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.
ANNOUNCING SOME SALES, SOME BUYS, SOME RECOMMENDATIONS
I have chosen an amount between the Fidelity and Scottrade commission and fee amounts…$7.47 per transaction, and $1 per contract. From this point forward, I will apply these costs to our transactions.
Some of you may have bought options that we are holding. So I’m letting you know that I made some sales. ARNA reported after hours on Friday, and dropped when the market opened this morning…so I sold. I also sold Puts on P. MXWL was also sold this morning.
Here are new buys: ARWR…SGMO…TSRO.
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ARWR is in one of my favorite trend-line patterns. The stock-price steadily climbed one side of the mountain, moving from $10.00 to $27.63, more quickly went down the other side back to $10.00, then rose off the low to $10.56 (with that rise being my signal to buy). If it returns to $27.63, an investor will gain 61.78% (and an investor using options will gain many times that % amount). Arrowhead Research’s focus is on RNA.
ARWR – $10.56. 5/12 bought ARWR June expiration, strike 10.00 for 2.00 per option share. Each contract has 100 shares, so each contract costs (100X2.00=$200 per contract). $1,300 (that we are allotting for each transaction) divided by 200 allows us to buy 6 contracts.
6 X $200 = $1,200 (with $100 left over) Commission of $7.47 + fees of ($1 X 6 = $6) total $13.47. So the cost is $1,200 + $13.47 = $1,213.47.
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SGMO has a similar trend-line pattern, but with a slower climb up one side of the mountain, and a quicker run down the other side. From its high of $24.69, SGMO’s stock price fell more than 50%, then rose 5.12% off its low (my signal to buy). Volume increased from 983K to 1.3M (also a positive indicator).
5/12 bought SGMO June strike 12.00 @ 1.35. [$1,300 divided by $135 = 9.] 9 contracts @ $135 = $1,215. Commission and fees are $7.47 for the transaction, and [9 X $1 = $9] for $16.47. Total cost is $1,231.47.
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TSRO is in Phase III trials for its anti-nausea drug for cancer patients. Its trend-line has been jaggedly down across the last 6 months. On news of good trial results, it jumped on Friday (my signal to buy). If the stock-price returns to its recent high of $38, and investor will gain 26.31%. By using options, we can gain much more than that.
TSRO – $28.30. On 5/12, bought TSRO June s$25.00 @ 4.90, 2 contracts for $980 [plus commission and fees of $7.47 + $2 = $9.47]. Total = $989.47.
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Reminder: I earlier recommended that this is a good point for buying RGDO (that has no options). Also, I noticed this morning that BNIKF was up from 0.88 to 0.92. I bought back into BNIKF at this point (and will keep a tight stop-loss point on it). If BNIKF returns to $2.00, an investor who enters the position now will gain 117.39%. If you were one who held on to BNIKF as it fell, you will then have made up your loss but will not yet have any gain.
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR MONDAY MAY 12
[Listing the % gain since purchase]
ARWR (J 10.00, 2.00) – $2.05 [+12.50%]
BWEN (J 12.50, 1.75) – $1.60 [-8.57%]
DRTX (J 12.50, 2.08) – $4.40 [+111.53%]
DRTX (J 15.00, 1.75) – $2.70 [+54.28%]
GGB (J 6.00, 0.40) – $0.70 [+75.00%]
GILD (M 75.00, 3.19) – $5.50 [+72.41%]
GILD (M 77.50, 2.90) – $3.15 [+8.62%]
GILD (M 79.00, 2.50) – $1.87 [-25.20%]
MDVN (J 62.50, 3.70) – $5.75 [+55.40%]
MDVN (S 65.00, 7.15) – $7.65 [+6.99%]
MNTA (J 10.00, 1.50) – $1.95 [+30.00%]
SGMO (J 12.00, 1.35) – $1.80 [+33.33%]
TSRO (J 25.00, 4.90) – $5.50 [+12.24%]
WPRT (Jly 15.00, 1.40) – $1.65 [+17.80%]
[After these options are sold, we will figure the gains/losses of these along with the 6 that have already been sold.]
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR TUESDAY MAY 13
ARWR (J 10.00, 2.00) – 2.05….2.50 [+25.00%]
BWEN (J 12.50, 1.75) – sold 5/13
DRTX (J 12.50, 2.08) – 4.40….4.30 [+106.73%]
DRTX J 15.00, 1.75) – 2.70….2.75 [+57.14%]
GGB (J 6.00, 0.40) – 0.70….0.65 [+62.50%]
GILD (M 75.00, 3.19) – 5.50….5.35 [+67.71%]
GILD (M 77.50, 2.90) – sold 5/13
GILD (M 79.00, 2.50) – sold 5/13
MDVN (J 62.50, 3.70) – 5.75….5.90 [59.45%]
MDVN (S 65.00, 7.15) – 7.65….7.85 [+9.79%]
MNTA (J 10.00, 1.50) – 1.95….1.45 [-3.33]
SGMO (J 12.00, 1.35) – 1.80….1.75 [+29.62%]
TSRO (J 25.00, 4.90) – 5.50….4.40 [-10.20%]
WPRT (JLY 15.00, 1.40) – 1.65….1.40 [ – ]
Friday (May Expiration Day) will be 16 days since buying our first options. By then, all will be sold and we will figure out how they did for us.
