-
Categories
- No categories
WordPress database error: [Table 'wordpress.wp_categories' doesn't exist]
SELECT * FROM wp_categoriesWordPress database error: [Table 'wordpress.wp_categories' doesn't exist]
SELECT * FROM wp_categories WHERE cat_ID > 0 ORDER BY cat_name ASC -
Archives
-
Recent Posts
- Rolling Covered Calls - Options Mastery Series Lesson 40
- More on Stock Option Premium Collection - Options Mastery Series Lesson 39
- More on Covered Call Writing - Options Mastery Series Lesson 38
- Making Money with Stagnant Stocks - Options Mastery Series Lesson 37
- Understanding Synthetics: the Basic Formula - Options Mastery Series Lesson 36
- More on Synthetic Stock Positions - Options Mastery Series Lesson 35
- Rolling-up - Options Mastery Series Lesson 34
- Options Vs Stop Loss Orders - Options Mastery Series Lesson 33
- More on Synthetic Stock - Options Mastery Series Lesson 32
- Synthetic Stocks - Options Mastery Series Lesson 31
Pages
Press Release
Feeds
Our Blog Partners
Bookmarking |
Aug
22
Rolling Covered Calls - Options Mastery Series Lesson 40
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (279)
Rolling Covered Calls
Writing covered calls has become a popular way for more conservative investors to make use of stock options. As a matter of fact, even retail brokerages like the strategy. This says volumes because most brokerages usually try to keep the average investor away from stock options. This is due to the fact that stock options are more complex than stocks and most brokers don’t have the training in options.
As you already know, a covered call is long stock and short call. You sell the options, collect premiums and if the stock doesn’t move much and the option stays out-of-the- money, you keep the collected premiums from selling the calls at expiration. If the stock stays stagnant, you can repeat this process over and over again. But what happens if the stock moves into-the-money?
If the short call goes into the money, the chance increases that the call option will be exercised. Moreover, it becomes more expensive to buy out of the position (buying back the short call). As a result, you consider “rolling” the position if it appears that the stock isn’t making a second or third standard deviation type move. “Rolling up” involves buying back this month’s option and selling the call for the next strike up in the next month.
Keep in mind that the stock you hold as part of the covered call position has also appreciated in value and this will usually more than offset the costs of closing out the short option position. Of course, when you roll up and sell the new call, you collect the premiums again. If the stock keeps moving up, you can also keep rolling up. So, even though premium collection is mainly for range bound, stagnant stocks, you can also roll up as the stock moves up. OK, but what happens if the stock starts trading down?
When the stock moves down, we don’t roll the position. Why is that? In a covered call strategy, you get out of the call. The covered call strategy no longer applies. If the stock looks like it’s breaking down, you could then buy puts if you intend on keeping the long stock.
As a matter of fact, you can close out the short call by purchasing the corresponding put. (The corresponding put is the put opposite the call-same strike and month). However, if you plan on keeping the stock, just buy two corresponding puts and you will end up with long a put. Of course, you are in a one-to-one ratio with the stock and options. So, if you were long 500 stocks you would have 5 long puts. When you “morph” a position it is also called a continuation strategy.
As Ron Ianieri, stock option guru and founder of the Options University states: “I might roll up strikes as the stock is going in my direction but when the stock stops going in my direction and heads the other way, it’s time to close out unless I have the wits about me to say that the reason I’m closing this position is the stock broke its up trend. It can’t be that it’s just trading down just a bit. It has to be a technical break like when that stock moves below the 50 day moving average and then follow through the next day down further.
I can close out my buy write with the purchase of the first corresponding put, but I can actually get short by buying a second corresponding put and then play the downward movement; that’s called a morph and completely changes the position with just one little trade. I went from being in the wrong covered call position with a stock that’s broken its up trend and has now broken its up trend and is breaking down.
