Hi Bernard, you definitely understand the strategy, but I think you mistyped one or two things. This is my version of my understanding for Susie aka Jenny.
You buy a 100 shares of stock WXYZ for $10 -- total cost $1000. You discover that Feb 12.5 calls are going for $1. This means that "the market" believes that sometime between now and mid-Feb (when the options expire), WXYZ will be trading above $13.50, because at the moment, someone is willing to pay you $1.00 for the priviledge of buying your shares from you at $12.50 -- if they decide to exercise the option to do so. That is why they are called "options".
So you, the person who owns 100 shares of WXYZ @ $10, decides to SELL a Feb 12.5 call to someone for $1.00. You immediately get $100 back of the $1000 you spent buying the 100 shares.
Now the person who BOUGHT your call for $100 would be an idiot to exercise the option with WXYZ trading at $10, because he would immediately lose $350 if he did so. He is hoping WXYZ will trade above $13.50. Here's why:
Lets say a month later WXYZ shoots up to $16. The guy who bought your option exercises it by paying you $1250 for your 100 shares and then immediately sells them to "the market" for $1600. Including the $100 cost of the option, he just made $250 ($1600 - $1350) ! Pretend for now that the time it took for him to buy your shares for $1250 and sell them for $1600 was so fast that he really didn't need to have the $1250, he simply borrowed the $1250 from his broker for about 2 seconds and paid it back with part of the $1600 he just made.
When you net it out, the guy who bought you option made $250 on a $100 investment in a month -- a 250% return ! Extremely risky, but potentially very profitable if the markets are volatile and you correctly guess a rebound.
Options move more or less in sympathy with the underlying stock price -- meaning if the stock moves up $1 -- the options with near term expiration will also generally move $1. But since they are lower priced that the underlying stock, they move in much greater percentages than the underlying stock. Now you know why Wayne likes them, lol !
When Wayne sells his call options, if the stock goes up, he makes a profit on his underlying stock, if the stock goes down, he can buy back his call option at a cheaper price, thereby also making a profit on his call option. You don't want to do this with a stock that's going down the tubes or heading for the sky -- you do this with stocks that are bouncing around in a trading ranges with big price swings -- like INSP seems to be doing between 18 and 24 (representing a 25% - 30% change in value every 2 or 3 days). I bet certain INSP options are fluxuating 100% or more intraday, lol.
Wayne is a sharp trader, he is there to sell his calls and buy them back intraday as the underlying stocks make their big percentage price swings.
Hope that helps,
Chris |
