<Explain to me in details on how you made money on the covered calls.
Step by step please.>
Calls are bought and sold. In order for you to buy a call, someone who owns the stock has to sell a call, or a high risk investor could sell an uncovered call (they have to go to the market and buy stock should you exercise your option), or an options market maker will construct a series of transactions; shorts, puts or whatever to create a hedged position to sell a call.
So, as a stockholder, I have the choice of selling options. When you see a table of options prices, there is always a bid and ask. If you hold the shares and want to sell a covered call, the bid is what you get. It's cash in hand that goes straight into your account.
Once you've sold a covered call, the broker won't let you sell you stock until the options are cleared. This can prevent you from making money when the stock has a good rise and you'll have to hold the position for the whole event. It could have been easy to sell March 30's for example when the stock was trading at $20 in November. Now, you'd still have another month before you could unlock your capitol. Very boring when this happens. Still, the market could crash before March.
Well, you need not sell a call and wait for the ex day. You can trade it when the stock dips and go for small profits. Often, I sell calls with 6 weeks to 2 months to expiration. I find these calls have a quick price drop over a month as the time premium decays. If I sell a 45 call and the price hangs around 45 until the end, the time decay makes the price fall. So, an option that's $1 in the money a week before expiration may be worth less than an option $5 out of the money that has 6 months to go.
Time is the main value of an option. If an option has time to build price, it can make a big profit, as you aren't stuck waiting for a short-term event to profit. As an options buyer, the more time the better, but of course there is a price to pay. Look at an options table and compare the prices of one strike for each month.
Now, selling an option that's 6 months away seems like a big risk to me and the payment isn't enough for me to tie up my money like that. So, I sell the nearer term options and think if the stock does run away, I 'll just take what I get and then re-invest in 6 weeks. Hopefully, selling the option is a moneymaker, but it's also normal to sell options on stocks that have losses to try to regain some of the lost position.
So, most recently, I sold at the money calls. ESIO was trading at 45 and change and I sold Feb 45 calls for $4 with about 7 weeks time. I watched them rise and fall in tandem with the share price, because being near the money, a 1/2 point move in the stock will have a big impact on the option, especially an option that is in the money.
I watched the stock fall last week and decided that it should follow the other semi equips up and bought my options back for 2 1/2. Well, in this case I didn't time the market very well as I could probably get them today for 1 1/2. Still, I have closed my obligation to the options contract and made 1 1/2 with no investment.
Maybe I should have waited and gone for the entire $4 as it still seems quite likely ESIO won't be over $45 in Feb. Here's the other risk. I sell calls and then watch my stock fall 20 or 30%. Then, getting $4 doesn't seem all that interesting when I should have just sold my position. Still, $4 is better than a kick in the head.
So, if the stock falls, I can buy back my options and sell new options at a lower or higher strike. Say I think the price will now go to $37 based on recent news, then I would be wise to buy back my 45's and sell 40's or even 35's. Timely moves like this would be very cool, but not so easy to do.
If I held the option and found on the last day that I was going to loose my stock, I have several choices. Let it go and make a new investment. Roll out to another month.
A roll out is simple. Instruct your broker to make this special transaction. You're looking at buying Feb, which is in the money. Since it's about to expire, there's no time premium. Selling the same strike for a future month has time premium. So, say the stock trades at $48 and you had sold 45 calls. It would probably cost you $3 3/8 to buy the calls back (remember, we sold for $4) and then you could sell the next month or 3 months out for more depending on the volatility. So, maybe you could sell March options for 3 3/4 and May for 4 1/2.
Whatever you choose to do, the best decision is to look at the spread and set a price. Maybe you want 1, or 1 5/16, which is slightly higher that the natural spread. It's very common to get better than the natural. So, you set your net and let the broker issue a rollout. Than, as the price rises and falls through the day at some point the order may get filled regardless of how it moves. Here, you are only interested in the net change.
So, you've now rolled out your stock and maybe you get a net of $1 1/2. This is now in addition to the $4 you already took making your eventual return $45 plus $5 1/2. In the next 2 months or whatever time you choose for your roll out, the price might dip and again you will buy back the options and close the contract, or perhaps let it expire.
Using rollouts, you can extend these options whether they are in or out of the money for a long time. My father had Ford and GM. He's not interested in selling them, but if he did, he's well in a profit. So, I sell calls for him from time to time and buy them back when they fall. I sell longer-term calls for him because I know he's mainly interested in holding them and collecting dividends.
Selling calls added an extra 20% to his return last year. It takes some market timing to make them work and you have to watch for opportunities to buy back. It's money earned.
In general, I make more money buying options. The money I make selling often seems to screw me in the long run as I should make more stock buys and sells when I feel I have a good market feeling. Selling the option is a much less dramatic move to selling a stock and trading for a point. Also, the capital gains may be an issue when you make small trades in stocks?
Hope that helps. I got a little long winded.
Regards,
Mark |