For information, online classes, mentoring and all things stock option, contact the Options University at www.optionsuniversity.com
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 279
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 279
Aug
21
More on Stock Option Premium Collection - Options Mastery Series Lesson 39
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (278)
More on Stock Option Premium Collection
If you insist on owning stocks in your portfolio, a covered call strategy should be an important strategy to pull out of your investor tool box when the stocks you own hit a stagnant period. Being able to capitalize on covered calls can add significantly to the overall return of the stock by adding premium collections during slow times to the gains made in times of the stock appreciation.
As with most stock option positions, each strategy has a sister position. As you may recall, a covered call is constructed of long stock and short calls in a one-to-one ratio. So, what is the sister of the covered call? Well, it is the opposite of the long stock-short call and is short stock and long call, normally referred to as a Synthetic Put. When you sell the call, you collect premiums. With the synthetic put, instead of writing for a premium, you pay for the put options. In other words, a covered call creates a credit to your trading account and a synthetic put creates a debit. Typically, because you are long call, the synthetic put anticipates a slight bias for a slow up trend in the stock. However, the long call is more of insurance and the real philosophy behind the synthetic put strategy is that the stock will make a rapid drop.
So, even though the positions between the covered call and its sister synthetic put are opposite, (long stock-short call; short stock, long call), the philosophy behind the strategies are a bit different. The covered call anticipates little stock movement, whereas the synthetic put anticipates a downward movement in the stock. Moreover, the covered call strategy is a premium collection strategy and the synthetic put is more of a directional play.
An important thing to remember is: the odds are in favor of the seller of an option. You see, stocks are typically range bound more than they make large moves. If this is the case, could a strategy of continuous premium collection-month after month- be an effective strategy? Even though profits are limited on a month by month basis, if they can be repeated with frequency, this can be a very effective long term strategy.
As you can see, a buy-write (aka covered call) strategy can be good strategy particularly when hedged by a long stock position. The worst that can happen is that you lose the potential future profits from the stock if the call buyer is able to exercise the call option you sold them.
This premium collection strategy has become further refined by the creation of certain combinations of stock options, which can replace the need to be long or short stock. These option spreads make it possible to participate in premium collection with much less capital investment. Two of the most popular premium collection spread strategies are the “Bear call credit spread”-usually used in flat to slightly down markets and the sister strategy the “Bull put credit spread” which is usually used in flat to slightly up markets.
For information on just about everything concerning stock options, contact the Options University at www.optionsuniversity.com
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 278
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 278
Aug
20
More on Covered Call Writing - Options Mastery Series Lesson 38
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (277)
More on Covered Call Writing
As you know, an option can have two types of value: intrinsic and extrinsic value.
Intrinsic value is achieved when the option moves into-the-money. If the strike price was $50 and the stock price moves to $51, the call option will have $1 of intrinsic value. If the option is out-of-the money, it has some value because it has a chance of going into-the- money. This option has no intrinsic value; just extrinsic value for its potential. However it’s important to understand that all extrinsic value decreases as time runs out for the option period.
Extrinsic Value Decay
About 20 days out from the expirations date, chances for moving into-the-money become reduced and there are fewer buyers for that month’s option at that strike price. Option traders will move on to other further out months. As a result, demand for these options fall as does the option premiums. This happens to all out-of-the money options. As a matter of fact, during the last ten days or so of the option period, the drop in premium prices accelerates to zero as the option heads to expiring worthless; after all, there will be no premium left because there will be zero chance of getting into-the- money and producing any intrinsic residual value.
If you plan to sell an option, you are always best to sell at-the-money options because they have the highest amount of extrinsic value. After all, just a bit more and the option gains intrinsic value; needless to say, there is more demand for these options and premiums are priced accordingly.
If you plan to write an option to collect premium, you are best advised to sell a front month option at-the-money. In this way, you can ride the decay as extrinsic value goes to zero and the option stays out-of-the-money. By writing short term contracts with the anticipation of not going into-the-money, you can take advantage of the ability to use this strategy repeatedly so that even small gains can compound over time.
