A call is a right to buy a stock at a specific price on a certain date. The advantage of having this right is that for a small amount of money, you can control rights to profit from many shares.
The value of an option is determined by share price plus a "premium" based on time to expiration and volitility of the stock. Options trade like a stock with a Bid/Ask. Options usually have the same liquidity of a stock and can be bought and sold freely up to expiration.
The trouble with options is they expire and then they are either "in the money" or worthless. When you own the stock, you can wait for as long as you like to achieve your investment goal. Options have more urgency.
Options are usually traded for 4 to 6 months of each year, not every month. ESIO has July, August, September and Dec. Options expire on the 3rd Friday of the month. July options expire on the 18th.
You can either buy or sell options. Today, I sold July 45 Call options for 7/8's. I have limited my upside gain potential to $45. The person who bought my option thinks it will go above $45. I sold options against 1000 shares and was paid $875. If the stock ends on July 18th below $45, I will keep my stock and have made an extra $875 for taking the risk of loosing the potential gain above $45.
If ESIO suddenly went to $50, the option I sold would be worth $5 plus premium. Probably the person who bought the option would sell it for $5+, but he could also exercise it at anytime before July 18th and take my stock. In fact, if he wanted to be irrational, he could buy my stock at anytime for $45, even if it was selling for $43, but this is unlikely as he would have to give me $45.
I hope we will have a trading range that stays below 45 until the 18th. After that, I hope it goes to $100.
I could have sold options with more time value and make more money, but I think the premium of 7/8's is very high for 9 trading days. Maybe I should have sold August options as they pay 2 1/8. Dec is paying 5 1/2. I don't like selling calls for more than 2 months.
Actually looking at it again, I probably should have sold the August Calls. I like selling short term options because the premium for time decays very quickly. If the stock stays in a trading range for 4 weeks, I can buy back my calls for much less than I sold. If it falls much, I can buy them back for a very good price and sell more calls against another strike or wait for the stock to rise again.
Anyway, my thought is that ESIO won't go above $45 this month. If I am wrong, my cost for these shares is about $24, so I'll do well anyway. It's very complicated, but selling options can add a lot of value to you portfolio.
CBOE has FAQ's about options. The site for CBOE and ESIO options is;
webservices.pcquote.com
It all gets so complicated, I'll be happy to answer questions.
Mark |
