loss. That $5 stock would need a 100% gain to get back to $10.
Travis – All these days, I’ve continued to puzzle over this, staying with my same sense of ALMOST grasping a 50% drop becoming a 100% rise as the stock-price makes up its loss.
Today I was figuring % gains/losses for the Fantasy Portfolio and recalled the figures that you had chosen: A stock-price dropped from $10 to $5. Yes, I easily recognize that this stock lost half its value…a 50% loss. Now the stock-price STARTS at $5 as it returns to $10. So it needs to double its value (2 X $5 = $10, and $5 +$5 = $10)…yes, it needs a 100% gain.
Clever of you to choose those figures of $10 and $5!
Margaret — After a stock price declines, the percent needed to get back to original price can always be calculated by:
1. Divide the original price by the amount of loss.
2. Multiply result by 100 to get the percent needed..
This method can be derived algebraically as follows.
1. AmountLost = OriginalPrice minus LowerPrice
2. Let X be the multiplier needed to get back to
the OriginalPrice. Algebraically,
3. X times AmountLost = OriginalPrice
4. Dividing both sides by AmountLost
5. X times 1 = OriginalPrice divided by AmountLost,
6. Since X times 1 = X,
7. X = OriginalPrice divided by AmountLost
8. Multiply X by 100 to arrive at percent.
Example 1.
Original Price = $300, price falls to $180.
Loss = $120
Percent to get back to $300 = 300 divided by 120 = 2.5
2.5 times 100 = 250 %
Example 2.
Original Price = $300, price falls to $150.
Loss = $150
Percent to get back to $300 = 300 divided by 150 = 2
2 times 100 = 200 %
Example 3.
Original Price = $300, price falls to $120.
Loss = $180
Percent to get back to $300 = 300 divided by 180 = 1.667
1.667 times 100 = 166.7 %
Example 4
In one of your trades above,.
Original Price = $88.19, price falls to $64.54.
Loss = $23.65
Percent to get back to $88.19 = 88.19 divided by 23.65 = 3.72896
3.72896 times 100 = 372.896 %
=================================================
I apologize if someone covered this elsewhere..
Hi Pockets – Routinely, I would determine how much gain I might have if I buy a stock that was just moving up after a long drop. I would subtract the current price from the previous high (current price of $15 subtracted from high price of $30) then divide the amount into the high price and click % on my calculator. Using this method, I DID get the correct answer. But I did not recognize that a 50% drop (from $10 to $5, or from $30 to $15) would be followed by an increase of 100% if the stock-price returned to its high (moving from $5 to $10, or from $15 to $30).
So the example that StockGumshoe used ($10 to $5 and back to $10) brought me to an AHA!! moment. And you gave me a method for computing the amount if my calculator doesn’t work.
I do so enjoy the experience of finally understanding something that has been illusive.
WHOOPS! Mistake in the order for MDVN June expiration. Each option share price was $3.70. Therefore each option contract was 100X3.70=$370 (NOT $140). $1,300 divided by 370= 3.51. So we could buy 3 contracts. 3X370=$1,110. $1,300 minus $1,110=$190 remaining.
I made this correction so that the mistake would not confuse you. Now, I read my correction, and what I wrote here confuses me.
Frank – Thank-you for explaining the goal of selling a put. So I would start by wanting to have a position in the underlying stock, then use this type of option to get the stock at a lower price. This has appeal to me, so I will try it.
Selling a call sounds like it has more risk. And I’m not clear on what the appeal of selling a call would be.
To me, selling a naked call has no appeal at all. Unlimited loss potentil is rarely appealing. However, selling calls can have quite a bit of appeal if they are ‘covered’ with something.
For example, if you own 500 shares of PSEC, you could boost the dividend (so to speak), by selling 5 call contracts on it. I did this in, I think January. While trading around $11.20, I was able to sell the May calls for something tiny like $0.05 per option (N.B. I do not use the word “share” in this context, because it is non-standard and can be confused with stock shares). So, it only brought in $5 per hundred shares that were covered by calls, but I PSEC is a rather large holding, and a rather long one, so why not bring in a tiny bit of extra cash to offset any possible losses while I’m holding it? PSEC almost never goes to $12.50, so the chance of being assigned on these is microscopic.