In the “Options Mastery Course” offered by the Options University, the case is established that you are mathematically better off writing front-month contracts than writing out-month contracts.
Profit, loss and breakeven when writing Covered Call options.
The first thing you need to find out is the breakeven; the point that your position makes zero gain or loss. To figure out breakeven, all you need to do is take the stock price and subtract the call price. For example, if you sold a call for a $2 premium, and the at-the-money- strike is at $40, your breakeven would be at $38 for the stock. If the stock goes down to $38, you would lose $2 but you received $2 for selling the options, which would offset the loss.
When you write an option, your maximum profit is the premium collected. If the option goes into-the-money and is exercised, your loss will be the stock you hold, which may not be a loss at all; however, any potential gains from owning the stock is lost due to giving up your stock. Of course, the premium collected helps to offset any losses.
For more information about all things options, go to www.optionsuniversity.com
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 277
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 277
Aug
19
Making Money with Stagnant Stocks - Options Mastery Series Lesson 37
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (276)
Making Money with Stagnant Stocks
Most stock investors can become comfortable investing in stock options. The fundamentals are easy to understand and usually, once an investor has purchased stocks on margin, it becomes a fairly easy transition to stock options. However, to make the process of transitioning to options easier, it’s a good idea to start using stocks and options in combination.
One of the most simple and conservative ways to incorporate options into a trading strategy is to use what is called “Covered calls” (aka “Buy-write”).
Covered Call/ Buy-Write
This basic options strategy is made up of buying stock and then writing a call; “writing” means selling. This strategy is also called a buy-write because stock is owned or purchased and calls on the stock are sold on a one-to-one ratio. In other words, if you purchase or already own 500 shares of IBM, to set up a covered call position you would sell (write) 5 IBM calls (each contract is 100 shares). In exchange for selling the rights of your shares to the call buyer, you receive payment. This payment is referred to as the premium. If the premium for one share of IBM is $4.00, you would receive $400 for each contract or in the case of our example a total of five contracts is $2,000.
If at the end of the option period the IBM stock hasn’t gone into-the-money, you get to keep all of the premiums you collected. If IBM stock is currently worth $ 120, your 500 shares would be worth $60,000. If your covered call strategy works as you hoped, the $2,000 premium collected yields a 3.3% return based on the value of the stock. Not bad for one month seeing that this strategy can be repeated time and again with the same stock. Of course, if you were successful for 12 straight months, your return would be 39.6 %. So, if your long term hold stocks aren’t performing and you don’t want to sell them, consider writing covered calls while you’re waiting for them to appreciate.
But what happens if the options you sold go into-the-money? Well, first the buyer of the option must exercise their rights by requesting the stock you owe them at the strike price you sold the options for. For example, if you sold 5 options contracts of IBM with a strike price of $125, you would be required to transfer 500 shares of IBM stock at a value of $125 per share. So, if you had purchased the stocks at $110, you would make the $15 profit per share and also keep the $2,000.
However, if IBM continues skyward, that would be your opportunity cost of being forced to hand over your stock. By the same token, if IBM goes down in value, you suffer the loss of the stock, but the premium you collected helps to mitigate the losses. For instance, on the $2,000 premium you collected in the example, the IBM stock would have to go down $4.00 to breakeven. So, in effect a covered call strategy does provide some limited downside protection associated with the holding of the stock. Because of these fairly benign consequences, the covered call strategy (or buy-write) is considered a conservative position and is allowed by most retail brokerages.
When to use the Covered Call strategy
This strategy is called a premium collection strategy and gains are based on the non movement of the stock. Normally, stock investors think of a gain as something coming from the appreciation of the stock (if long) or devaluation of the stock-if short. Rarely does it occur that money can be made by no movement at all!
