DRL,
I'll try to explain. LRCX closed today at about 25. An option to buy 100 shares of LRCX between now and October 19 has a bid/ask of 2 1/8 by 2 1/2 (the symbol for this option is LMQJE, and you can get 20 minute delayed quotes on options at www.lombard.com).
If you owned some multiple of 100 shares of LRCX (let's say 300 shares), you might be able to sell 3 options contracts tomorrow - each contract covering 100 shares - at 2.50, if LRCX stays in the 25 range.
2.50 times 300 shares is $750, which you would receive in your account, and in effect reduces your cost basis in LRCX by 2.50 per share. Commissions vary, but on 3 contracts I'd think you'd pay somewhere between $50-75.
By your selling these contracts, you should consider your 300 shares to be encumbered, so you really have tied your hands until October 19 unless you decided later to buy back the 3 options contracts (hopefully well below what you initially sold them for, thereby earning a short term gain).
One of two things will happen:
1. Between now and October 19 LRCX will rise above 25/share and at some point (not of your own choosing) you will be asked to deliver your 300 shares at the price of 25. Since you have been paid 2.50/share from the option sale, you really have ended up selling at 27.50 per share (before commissions).
2. The other possibility is LRCX will languish or retreat from 25 level, and come October 19, the options you sold will expire unexercised. In that event, you have pocketed the proceeds ($750) from the sale and are free to sell new options, perhaps the January 25's, April 25's or even the January 20's, depending which offer the greatest perceived value in your judgement.
I hope this explanation helps, and I don't mean to offend your intelligence if I took too basic an approach. Any brokerage should be happy to send you a free pamphlet on options trading that would be far more complete than this note. I'm not a broker, and am giving you the benefit of my understanding only. Please do not consider this as advice or professional help <g>.
But if you believe (as I do) that LRCX will take off again, just not for a few months or quarters in all likelihood, I think it's wise to evaluate the writing of such "covered" calls so you can collect the premium someone else is willing to pay you for the time value of the strike price.
Paul |