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR WEDNESDAY MAY 14
[% GAIN/LOSS SINCE PURCHASE]
ARWR (JUNE 10.00, 2.00)….2.05….2.50….2.35 [+17.50%]
DRTX (JUNE 12.50, 2.08)…..4.90….4.30….4.20 [+101.92%]
DRTX (JUNE 15.00, 1.75)…..2.70….2.75….2.50 [+42.85%]
GGB (JUNE 6.00, 0.40)………0.70….0.65….0.55 [+37.50%]
GILD (MAY 75.00, 3.19)…..5.50….5.35….6.05 [+89.65%]
MDVN (JUNE 62.50, 3.70)..5.75….5.90….6.25 [+68.91%]
MDVN (SEPT 65.00, 7.15)..7.65….7.85….8.15 [+13.98%]
MNTA (JUNE 10.00, 1.50)…1.95….1.45….1.45 [-3.33%]
SGMO (JUNE 12.00, 1.35)…1.80…1.75…2.20 [+62.96%]
TSRO (JUNE 25.00, 4.90)…..5.50….4.40….4.30 [-12.24%]
WPRT (JLY 15.00, 1.40)……..1.65….1.40….1.35 [-3.57%]
This really is excellent Margaret. Thanks
Thank you, Margaret! I’m impressed at some of these gains. I guess the trick is knowing when to sell.
Linda – Back when people wanted us to paper-trade some options, I was quite reluctant. I do not buy options when the market is so wobbly. And I did not want people to have a bad experience, even with just paper-trading.
But it has been a good experience. So I can expound here on how to get fine gains with option plays.
A good option contract is one with a good underlying stock. Simple as that. So if you have good gains as an investor in stocks, you can have good gains when using options. I think that it could be said: The trick is to be a good stock analyst.
The next most important aspect of trading options: Sell QUICKLY any option contract that has lost 25% to 35%. Preservation of your investment capital is a VITAL goal.
The investor can have an image of rushing in as a rescue operation. The goal is to rescue your investment capital. [And with all your stocks, too, you will have better gains f you rescue your investment capital that is being lost as a stock-price falls.]
NO, I say if I claim that this option is just on the verge of a big gain. NO, I say to me when I point to the expiration date, still so far away, with plenty of time for this option to go up a lot. NO I say to me when I wheedle. So I rescue my money. Then I reward myself.
For saying NO, I reward myself by remembering times when I DID hang on…by remembering option contracts that I refused to sell, that ended up being worth absolutely nothing. Then I find a good stock that can multiply my rescued money.
Excellent advise! And I already see that in myself. I should have listened to me yesterday when I wanted to sell that GILD exp May 30 s 79 for a small profit. But nooooo I held it greedily thinking I could profit just a few more $$’s! ha ha The wonderful thing about options that I think I’m really going to like is the fact that I can buy and sell for a quick profit and not feel so “attached” to the stock as I seem to feel when I actually own it.
This thread has been a gem for me, Margaret, and I sincerely thank you for being such a pleasant and thorough teacher!
Linda – That is so very good to hear!!
I surely know that holding out for a bit more profit can turn a gain into a loss! I’m glad that you enjoyed holding your one option contract, anyway! Now, given the pleasure that you experienced, I give you a warning: Be aware that on one bad day at the market ALL your options can drop in value a LOT. So determine a percentage of your investment capital that will be the MAXIMUM that you ever put into options. I have to give this warning to myself over and over, even though I have my real-life experience of losing a lot of money due to having all my investment capital in options.
Something to consider: Gains that average about 15% on 4 or more options, all held for less than one month, is a goal that you can consistently achieve. But you do need to hold at least 4 option contracts, and you do need to rapidly sell out of any under-performers (while putting the rescued money into a new option). Our Fantasy Portfolio was started only 16 days ago. Yet its original options are all sold except those on DRTX. In….Out. Quick profit. A lot of fun!
Thank you, Margaret. I wish I had followed your advice in the past for my stock investments.
Hi Pockets – Many times, I wish that I’d always follow my OWN advice.
I do think that we can much improve our total yearly percentage gain (with ALL our investments) if we use tactics that work so well with options. Choose stocks with trend-lines that typically make great gains in the near-term future. Cut losses, and re-invest capital.
As a real world example of ignoring Margaret’s advice about rescuing capital:
For background, see my post #116 – purchasing ACRX options, and Margaret’s analysis in post #118.