For information on stock options-from beginner to expert-contact the Options University at www.optionsuniversity.com
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 276
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 276
Aug
18
Understanding Synthetics: the Basic Formula - Options Mastery Series Lesson 36
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (275)
Understanding Synthetics: the Basic Formula
Let’s talk about put/call parity. Say What? You remember that’s the fact that a corresponding call and put are equal to the parity of the stock at that strike price. In other words, a corresponding call/put will be mathematically related to the current value of the underlying stock. This is key to understanding the option strategy of stock replacement.
In Options University’s Options Mastery course, this relationship is expressed in a formula: Call price-Put price= Stock price-Strike price.
So, when we look at this base formula and we see the call price minus the put price, what we’re doing is canceling out the extrinsic value of that strike and only leaving the intrinsic value of that strike. When we do this, we are left with just intrinsic value of the strike. After all, only one of the corresponding call or put can have intrinsic value.
Likewise, when we subtract the strike price from the stock price, we are left with intrinsic value if the strike is in the money.
The following example taken from the Mastery Course will help to prove the point. For example, let’s take the June 70 calls with the stock at $69.50. From here let’s go back and plug in our numbers and see what we get. We’ll go back for our call price and put price but we know the strike price was $70 and we know that our stock price is $69.50. What type of value do we get, a minus .50 cents, simple math.
Now, let’s look at our call price minus our put price. Our call price is going to be $1.65 and our put price is going to be $2.09, so let’s plug that in, $1.65 for the call and $2.09 for the put. What we come up with is a minus .44 cents. You may say wait, the two of those aren’t equal. That’s because we haven’t adjusted for interest rate and dividend. The bottom line is that if you buy a call and sell the corresponding put, it will create a long synthetic stock position; however, there is no adjustment for interest rate or dividends.
Of course, the same holds true if you want to create a short synthetic stock; buy the put and sell the call. Moreover, we can create the six synthetic stock positions. For example, by either buying stock and buying puts, which will give a long call position, we can create a short call by selling the stock and selling the put. You can create a long put by selling the put and buying a call. Key to making this work is using corresponding options in a one to one ratio.
According to Ron Ianieri, author of the Mastery Course, “These six majors are critical because everything else that we’re going to be doing is going to involve synthetic relationships at some level. This is what separates the men from the boys and the women from the girls. This is what separates people that really understand what they’re doing in options and those who don’t. This is what separates the people who make money in options and the people who lose money in options.”
For information on everything stock options, contact the Options University at:
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 275
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 275
Aug
17
More on Synthetic Stock Positions - Options Mastery Series Lesson 35
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (274)
More on Synthetic Stock Positions
Anything synthetic is made up of components that when put together in the right way can make up a completely different object. Often times, synthetic products are produced because they accomplish the same thing as the “real thing”, but there are distinct advantages in using the synthetic over the real. In the case of creating a synthetic stock position, stock options have some real advantages for certain situations.
Stock options and stocks are mathematical entities made up of certain measurable entities. For example, one stock has a Delta of 1.0. It is totally correlated to itself. A stock option, on the other hand, has the relational factors of Delta, Gamma, Vega and Theta, which define a specific option (derivative) with its underlying stock. When we want to create an investment in a synthetic stock position, we use stock options that will exactly mimic the movements of the actual stock. From a mathematical standpoint, we want the total Deltas of the options to match the total Deltas of the stock.
For example, if you have 1000 shares of XYZ stock, you would have a total amount of 1000 Deltas. If you want to construct an option position that would exactly mimic the movements of the 1000 XYZ shares, you would need to create an option position which would also have a total of 1000 Deltas.
The Option Pricing Model, which is in constant evolution, mathematically defines the relationship between option derivative and the underlying stock. To construct a synthetic stock position, it is essential to understand how options relate to each other and the underlying stock.
According to Ron Ianieri, one of the founders of Options University, If you can understand synthetic positions, then not only is it going to help you make money but also it’s going to give you a much deeper understanding of options in general. If you can create the exact same position in two different ways, then there is a possibility that one of those ways might be cheaper than the other.