Of course, that is a very small bit of income per year. Covered calls on other positions can be used to generate quarterly or monthly (or sometimes weekly!) income quite nicely.
And it doesn’t have to be stock. If you hold calls, and expect to be holding them for some time while a situation developes, why not sell some out of the money calls against them, to help reduce your cost basis?
In addition, a sold call is half of the popular collar strategy, used by many to protect long positions.
Naturally, short calls also play a part in exactly half of all advanced strategies, but that is not the topic at hand.
Short puts, on the other hand, as Frank said, are a good way to get paid for carrying a sort of limit order. I think I talked about that in my put buying and selling post early in this thread, so won’t re-hash it here.
This is a tad off topic, but the topic is options and you do have an option to talk more about PSEC. :>)
Could you comment on the SEC requesting PSEC to restate their financials? There’s one article here: http://seekingalpha.com/article/2208583-prospect-capitals-potential-financial-restatements-explaining-the-current-situation-and-its-impacts-part-1
I’m not sure how much I can contribute. The subject of passthrough entities, holding companies, and the unique tax circumstances of BDCs is a rather specialized one, and I am by far not an expert on it. I tend to side more with PSEC’s view (given their ‘money from LBOs’ argument), but I doubt they will win. They will probably delay it for a while, and I suspect the stock will recover some before it actually happens.
I might close all positions at $10 (~30 cents above my current stop) to wait it out, but that will depend on what seems to be happening in the next couple of weeks.
I remain unclear about what exactly to expect if they do roll these holding companies up. I thought at first that it might be favorable–having to reintegrate that capital may lead to a special dividend or the like–but again, I’m not an expert on what would happen in the various ways this could play out.
The PSEC share price had dropped about 7 % during the past few days, down to $10.20, which brings the yield up to 13 %. This equates to about 35 cents per share per quarter.
If they have to cut the yield I’m thinking that at worst it would be to around 3 to 6 percent, or 8 to 16 cents per share. .
I hope! You pays your money and you takes your chances. :>)
In the recent conference call, one of the officers opined that the SEC situation would have little effect on shareholders, and gave a few reasons why. What worries me, though, is that they have made 4 registration statements during the past 3 weeks. The last one was 246 pages. I have trouble wading through them.
BDT Thank you for catching what I should have made clear. Never trade ‘naked,,,,’ the risk is too great. I think most brokers will not permit small traders to do it anyway. In example I gave I implied selling covered calls but did not make that clear . I purposely stayed away from combining selling covered Calls & simultaneously buying ITM Calls or Puts or selling Puts as it is difficult to explain in a sound bite post. Perhaps you would sometime cover subject? fa
HI Margaret,
Selling puts has some risk, too. Let me give you a recent example. Over the past several weeks, there has been a mini-meltdown in many of the high-growth “momo” tech stocks (e.g., FEYE, SPLK, WDAY, YELP, etc.). We’re talking 50, 60, 70% declines as record highs are being achieved in the general indicies. Very ugly situation. Had you sold puts in these stocks during this meltdown (and for all we know, the meltdown might still be ongoing), you likely would have had them “put” to you at much higher prices than they are today, even considering the option sale price you received. Having said that, however, if you have sufficient money in your account to cover the cost of having the underlying stock “put” to you, AND your are planning this as a long-term investment, AND you have faith in the long-term viability of the underlying stock, selling puts is a reasonable strategy. Getting back to IV, in this case you are looking for the HIGHEST IV possible, to get as much premium as possible for selling your puts.
Reasonable Guy – IV is implied volatility? That is something else that I’ve not been aware of, so have not checked for when selecting an option contract.
Selling puts clearly can be useful. But there are potential problems, too. It would surely be no fun to be forced, due to selling puts, to have to buy a stock at a higher price than I’d pay on the open market. And big declines do happen, as we just recently saw with so many small biotech stocks dropping 30% to 50% (or this group of tech stocks dropping as much as 70%).
Oh, now I remember that we talked about this earlier. And you gave us a link to learn about implied volatility. ..IV.
Very good post and one reason I stay away from momos except FB, which I am comfortable owning at 52 to 55 at the time of this writing.
momos–I like it!:)
Like them, too, most of the time.