Now the update. Those calls expire Saturday, and the current share price of ACRX is $8.78. NO ONE is going to want my options with a strike price of $10. So unless some kind of miracle happens tomorrow, they will expire worthless, and I will be out $250.
jer_vic – You did give us an ideal example for analyzing. And it MIGHT have taken off despite probabilities indicating that it would not.
*advice
INVESTMENT CAPITAL RESCUED ON THURSDAY, MAY 15
Tomorrow we will close all positions. These positions were sold today due to a fall of the price of the underlying stock, that dropped the option price, and will likely drop the option price for tomorrow also.
GGB (JUNE 6.00, bought at 0.40): Sold at $0.52 for a gain of 30%.
GILD (MAY 75.00, bought at 3.19): Sold at $6.00, for a gain of 88.08%.
MDVN (JUNE 62.50, bought at 3.70): Sold at $6.00, for a gain of 62.16%.
MDVN (SEPT 65.00, bought at 7.15): Sold at $8.02 for a gain of 12.16%.
TSRO (JUNE 25.00, bought at 4.90); Sold at $4.05 for a loss of 17.07%.
WPRT (JULY 15.00, bought for 1.40): Sold at $1.12 for a loss of 20.00%.
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR THURSDAY MAY 15
[Percentage gain/loss since purchase]
ARWR (JUNE 10.00, 2.00)…..2.25….2.50….2.35….2.25 [+12.50%]
DRTX (JUNE 12.50, 2.08)…..4.90….4.30….4.20….4.70 [+125.96%]
DRTX (JUNE 15.00, 1.75)…..2.70….2.75….2.50….2.90 [+65.71%]
MNTA (JUNE 10.00, 1.50)….1.95….1.45….1.45….2.35 [+56.66%]
SGMO (JUNE 12.00, 1.35)….1.80….1.70….2.20….2.15 [+59.25%]
I’ve got some DRTX June calls myself, looking at a nice gain so far. Normally I would expect the underlying stock to bump up or down significantly with the FDA decision. Looking back at the unanimous ad-com recommendation last month, where the stock did basically nothing, I am debating selling half of my calls prior to decision day. As in you never go broke taking a profit. What are your thoughts on this?
I don’t think Margaret will agree with me here, but personally I would close the day before the decision. Or, if the timing is right, a few minutes or hours before the decision.
Now, the disclaimer: I have no experience trading against FDA decisions.
That said, as I’ve said multiple times in this thread: implied volitility (IV) is crushed once the “event” outcome is known, when something has had a runup before an event. (earnings announcement, FDA decision, new product release)
That IV can be a significant portion of the price of your calls, and once there is no more speculation about what the decision will be, that portion will evaporate, instantly.
So, you had better hope that the stock makes a major move, to compensate fully for that IV loss.
Now, again, maybe in these FDA decision situations they always do. But I don’t see why they would be different.
This is why the premium harvesting types like selling strattles into earnings events and such. They capture the large premium provided by the volitility, then after the event they can buy back the call and put, often at a gain even if the stock does move, because of that vol crush. That is a risk-full strategy, and I would never recommend it, but the reason it works for anyone is because of the loss of IV after an event outcome is known.
So personally I would definitely sell half of that position, unless this is just play money and you’re only doing it to find out the outcome.
Although, Margaret could be completely right, and I could be missing some significant factor relating to biotech companies. She has been using this strategy for a while, and I never have, so don’t necessarily listen to me. I just wanted to provide an alternative view–do your research on the best likely outcome, maybe with some historical vol numbers from ivolitility.com.
Blind DayTrader – It seems to me that we need to learn how other biotechs did following 100% approval during AdComm.
We do know that DRTX has made fine gains for us since 4/30…all being post-AdComm days. So I’ve assumed that DRTX will continue to do well next week, too. That is a guess. I also do not know whether DRTX will make a good gain after FDA approval, but it doesn’t make sense for approval to be followed by a stock-price fall, either.
Okay. I’m simply guessing. And what you say, Blind DayTrader, about loss of implied volatility makes sense. Given your concerns, it seems prudent to sell prior to the decree of the FDA. We would then exit May 25. And I would certainly be keeping an eye on stock performance each day next week, prepared to close options if the stock-price falls.
Since I talked earlier about using both calls and puts at the point of the AdComm, then again at the FDA decision, I’ll mention that I would not do so with DRTX. I reserve that tactic for a drug that has generated a lot of interest, plus at least some uncertainty over approval, and with the stock (and options, too) having notable volume. Those factors don’t come together frequently.
Thank-you, Blind DayTrader, for weighing in on Frank’s question.
Frank – Investment capital held in options is always at risk. But I’m viewing my paper-profits for DRTX options as safe. And I will definitely hold option contracts through FDA decision day UNLESS the option price drops more than 12% along the way.
