Pretty much Joe... I got paid 606$ on 300 shares I am in @ $21.66. If the shares drop below 20 on exp date in May, then I am in each share about 2$ less given the premium paid.
I am just wondering what a hedge fund guy would have done. I did this based on common sense (I hope). Is there anything I am missing?
I am sitting on two lots of SKF. 50 shares each (100 total). Average price $107.21. May 110$ calls are selling for $520 a contract. If it closes under I keep the ~5%. If it closes over, then I might miss some opp cost, but I still keep the ~3% from the 110$ sell price.
I am thinking of this strategy, because I am often away, cant trade as I have a 'real' job. This gives me some good profit making abilities without the huge time commitment.
Yes, SA options are American style options and can be exercised on any trading day up until expiration.
Cubed just got me thinking about something though (hey it happens on rare occasion). Are SKF options Index options? Correct me if I'm wrong here, but I think index options are traded European style. Anyone know for sure?
If I get called, is it at the closing price of the day or anytime during the day? If SA plunges tomorrow (which is my guess), then I can still buy to close right? If he can exercise at anytime (not at the end of the day) how could I do that?
Right...I was thinking about it after I asked the question. Doesnt make sense for him to option it now since he paid a $2.05 premium per share, so he wont option at least until SA goes to $22.10 or so...
I know little about options but doesn't a put give you the ability to sell for a higher price in a down market? Think about the Bear Sterns collapse and all of those $30 puts that were out.
John, How does the call limit the downside? If the stock falls? It can go to zero if you don't act and sell, all is gone. I can only see a limit to your upside. If the stock rises, the option is exercised ant you are out. Is that not the way it works? As is said I know very little about options.
On my SA example, writing the covered call allows for the stock to go down to 19.64$ by May and for me still to be in the black if I sold it after the option expired.
It does limit upside...and of course it COULD go to zero, which is some risk, but I am reasonably sure that isnt going to happen.
Plus, if SA takes a big dump today...I can always buy to close, and take a smaller amount of profit than the 606$ when I sold to open.
It is just a way to short your own shares.
Lets say the calls I sold yesterday for 2.05$ are selling today for 1.50$. I can close my positions, make 165$ and have a basis ~50cents less on each share. When it goes back up, write more covered calls in the money where an option exercise would leave me with more profit. Rinse and repeat....
26 comments:
Pretty much Joe... I got paid 606$ on 300 shares I am in @ $21.66. If the shares drop below 20 on exp date in May, then I am in each share about 2$ less given the premium paid.
I am just wondering what a hedge fund guy would have done. I did this based on common sense (I hope). Is there anything I am missing?
Another play I am looking at...
I am sitting on two lots of SKF. 50 shares each (100 total). Average price $107.21. May 110$ calls are selling for $520 a contract. If it closes under I keep the ~5%. If it closes over, then I might miss some opp cost, but I still keep the ~3% from the 110$ sell price.
I am thinking of this strategy, because I am often away, cant trade as I have a 'real' job. This gives me some good profit making abilities without the huge time commitment.
Thoughts?
The SA calls are in the money, correct?
yes...
So the purchaser of the call can exercise now, correct?
Unless it is a European style Call?
I didnt think that were true, but maybe it is? I thought it wasnt until the exp date that they could be called. Anyone know for sure? Goldfinger?
You might want to give your broker a call. I'd bet that you don't have European style options. JMHO
I will gcubed...
Here is what I was trying to do after the fact...I found a good article.
http://www.investopedia.com/
articles/optioninvestor/06/
InTheMoneyCallWrite.asp
Yes, SA options are American style options and can be exercised on any trading day up until expiration.
Cubed just got me thinking about something though (hey it happens on rare occasion). Are SKF options Index options? Correct me if I'm wrong here, but I think index options are traded European style. Anyone know for sure?
Auric, I can't say for sure but I do know that SKF is an ETF and not an index.
Guys,
If I get called, is it at the closing price of the day or anytime during the day? If SA plunges tomorrow (which is my guess), then I can still buy to close right? If he can exercise at anytime (not at the end of the day) how could I do that?
The call is filled at the strike price.
He is only going to exercise if SA goes UP!!
Right...I was thinking about it after I asked the question. Doesnt make sense for him to option it now since he paid a $2.05 premium per share, so he wont option at least until SA goes to $22.10 or so...
Now you've got it!! :0)
I am really trying to develop this strategy....thanks for the help.
I think you need to study puts.
Can you expound?
I mean...why you think that?
I know little about options but doesn't a put give you the ability to sell for a higher price in a down market? Think about the Bear Sterns collapse and all of those $30 puts that were out.
They certainly do...I will look into the strategy with those too.
The writing of covered calls is siimilar to a put, but it limits the downside...which is why I like them.
A put can expire worthless, and often does, taking away from your investment in the stock in question.
Covered calls act in additive way that seems to fit.
I will let you guys know as I go along what strategis I am using.
John
John, How does the call limit the downside? If the stock falls? It can go to zero if you don't act and sell, all is gone. I can only see a limit to your upside. If the stock rises, the option is exercised ant you are out. Is that not the way it works? As is said I know very little about options.
Cubed,
On my SA example, writing the covered call allows for the stock to go down to 19.64$ by May and for me still to be in the black if I sold it after the option expired.
It does limit upside...and of course it COULD go to zero, which is some risk, but I am reasonably sure that isnt going to happen.
Dont know if I am explaining this clearly. :o
Plus, if SA takes a big dump today...I can always buy to close, and take a smaller amount of profit than the 606$ when I sold to open.
It is just a way to short your own shares.
Lets say the calls I sold yesterday for 2.05$ are selling today for 1.50$. I can close my positions, make 165$ and have a basis ~50cents less on each share. When it goes back up, write more covered calls in the money where an option exercise would leave me with more profit. Rinse and repeat....
I got ya. I'm still at the bottom of the curve on options but I still think puts are what you need to explore. I may be totally wrong.
Goldfinger is an option dude....his input would be appreciated.
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