For example, you may often times find that creating a synthetic stock position is cheaper to buy than the underlying stock. If this is the case, than the corresponding ROI will be higher. By being less expensive, a synthetic position will also allow for lower entry and exit points. When talking about the nature of stock options, we talk about flexibility and synthetic positions are just one example.
In the Options University Options Mastery Course, the students learn that there are six basic types of synthetic positions:
· Synthetic long stock and synthetic short stock; by using a combination of a call and its corresponding put you can recreate a long stock position or a short stock position just using a call and a put.
· Synthetic long call and synthetic short call; using a combination of the corresponding put and the stock you can create a long call or a short call simply using the corresponding put and the stock.
· Synthetic long put and synthetic short put; by using a combination of the stock and the call, you can create a long put or a short put, depending on the combination I use.
For everything you want to know about stock options, contact the Options University at:
Help others find this article at:
del.icio.us Digg Furl Reddit Ask BlinkList blogmarks Blogg-Buzz Google Ma.gnolia Netscape ppnow Rojo Shadows Simpy Socializer Spurl StumbleUpon Tailrank Technorati Windows Live Wists Yahoo!
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 274
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT category_id FROM wp_post2cat WHERE post_id = 274
Aug
16
Rolling-up - Options Mastery Series Lesson 34
Filed Under
WordPress database error: [Table 'wordpress.wp_post2cat' doesn't exist]
SELECT post_id, category_id FROM wp_post2cat WHERE post_id IN (273)
Rolling-up
What happens if your timing is off and the stock replacement strategy you established looks to expire before the move you anticipated has been completed? Do you have to bail out of the position? The answer is no; you can roll it.
When an option trader wants to maintain a position into a new option period, they can “roll up” the call by selling it and buying the next strike up (if the stock is moving up). Of course, you will be selling a more expensive call and buying a cheaper call. This will create a credit. That credit is actually taking part of the profit you may have made up to that point. This is very different from selling a stock.
When you take some profit from your stock position, you lose some of the position. You must sell the stock. In the case of rolling, you keep a bit of your profit and maintain the same position. Rolling-up allows the option trader to extend the same position and take some profits at the same time.
Morphing
In their Options Mastery Course offered by the Options University, the many ways that an option trader can close out of a trade are explained. For example, if you have established a vertical spread and are considering how best to close out a call spread, you find there are three possible outcomes.
First, the spread can finish out-of-the-money and become valueless. For a call spread, this scenario occurs when the stock closes at or above the strikes of the spread. In order to close out the spread, an option trader would just let it expire. Both options finish out of the money so there is no residual position left over. Say goodbye the premiums you paid to get into the position.
Now, if the spread finishes in-the-money, meaning both options are in-the-money, both options are exercised. You will exercise your long call and your short call will be assigned. They cancel each other out leaving you with no residual position. This scenario occurs when the stock price closes lower than the lower strike call involved in the spread.
The last scenario is a bit problematic; what happens if a stock closes between the two strikes of the spread? This creates a situation where one strike winds up being in-the-money while the other ends up out-of-the-money. We know that when both options expire in-the-money, they are both exercised. One creates a long stock option, the other a short position canceling each other out. But in the case of a closing price between both strikes, it’s different. The option that is in-the-money leaves a residual stock position. Since the other option is out-of-the-money, it cannot offset the residual stock position created by the expiring in-the-money option.
In this situation, there are two actions possible. One is to trade out of the spread on expiration Friday just before the close. Because of the bid/ask spread of the two options, you will probably have to give away some of your profits in order to close out the position. This may be the best thing to do in order to avoid being caught “naked”. If you only trade out of the in-the-money option, you run the risk that the stock moves adversely and the out-of-the-money option suddenly becomes in-the-money.
For more on all things about stock options, go to www.optionsuniversity.com