There may be a nice increase following the FDA decision (even though it is not a cliff-hanger). And there may be nice gains next week…maybe similar to this week’s. Since Friday 5/9, DRTX strike 12.50 went up from 3.50 to 4.70…+34.28%. Strike 15.00 went up from 2.15 to 2.90…+34.88%.
I did make a change Wednesday. I sold my DRTX strike 12.50 and bought more option contracts for strike 15.00. My reason: Tuesday, strike 15.00 rose from 2.70 to 2.75, while strike 12.50 fell from 4.90 to 4.30. Notice that strike 12.50 gained 11.90% Wednesday to Thursday (4.20 to 4.70), while DRTX strike 15.00 gained 16% Wednesday to Thursday (2.50 to 2.90). This disparity will increase if the stock price keeps rising.
I will also check each day to learn whether another strike was added to DRTX options. They might add one for about 16.50 if the stock price continues to rise, plus option volume increases. I would then buy contracts for that new strike, too.
Clearly, I’m expecting further gain. So my line of thinking spurred me to increase the amount of investment capital that I’ve got on DRTX. But I could be entirely mistaken.
Yes, Frank…..You never go broke taking a profit. And if you feel uneasy over the amount you have at risk, do decrease it.
Margaret – ‘preciate your post. Thank you.
Im really torn on this one. The only 2 explanations for the price falling after a 100% adcom recco is, it was already priced in and people sold on the news, or theres some doubt that FDA will call for more tests/time ‘just to be sure’.
On balance, I would would be tempted to sell half. Winning traders protect their capital/profits. Greedy traders always lose in the end.
Ps… thats my options advice coz your playing against a ticking clock….my ‘long’ advice would be to hold and watch.
Thanks for all the feedback. If I recall correctly, the FDA decision is due on Memorial Day, markets closed and probably no one working in DC that day. My plan is to wait until Wednesday or Thursday next week. At that point, depending on the price I will exercise some of my calls,, sell the rest and wind up with free trading shares of Durata. Love those free traders!
My most frequent options error has been to hold on too long, I have learned my lesson (more than once).
2 more ideas:
1) Mannkind (MNKD) July calls.
They have a PDUFA coming up on July 15th for Afrezza. ADCOM has voted overwhelmingly to approve. Trading at ~$7 right now. Strike price of $5 or $6 looks attractive?
2) Cubist (CBST) June calls.
They have a PDUFA coming up on June 20th for Tedizolid phosphate. Again, ADCOME has voted overwhelmingly to approve. Trading ~$64.75 right now, dropped from ~$71 on Mon./Tues. Intuitively, I like the $60 strike price, but the open interest there is very low….
Thoughts, anyone?
jer_vic – Yesterday I was analyzing MNKD…puzzled by the trend-line. Across the past 6 months, it moved from 5.00 to 7.08, drooped to 4.00, shot up back to 7.00. Basically, I view it as not trending. “The trend is your friend,” so I don’t like a non-trending underlying stock for options. Yet this inhaled insulin seems likely to have great sales within the huge diabetes crowd. There is also fine volume (6.4M). Volume is okay for options, too. For options to be profitable, you need some stock-price gains…that this non-trending stock has not wanted to give investors. So I would wait for the stock-price to pierce the $7.08 ceiling.
CBST for options is a no-go for me, due to the volume being too small. June strike 65.00 has volume of 1, open interest of only 29. Strike 70.00 has volume of 1, open interest of 341. With such small volume, selling the options is problematic.
One I’m watching is ACAD. It was $32.00, and fell 46.87%. It has bounced off the low of $17.00 two times. If it moves above $18.90, I would buy it as a stock. I would gain 70% if it returned to $32.00. And options would give you an exciting ride then, too. But I haven’t checked them, and don’t even know whether ACAD is optionable.
QUIZ On EXERCISING OPTION CONTRACTS
SITUATION: For our Fantasy Portfolio, we bought options on DRTX. We hold 5 contracts DRTX with a strike of $15.00 , option share price of 1.75, and June expiration. We spent $884.75 (including commission and fees). We decide to exercise the options on a day when the stock price is $18.00. These DRTX options are in-the-money, so you can “exercise” them.
QUESTIONS: How do you exercise these 5 option contracts?
How much will you pay to exercise them?
What will be your price per share for DRTX stock?
Are there advantages of exercising these options compared with
selling them?
Hi Margaret;
Select the option you are exercising in your account >option trade > action> exercise> 5 contracts. If you do not see the ‘exercise’ action, do not proceed. Call your broker.
For TD Ameritrade, the standard stock commission, is 9.99. I was charged 19.99. so it looks like there is an additional 10.00 fee or possibly 1.00 per contract.
Your account will be charged 500 shares at 15.00 strike equals 7500.00 plus the standard stock commission plus the option fee mentioned above.