I used to play them during my daytrading period of mid 2013. Made some good money day and swing trading the socials–LNKD and FB, and some non social momos.
Sadly, I lost it all (and thensome!) on some bad SPY trades that made me stop short term trading until I can write better software.
ASSESSING GAINS/LOSSES OF OUR OPTIONS AS OF MAY 9
ARNA – 22 contracts for $1,276 – option price 0.58 to1.30 (+124.13%)
…………..22 contracts 5/9 for $130 each = $2860 [+$1,584.00]
CBST – 4 contracts for $1,320 – option price 3.30 to 2.35 (-28.78%)
………….4 contracts SOLD 5/5 for $235 each = $940.00 [-$380.00]
DRTX 12.50 – 6 contracts for $1,248 – option price 2.08 to 3.50 (+68.26%)
…………..6 contracts 5/9 for $350 each = $2,100 [+$852.00].
DRTX 15.00 – 5 contracts for $875 – option price 1.75 to 2.15 (+22.85%)
………….5 contracts 5/9 for $215 each = $1,075 [+$200.00]
GILD 75.00 – 4 contracts for $$1,276 – option price 3.19 to 5.00 (+56.73%)
………….4 contracts 5/9 for $500 each = $2,000 [+$724.00]
GILD 77.50 – 4 contracts for $1,160 – option price 2.90 to 2.79 (-3.79%)
………….4 contracts 5/9 for $279 each = $1,116 [-$44.00]
GILD 79.00 – 5 contracts for $1,285 – option price 2.57 to 1.69 (-34.24%)
………….5 contracts 5/9 for $169 each = $$845 [-$440.00]
GGB – 32 contracts for $1,280 – option price 0.40 to 0.60 (+50.00%]
…………32 contracts 5/9 for $60 each = $1,920 [+$640.00]
MXWL – 6 contracts for $1,200 – option price 2.00 to 1.30 (-35.00%)
…………..6 contracts 5/9 for $130 each = $780 [-$420.00]
P – 5 contracts for $1,205 – option price 2.41 to 2.72 (+12.86%)
……….5 contracts 5/9 for $272 each = $1,360 [+155.00]
P 23.00 – 4 contracts for $1,440 – option price 3.60 to 3.45 (-4.16%)
…………4 contracts 5/9 for $343 each = $1,372 [-$68.00]
P 29.00 – 2 contracts for $1,610 – option price 8.05 to 7.65 (-4.96%)
………….2 contracts 5/9 for $765 each = $1,530 [-$80.00]
______________________________________________________________________________
Invested: $13,895
Gains $4,155
Losses 1,432
____________.
total gain $2,723 – +19.59%
_______________________________________________________________________
When using options, an investor improves gains by:
(1) opening 4 or more option trades (a basket of options);
(2) learning trend-line patterns that predict stock-price gain, and
selecting stocks with these patterns for option plays;
(3) choosing a strike price that is lower than the share-price of the
underlying stock (and for a put option, choosing a strike price that is
higher than the share price of the underlying stock);
(4) making sure that there is good volume and open interest before
opening any option trade;
(5) closing an option after it is down 30% to 37%, or after the price of the
underlying stock has fallen 5% to 10%, rescuing your investment capital;
(6) buying more contracts for an option that is making fine gains (as we could
have done when we recognized that ARNA was doing so well).
Margaret,
To make it more of a real world exercise, you might also want to include the effect of brokerage commissions. For Fidelity, it’s 7.95 per trade plus .75 per contract, which seems in line with what other brokers charge. For the positions above, I count 12 positions and 97 contracts, for a total commission of $168.15 to buy, and another $168.15 to sell, for a total of about $336 subtracted from profit. Also consider that if you wanted to sell at this moment, it would be at the “bid” price, which would affect your calculations. For example, the DRTX 12.50 June calls as of the 5/9 close were 2.90 bid and 3.50 ask, a pretty big spread percentage-wise. If you price them at the bid of $290 rather than the ask of $350, then the total for 6 becomes $1740, not $2100. Open interest was only 208 contracts (i.e., fairly low liquidity). Implied volatility is about 118% (i.e., expensive).
Not trying to be a pain at all, just trying to throw some realism in there for anyone putting any actual money into these.
