Sorry folks, I don't type that well (although I'm getting better with all the practice), and he did ask (foolish boy), so I'm getting double duty out of those e-mails. Anybody who's still reading, bless you.
Last post continued:
I wanted to cover a couple of general things that occurred to me. One is ‘at the money’ (ATM) vs ‘in the money’ (ITM) vs ‘out if the money’ (OTM) calls. They all tend to act differently, and can accomplish different things. Way to complicated for me to factor into a strategy, since I am not a programmer/mathematician. I sell OTM calls, typically a strike or two out of the money. I find that there is sufficient premium there with a small risk of the underlying being called away, along with a high probability that the normal market gyrations will allow me to trade it.
ITM options (I’ll use the QCOM April 45 call) tend to trade in lock step with the underlying stock, with very little time premium. As such, if the stock is at $50, I would expect the option to trade pretty close to $5. I’m sure there are people who have figured out strategies to trade ITM options and make money, but I’m not one of them.
ATM options are more interesting to me, especially going forward, in that they tend to have the largest time premium. In fact, the near month ATM option should be the fattest and most volatile option. Using the QCOM April 50 for example, with QCOM closing at 49.40, it closed at $1.25. I wasn’t following this option yesterday, so don’t know with pinpoint accuracy if this was the relationship near the end of the day, but it had to be close. For discussion purposes, we can put the time premium at about $1.75, with about 24 calendar days to expiration (you can use calendar days or trading days, doesn’t matter as long as consistent. Whichever is easier). That’s a $7 per day premium, which is very attractive. If I were doing a buy-write this is the option I would want to sell
OTM calls is mostly where I live. It may change some going forward as I start with a new account devoid of existing shares, but when I started I had a lot of shares that I wanted to own that I had no intention of selling low, so my situation was that I wanted options to provide an income (which I turned into more shares), without selling the shares. Kind of like being paid a dividend. Because this was my goal, it colored my approach, and colored my definition of risk, and helped define the “rules” I tend to follow.
With covered calls, (or cash covered puts for that matter-another area of interest to me with similar dynamics) the main risk is always that the underlying stock will fall faster than the premiums can cover. If I’m writing against a given inventory of stock that I have already made the decision I want to own even though they are down, and even though they may continue to go down, I’ve already accepted that risk as part of owning the stock. Writing calls or not doesn’t add any risk to the calculation. In my particular case, most of the calls I wrote for the first few years were against shares that were down substantially, and I had to assess if I would be happy taking a loss if they were called away. This contributed to my only selling one option at a time, and only selling against a small portion of the holdings, and also in picking options somewhat out of the money. In truth, I’m never happy taking a loss, so I also got in the habit of buying them back quickly.
The mind set I had going in was that the person on the other side of the trade (the person buying the option) knew more about options than me, had more resources than me, and would clean my clock if I got within arms length. Kind of like I’m getting into a boxing match with the heavy weight world champ. If I get in the ring I’m toast, but if I dance around just outside the ropes, out of reach, I can do ok. I’ve found this to be true, having on more than one occasion sold 100+ contracts in a row without having any shares called away, and all the contracts either expiring worthless or having been bought back at a profit.
Doing a buy-write, which is what I’m going to do more of going forward, is a little different in that I would be buying the stock strictly with the intention of writing the option, where the optimal outcome would be to have the stock called away. In that case, the risk of owning the stock if it drops precipitously has to be factored into the option transaction. Even in this case though, I would never buy a stock to write the call if the only reason was that the premium looked good. I still would only do it with stock in a company I was willing to own should it all go south.
One other thing. In reading the thread I referenced or a book on options you might find reference to repair strategies. I don’t do them. They tend to be complicated and of marginal use. If I were to sell 1000 options that I couldn’t really afford and the position went against me, I would be more interested in repair strategies just so I didn’t go bankrupt and end up eating dog food in my old age, but beyond that they don’t look useful to me. That’s part of never doing anything I wouldn’t be happy with the outcome NO MATTER WHAT. Sometimes the outcome is the least desirable of the possibilities, and that’s got to be ok. If not, I don’t sleep well at night and the whole thing just isn’t worth it.
I’m finding that going though this is helping me prepare for starting up the new account. It’s always good to review to see if old beliefs and habits are still useful. Hope you get some use out of it.
Okay, regarding QCOM options. I just went over the 55 calls (May, July, Oct, Jan 07) and the premium is up to $1.40/day for July and Oct., falling off (but not much) to 1.34 in Jan.
For the 57.50 calls, the same situation exists where May is at .28, July is at .88, and Oct. is at $1.01. (No Jan at this strike)
For the 60 calls the prices are July at .52, Oct. at .70 and Jan 07 at .82/day.
This is fairly unusual. While it is true that most options expire worthless, and that therefore most people who buy options are wrong, this reversal of the normal order of things gives me pause. I want to now check the # of open contracts, but these numbers indicate that someone expects a good summer through Christmas, and I will keep that in my head, adjusting my targets up as a result, presuming there’s any volume behind it. While I rarely sell anything out further than 2 months, and am not inclined to do so now, (there’s just too much that can go on that far out), I’m now inclined to only sell one more contract (either April of May) and am going to be a little more greedy still. I’m also going to be a little more willing to buy back the one I sold today, should the market pull back next week. I wanted to add that I’m usually not this cute with the whole thing, but that those prices really are very unusual.
Well after watching yesterday, in between cutting granite tiles, and sleeping on it, I decided not to sell any more QCOM for now. This was hard and I may not be able to hold off today, but that is my intention.
Yesterday was picture perfect as far as what I historically would look for. There were a few chances to sell the April 52.50 for $100, and I would normally have taken that. Then today I would be looking to sell a third contract, probably either an April 55, or a May 57.50. This would put between $200 & $ 400 in my pocket and I would sit back, either looking for the market to pull back so I could buy one or all of them back (so as to be able to sell them again), or not. Ideally, the market would go through a multi-day pullback and I would buy them back one at a time. If possible, I would buy the farthest out in time and the closest to the ATM strike first.
The general rule I follow is sell as little time as possible and buy as much time as possible. So, given that prices were acting reasonably in tandem as they almost always do, I would be inclined to buy the May 57.50, then the May 55, then the April 55 and lastly the April 52.50. This is not hard and fast, and if the April 52.50 suddenly was going for $20… you get the idea.
Also, it’s reasonable to expect that I would not buy any of them back. If the stock didn’t move much, the options would slowly loose their value. I often buy the option back for $5-10, even if it is only a few days to expiration, and even if it looks like it will expire worthless. It has happened to me that news has come out 2 days before expiration that took an option from $5 to $100 overnight. It’s no big deal, and I don’t do any one thing universally, but it’s often worth the few bucks just to end it.
In the end, as long as I don’t ever do anything I wouldn’t be happy with the outcome, no matter what, I’ve always got options with options. |