The only advantage is that you avoid that bid/ask game that the market makers are playing. There would be a tax advantage if you intend to hold the shares long term. If you don’t have cash in your account to cover the purchase but have buying power, as far as I can see, there would be no advantage. Margin fees for the stock purchase will exceed selling the option on the bid versus getting your own limit price.
After the fact, I looked up the TD Ameritrade fee for exercising options and it is a flat 19.99 regardless of the number of contracts. Scottrade charges a flat fee of 17.00 to exercise options.
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR FRIDAY MAY 16
[% gain/loss since purchase]
ARWR (JUNE 10.00, 2.00)…..2.25….2.50….2.35….2.25….SOLD AT 2.20 [+10.00%]
DRTX (JUNE 12.50, 2.08)…..4.90….4.30….4.20….4.70….SOLD AT 4.60 [+121.15%]
DRTX (JUNE 15.00, 1.75)…..2.70….2.75….2.50….2.90….SOLD AT 2.85 [+62.85%]
MNTA (JUNE 10.00, 1.50)….1.95….1.45….1.45….2.35….SOLD AT 2.40 [+60.00%]
SGMO (JUNE 12.00, 1.35)….1.80….1.75….2.20….2.15….SOLD AT 2.10 [+55.55%]
Between 4/30 and 5/16, our Fantasy Portfolio held 20 option plays.
LOSSES:
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CBST – 4 contracts (May 70.00, 3.30) = $1,320.00 ($11.47 fees)= $1,331.47
…………….Sold at 2.35 = $940.00 (-$11.47) = $928.53
…………….Loss $402.94 [-30.26%]
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MXWL – 6 contracts (June 15.00 @ 2.00) = $1,200 (+$13.77)=$1,213.47
……………Sold at 1.30 per share = $780.00 (-$13.47 fees) = $766.53
……………Loss: $446.94 [-36.83%]
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P – 5 put contracts (June 24.00 @ 2.41) = $1,205.00 (+$12.47) = $1,217.47
…………..Sold at 1.96 per share = $980.00 (-$12.47 fees) = $967.53
…………..Loss: $249.94 [-20.52%]
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P – 4 put contracts (Sept 23.00 @ 3.60) = $1,440.00 (+ $11.47) = $1,451.47
………….Sold at 2.99 per share = $1,196.00 (-$11.47) = $1,184.53
………….Loss: $266.94 [-18.39%]
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P – 2 put contracts (Sept 29.00 @ 8.05) = $1,610.00 f(+9.47 ) = $1,619.47
………….Sold at 6.90 per share = $1,380 (-$11.47) = $1,370.53
………….Loss: $248.94 [-15.37%]
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TSRO – 2 CONTRACTS (JUNE 25.00 @ 4.90) = $980.00 (+$9.47) = $989.47
…………..Sold at 4.08 per share = $$816.00 (-$9.47) = $806.53
…………..Loss: $182.94 [-18.48%]
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WPRT – 9 contracts (July 15.00 @ 1.40) = $1,260.00 (+$16.47) = $1,276.47
……………..Sold at 1.12 per share = $1,008.00 (-$16.47) = total: $991.53
………………Loss: $284.94 [-22.32%]
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BWEN – 7 contracts (June 10.00 @ 2.00) = $1,225.00 (+$14.47) = $1,239.47
………………Sold at 1.30 per share = $910.00 (-$14.47) = $895.53
……………….Loss: $343.94 [-27.74%]
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GILD – 5 contracts (May 79.00 @ 2.50) = $1,250.00 (+$12.47) = $1,262.47
……………Sold at 1.67 per share = $$835.00 (-12.47) = $822.53
……………Loss: $439.94 [-34.84%]
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GAINS:
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ARNA – 22 contracts (May 6.00 @0.58) = $1,276.00 (+$29.47) = $1,305.47
…………Sold at 1.25 per share = $2,750.00 (-29.47) = $2,720.53
………….Gain: $1,415.06 [+108.39%]
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GGB – 32 contracts (June 6.00 @ 0.40) = $1,280.00 (+$39.47)= $1,319.47
……………Sold at 0.52 per share = $1,664.00 (-39.47) = $1,624.53
……………Gain: $305.06 [+23.11%]
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GILD – 4 contracts (May 77.50 @ 2.90) = $1,160.00 (+$11.47) = $1,171.47
……………Sold at 3.65 per share = $1,460.00 (-$11.47) = $1,448.53
……………Gain: $277.06 [+23.65%]
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GILD – 4 contracts (May 75.00 @ 3.19) = $1,276.00 (+11.47) = $1,287.47
……………Sold at 6.00 per share = $2,400.00 (-$11.47) = $2,388.53
……………Gain: $1,101.06 [+85.52%]
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ARWR – 6 contracts (June 10.00 @2.00) = $1,200.00 (+$13.47) = $1,213.47
………………Sold at 2.20 per share = $1,320.00 (-$13.47) = $1,306.53
………………Gain: $93.06 [+7.66%]
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MDVN – 3 contracts (June 62.50 @ 3.70) = $1,110.00 (+$10.47) = $1,120.47
……………….Sold at 6.00 per share = $1,800.00 (-$10.47) = $1,789.53
………………..Gain: $669.06 [+59.71%]
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MDVN – 2 contracts (Sept 65.00 @ 7.15) = $1,430.00 (+$9.47) = $1,439.47
……………….Sold at 8.05 per share = $1,610.00 (-$9.47) = $1,600.53