Here is a site that has free tools and education regarding options. For now I am showing DRTX as an example. Note the links you can click on at the bottom such as the Greeks and implied volatility! Try it. Lots of good free info here. http://www.schaeffersresearch.com/streetools/stock_quotes.aspx?Ticker=DRTX
Opposeablethumb – Thank-you for the link. Maybe when I check delta and implied volatility on stocks such as DRTX (that I understand better), I will determine the value to me of knowing such qualities.
We start expiration week for most of our positions. So these will soon be closed. When I report sales, I could subtract commissions and fees (both for the purchase and sale of the options).
Earlier, I had decided not to include these costs. One reason was to stay in line with the way options newsletters report. Another reason was that already cluttered reports would be further cluttered. So I’m still conflicted about how to handle this.
Also, there is not uniformity amongst brokerages. So your Fidelity costs are $7.95 per trade and $0.75 per contract. My Scottrade commission and fees are $7 per trade, and $1.25 per contract.
DRTX June calls 12.50 strike for our 6 contracts: With Scottrade, opening and closing is $7 + (1.25X 6=$7.50) [total $14.50 ] for a total of $29.00. With Fidelity, opening and closing is $7.95 + ($0.75 X 6= $4.50) [total $12.50] for a total of $25.00.
Reasonable Guy – I will need to sell options at the “bid” price, then, that also affects total gain for an investor.
Meg (Heh, I’m lazy this morning), you don’t always have to sell at the bid, or for that matter, buy at the ask. I try not to do either whenever possible.
Consider a stock with an option given a bid of $3.45 and an ask of $3.46. Well, you have no choice, really, but to use the bid and ask there, unless your broker lets you try for $3.455.
Similarly, consider a stock with an option at $7.50 as its bid, and $7.55 as its ask. Now, let’s say that it’s one of those stocks with options that only trade in nickle increments. Again, you can only trade at the bid (to sell) or ask (to buy), if you want to get a fill.
Of course, if you’re putting in a limit order for some later time (like if you want to sell after a certain point), you can go higher or lower, and let the price “come to you”.
But, let’s say that the option is trading for $3.41 (bid), and $3.52 (ask). Now, you have some flexibility. Instead of just buying by paying the ask of $3.52, why not try for $3.45? If that fails, how about $3.46? And so on?
One brokerage that I know of (but don’t use), Options Express, has an automated order type called the walk limit, which will do the incrementing on your behalf until it gets a fill or hits your real upper limit. A handy feature, that.
The bottom line is: you do not have to sell at the bid, unless you want to guarantee an immediate fill, and don’t have any time left to see if someone has interest at a better price. On big orders, it can make a real difference. Back when I used to scalp using options, before I discovered some of the really deep pitfalls of that activity, a one penny better price over the bid, might be a $30-$100 difference in P/L.
Hi Margaret,
Yep, I know commissions are not all the same. I was just using an example to illustrate that they are non-zero and do have an impact on total return, especially when dealing with a lot of contracts. In your example above, your gain of $2723 becomes reduced by 12% ($336) if the trades were placed through Fidelity. The impact is even greater if the total gain calculation is adjusted (reduced) to reflect selling at the bid price. I suppose you could eliminate taking commissions into account, but just in case anyone might be considering doing this for real, it’s nice to keep in the back of your mind.
Sure, I can see both sides of this. If the idea was to give a full profit and loss account, Reasonable Guy is right. But the idea was to give a demo of the methods/strategies of trading options so that all could learn and follow. Yes all brokers charge differently. So why not settle for a set 10% costs for simplicity. Reality is what reality is.
And in my brokerage, it would be $116.55 to get in, and the same to get out (total $233.10). I agree with Margaret’s original position–we can all factor in our own brokerage fees to get an idea of how the P&L would be changed by including commissions.
Most sites out there don’t even bother, and just say “not including brokerage fees”, which is how I would prefer to see it go here.
I like the statement of how many contracts, and how many transactions (97/12 in this case, according to RG’s count) are involved, which makes it very easy to quickly figure commissions.
(Side note: is that right? It’s an average of eight contracts per position.)
So my $0.02 is to stay out of the commissions figuring business, and stick to the market numbers only.
+1