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Options trading question?
Posted on 5/13/15 at 8:23 am
Posted on 5/13/15 at 8:23 am
I tried to put this in the options trading thread, but it has been locked.
Let's say I have 100 shares of a stock that I don't mind holding forever (like XOM, AAPL, etc).
If I bought it at $100 and sell the call option with a strike price at $105, I've just guaranteed myself the profit of the premium paid for the option and an additional $5 share if the option is executed. If the option is not executed, I still get the premium and I still own the stock.
Another factor would be the commission from the trader. For me that would be Schwab. I don't know how much that is.
It seems like a pretty good way to make some money. The only "loss" would be if the stock price goes over the strike price and you don't make as much profit as you could have, but you don't really lose money.
All these would be covered options BTW.
quote:
A call option gives the buyer of the option the opportunity to buy a block of stocks (in lots of 100 shares) at a set (strike) price. The person who buys the call option pays a price to the seller (writer) of the call option and this price is called the "premium."
Obviously the buyer of the call option hopes and/or expects the price of the underlying stock to go up. If it does, and the stock's price exceeds the "strike" price, he can exercise his option and buy the stock at the lower strike price contained in the option and immediately sell the shares at a profit (minus what he paid for the option).
Let's say I have 100 shares of a stock that I don't mind holding forever (like XOM, AAPL, etc).
If I bought it at $100 and sell the call option with a strike price at $105, I've just guaranteed myself the profit of the premium paid for the option and an additional $5 share if the option is executed. If the option is not executed, I still get the premium and I still own the stock.
Another factor would be the commission from the trader. For me that would be Schwab. I don't know how much that is.
It seems like a pretty good way to make some money. The only "loss" would be if the stock price goes over the strike price and you don't make as much profit as you could have, but you don't really lose money.
All these would be covered options BTW.
4
Posted on 5/13/15 at 10:54 am to white perch
Seems like you have a decent enough understanding. Take a look at the prices on calls and your commission rates and I think that you'll find that you'd be making very little per trade unless you have a significant amount of shares, sell longer term calls, or are willing to sell calls with a strike very close to the underlying price.
Also worth considering the tax implications of selling (getting exercised) on your long term holdings.
Also worth considering the tax implications of selling (getting exercised) on your long term holdings.
Posted on 5/13/15 at 12:04 pm to white perch
Good summation. And yes, this is a strategy (covered call/buy-write) that many investors use to generate extra income in a portfolio. It's the most conservative of the options strategies.
Do take note that, while the stock price rising above the strike price would cut your gain, it's not really a loss. If you bought at $100 and got called out at $105, you'd still have a gain. But you would be at a (paper) loss if the stock sank to $95, while you were locked into this trade until options expiration. If that's not acceptable, you could always buy a put that's at a strike price that represents your stop-loss point.
And if you can get approved for naked call writing, you'd actually love to see the stock sink like a rock. But that's a risky strategy, because if you're wrong, and the stock rises above the strike, your losses could be infinite... at least until expiration.
Getting comfortable with at least basic options strategies is something that (IMO) every seasoned investor should do. You don't have to become one of the Najarian brothers, but you can dramatically increase your portfolio gains *if* you follow a strict and sound methodology with respect to options.
Do take note that, while the stock price rising above the strike price would cut your gain, it's not really a loss. If you bought at $100 and got called out at $105, you'd still have a gain. But you would be at a (paper) loss if the stock sank to $95, while you were locked into this trade until options expiration. If that's not acceptable, you could always buy a put that's at a strike price that represents your stop-loss point.
And if you can get approved for naked call writing, you'd actually love to see the stock sink like a rock. But that's a risky strategy, because if you're wrong, and the stock rises above the strike, your losses could be infinite... at least until expiration.
Getting comfortable with at least basic options strategies is something that (IMO) every seasoned investor should do. You don't have to become one of the Najarian brothers, but you can dramatically increase your portfolio gains *if* you follow a strict and sound methodology with respect to options.
Posted on 5/13/15 at 4:55 pm to white perch
Selling covered calls is a good way to manage risk but as previously posted, commissions/fees are a factor. The 100 shares would be 1 contract and would cost around $10 to sell.
So for XOM, you could have made about $285 if you sold one jan 2016 $90 call contract today. That is like selling it for $92.85. Tax considerations are also a factor if selling in a taxable account.
So for XOM, you could have made about $285 if you sold one jan 2016 $90 call contract today. That is like selling it for $92.85. Tax considerations are also a factor if selling in a taxable account.
Posted on 5/14/15 at 8:39 am to white perch
Be careful, options are a good way to lose your arse. There's a lot more to it than picking an arbitrary strike price. Covered calls do reduce your risk though.
Posted on 5/14/15 at 8:49 am to Jag_Warrior
What would ya'll do today with a
MAY 15 2015 7.50 CALL: $0.69: Quote $7.80. Bid's yesterday were $.30
It's my second option trade. I made a good profit on the first by closing out early. I wanted to see what happended as a hold got close to the date since it's a small trade. This one looks like I either try to close at a slight loss and hedge an expiration loss or exercise and hope I see a bump over the summer from hopefully rising oil prices.
MAY 15 2015 7.50 CALL: $0.69: Quote $7.80. Bid's yesterday were $.30
It's my second option trade. I made a good profit on the first by closing out early. I wanted to see what happended as a hold got close to the date since it's a small trade. This one looks like I either try to close at a slight loss and hedge an expiration loss or exercise and hope I see a bump over the summer from hopefully rising oil prices.
This post was edited on 5/14/15 at 11:15 am
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