……………….Gain: $161.06 [+11.18%]
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MNTA – 8 contracts (June 10.00 @ 1.50) = $1,200.00 (+$15.47) = $1,215.47
………………Sold at 2.40 per share = $1,920.00 (-$15.47) = $1,904.53
………………Gain: $689.06 [+56.69%]
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SGMO – 9 contracts (June 12.00 @ 1.35) = $1,215.85 (+16.47) = $1,232.32
……………..Sold at 2.10 per share = $1,890.00 (-$16.47) = $1,873.53
……………..Gain: $641.21 [+52.03%
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DRTX – 6 contracts (June 12.50 @ 2.08) = $1,248.00 (+$13.47)= $1,239.47
…………….Sold at 4.60 per share = $2,760.00 (-$13.47) = $2,746.53
…………….Gain: $1,507.06 [+121.58%]
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DRTX – 5 contracts (June 15.00 @ 1.75) = $875.00 (+$9.75) = $884.75
…………….Sold at 2.85 per share = $1,425.00 (-$9.75) = $1,415.25
…………….Gain: $530.50 [+59.96%]
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You knew someone would do the arithmetic, didn’t you, Margaret! :>) :>)
Total Gains = $7389.10 (11 instances)
Total Losses = $2867.36 ( 9 instances)
________
Net Gain = $4521.74
Ratio Gains to Losses = 2.58
Average Gain $671.74
Average Loss $318.60
Your Fantasy Portfolio was Fantastical !!!
Hi Pockets – “Fantastical!” But my computing is not.
Now my incorrect corrections are also here for all to scorn. And I’m not going to try any more to come up with the correct gain amount and percentage gain.
Margaret,
Nicely done! If I did the calculation right, I totaled a net gain of $4521 on a total investment of $25030. 18% in two weeks is a pretty nice return. Also, I like how you listed actual trades including commissions. Just about none of the “make a zillion with options”-type newsletters would ever do that. Again, congratulations!
Reasonable Guy – We did get a pretty nice return, didn’t we?! Especially for such a tippy market.
But my % figure is not correct. I needed to compute off the total investment, as you did. Tip of the hat to you!
Homework assignment! From another web site; Does this make sense?
‘Example
Say you own a call option with a strike price of 90 that expires in two weeks. The stock currently trading at $100, and is expected to pay a $2.00 dividend tomorrow. The call option is deep in-the-money, and should have a fair value of 10 and a delta of 100. So the option has essentially the same characteristics as the stock. There are three possible choices of what to do
1. Do nothing (hold the option).
2. Exercise the option early.
3. Sell the option and buy 100 shares of stock.
Which of these choices is best? If you hold the option, it will maintain your delta position. But tomorrow the stock will open ex-dividend at 98 after the $2.00 dividend is deducted from its price. Since the option is at parity, it will open at 8, the new parity price, and you will lose two points ($200) on the position.
————————————————————————————————————————————–
If you exercise the option early and pay the strike price of 90 for the stock, you throw away the 10-point value of the option, and effectively purchase the stock at $100. When the stock goes ex-dividend, you lose $2 per share when it opens two points lower, but also receive the $2.00 dividend since you now own the stock.
———————————————————————————————————————————–
Since the $2.00 loss from the stock price is offset by the $2.00 dividend received, you are better off exercising the option than holding it. That is not because of any additional profit, but because you avoid a two-point loss. You must exercise the option early just to ensure you break even.’
The dash lines are mine to highlight the subject of the discussion. Sure you throw away the 10.00 (paper) profit on the option but you acquire the stock at 90.00 for a 10.00 paper profit. Excluding the dividend part, It’s a wash. ‘ effectively purchase the stock at $100’ does not make sense.
Copied from this web site;
http://www.tradingmarkets.com/recent/learn_when_you_should_exercise_an_option_early-640882.html
Tanglewood; The problem as posed can not give a reasonable answer in that it does not give the ask price to buy the option or the bid price to sell the option and close it,,,which should be a 4th and most likely best choice. Separate the problem into two transactions & leave the option out of it. Would you spend $10,000 to get $200 not knowing if the stock is likely to increase or decrease in value in a particular time frame,,,let’s say two weeks. If it recovers to $100 2% for two weeks = 52% yearly gain .. If it drops to $96 you have a loss of 24% on yearly basis.
ANALYSIS of our options’ performance
Gains: $7,389.25
Losses: $2,427.52
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…………….$4,9611.73 total gain
For our 20 option plays, the average gain was $248.08
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The % gains for 11 option plays add up to 609.48
[with an average gain of 55.40%].
The % losses for 9 option plays add up to 189.80
[with an average loss of 21.08%].
For our 20 option plays, the average % was a gain of 20.98%.
Why all this talk of exercising? There is rarely a good reason to exercise early, if at all, and especially not to lock in profits!
Consider…
Let’s say ABC is trading at $50..50.
You buy the front month $50 ITM call option for $2.
So, you have spent $200, and have three weeks until expiration.
At two weeks in, with one week left until expiration, let’s say ABC has risen to $52, and the option is worth something like $3.65.
Wait, why isn’t it worth $3.50 ($2 plus the $1.50 of additional rise of the stock)? Because of the time value of the remaining week.
You both lost a little time value in the two weeks, and have some left for the remaining week. Also some volatility will be included.
Now, we have a few choices.
1. You could exercise at the two week mark.
You buy the stock for $50 ($5,000), and your options go away. You can sell it for $52 ($5,200), for a total of $200.
You paid $200 for the option, so subtract that. You now have broken even.
Subtract from that the commissions for exercising the option, and for selling the stock. Plus any margin charges for holding the stock over night or the weekend.
Also, pray the stock doesn’t take a dip below $52 before you can sell it.
Lastly, if it’s in an IRA or other cash account, your money gets locked up for three business days during settlement.
In any case, you’re looking at at least -$15 or so, maybe much more (less?).
2. Instead of exercising, sell the calls.
Remember, the calls are worth $3.65 because of the remaining time value.
So, you sell them, and receive $365.
Subtract the $200 you paid, and you’re left with $165, minus just one commission.
If you’re using a cash account, your money is only frozen for one business day.
Hopefully, that makes my case right there. To me, a certain $165 is better than an uncertain $0, every day of the week, not counting additional factors such as commissions and settlement periods.
But, let’s continue.
3. Wait for expiration.
On expiration Friday, let’s say the stock has risen to $52.20.
All the time value is out of the options.
A. You could let them be exercised, in which case everything is the same as (1) above, except that you now receive an extra $20 which maybe covers your commissions.
B. You could sell them.
Since they have no time value left on expiration Friday (or very little), you’re only dealing with intrinsic value, of maybe $2.90.
So, you sell, and get $290, minus $200 for what you paid, giving you $90 minus sales commissions.
I still like option (2) the best of all.
Of course, the stock could rise to $55, in which case holding on would have been a wonderful move. Or not, you have to decide what is likely and take your chances accordingly.
N.B. I’m using utterly fake numbers here, with no real world formulation of what time value would add or subtract from the price.
The point is not how much, but that it will add or subtract from the price, so that selling the in the money option will always be worth more than exercising-then-selling-the-stock would have been at the same point in time. (Well, unless dividends are involved, but that’s a different discussion.)
As always, I’m open to contradictory reasoning, especially if I have messed up the math–I’m sick as a dog of the Dow right now, so may not be firing on all cylinders.
BDT; You make sense to me,,,,,If you hit your target of hoped for return early,,” Grab the money & run” seems like best strategy. Even if option has 1 or 2 months to go getting out early gives possibility of making another deal that is better. fa
Frank – I very much favor your line of thinking…to sell a holding (that could be either an option or a stock) in order to buy some other holding that is better.
Correction: I put an extra number into our total gain.
Correct to: $4,961.73 total gain.
Correction of our average percentage gain:
Our total cost for the 20 options was $25,077.06.
With our total gain of $4,961.73, our average percentage gain was 19.78%.
Here is my real-world situation regarding the exercising of options…..
In March I bought 5 contracts MNTA (May strike 11.00, @ 1.27) for $648.25. In mid-April, the option price had rose to 1.35, then abruptly dropped to 0.70. I tried to sell but did not catch a bid. [Lesson: Low volume on an option contract can result in not being able to sell out of options after they fall past your stop-loss point.]
Expiration week, I again tried to sell my option contracts. No buyer. Friday 5/16, my options were in the money. So I sold DRTX (June 15.00), that was down a bit (and, with the stock down also, will probably be down Monday as well). The sale put more than $6,000.00 cash into my account (enough to cover the cost of exercising my MNTA options.). So I’ll end up with 500 shares MNTA (that was $11.92 the last time I checked it.
Actually, I don’t know how I fared in this exercising maneuver.
Margaret: I have been repeatedly advised -when trading options (covered calls)- to stick with 3 at the very most – 1-2 usual- only high quality-blue chip-which you don’t mind keeping – or if they are called away – you trade again trying to keep your annualized income at a mini of 12 to 15%- keeping in mind that the premium is part of the formula-which you get to keep. Naked puts – 1 or 2 contracts at most – and only if you have the money to buy if obligated to do so. Keep expiration dates no longer than 90 days with a better date of around 60. This has worked for me so far. I am keeping the biomed DRTX for just a little while longer, but not by much – I am up 17% and know that it should be much higher just before I sell. So far I am making money – albeit slowly- but more that 25-30% annualized. Good luck and God Bless.
Carrole – It is good to hear from you.
You have a fine average annual return. So you have a sound basis for saying that your tactics work for you. And it sounds as though you are not inclined to try different approaches.
By contrast, I feel compelled to change outcomes. So in one aspect or another of investing, I am always experimenting and trying different tactics.
If you are, at some time, inclined to experiment, you could try the approaches used for the Fantasy Portfolio….maybe choosing just a 2 week period of time as we did.
Carole
Thanks for your post. I do a lot of the same thing with covered calls, and am managing to realize much greater gains than just the dividend income. Good job getting 25-30% annualized!
If there are weekly options, I like to sell calls dated three or four weeks out. If only monthly are available I usually go with one of the next two months. Higher beta, no upcoming earnings, tight bid/ask spreads are things I look for. If one of my positions is up 75% or so I usually buy to close, wait for the stock to have a nice up day, rinse and repeat. T, COP, AAPL have all done well for me on selling calls. A sideways market like we seem to have now is nice for this strategy.
For selling puts, the risk reward doesn’t fit for me, especially as I wouldn’t be surprised at a significant correction. E.g. I sell COP puts that are 5% out of the money, not getting a huge premium depending how far out they are. If the stock drops 10% or more which is certainly possible, then I have a loss which could greatly outweigh the potential gain. Guess I’m saying I prefer the defined risk of a covered call.
Okay, Margaret, for what it’s worth, if I dealt with stocks with volumes below a million, I would have bought in in March as well, given that price action.
It all seemes fine until 3/20, when the bars start to look wonky.
Also, on 3/26, the volume spikes above a mil, and the price consolidates down. Proof that higher volume does not always equal a price increase.:)
You wrote: “Actually, I don’t know how I fared in this exercising maneuver.”
Well, let’s see. The strike price was $11, and you spent $1.27 per option.
Basically, come Monday, you will own 500 shares of MNTA with a cost basis of $12.27 per share, or a total basis of $6,135.00.
Actually, no, add in your original $13.25 commission, and assuming the same roughly to buy the stock because I don’t know any better, and your total basis is:
$6,161.50.
The money from DRTX may cover this in cash, but you will still have lost on both transactions. You definitely lost on DRTX, and if you sell MNTA Monday, and it keeps its range of $11.90-$12.02 from Friday, you’ll lose between $151.50 and $211.50.
(My numbers are slightly wrong because I don’t know your commission structure beyond the $13.25 that was priced into your original purchase.)
I would likely hold on to the stock if I expected it to go back up given this situation, or possibly sell $12 calls, if I could get enough to more than break even.
I’d keep a VERY tight stop on it though.
P.S. I’m guessing you didn’t try to sell below the bid? That would have probably worked, by one increment down (a penny, a nickle, or a dime, whatever those options trade in). There should be a market maker in this stock that is required to buy it at the bid or below.
Also, I was wrong–the low for the day was $11.55, not $11.95, so my higher loss value should have been in the neighborhood of $360.00.
Here’s some fun reading about market makers–now that’s scalping! Assuming it’s true, some of which seems to be from what I know about the way floor guys operated.
Blind DayTrader – I so appreciate your analysis. I just could not think it through.
In assessing my thinking, I focused on the MNTA options not selling, which would result in them expiring worthless (due to my account not having money enough to exercise 500 shares). Putting it more accurately, I focused on the $648.25 invested in those options, and acted to guard that money. Too narrow a focus, wasn’t it?! And no consideration of outcomes, overall.
This could have been a stock much less promising than MNTA. It still has a fine trend-line, if not for those “wonky” bars, and a gap (that maybe has filled?). So I might enjoy riding MNTA for a while. Yes, I’ll keep a tight stop on it. 8%?…
Margaret, your comment is worth reposting…
I focused on the $648.25 invested in those options, and acted to guard that money.
Too narrow a focus, wasn’t it?! And no consideration of outcomes, overall.
How many times have we all done that? I’ve lost thousands to protect hundreds in my early to mid days (okay, probably more recently than I would like to admit). It is human nature to protect the trade in hand, and fail to take losses and move on.
It’s all in risk management. Risk management doesn’t just happen before the trade; it must be re-assessed throughout the trade, until it is closed. That is where we so often drop the ball.
I’m still trying to ram that one into my own thick head.