Options Strategy (Archive)

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    Posted: 03 September 2011 06:15 PM

    EDIT:  Ahem!  Since I’ve named the author of the Options Strategy thread because the thread got spliced…let’s…uh…talk options strategy!

    Yeah.  That’s the ticket.  You know me, just Mr. Calls 101 here with a dash of puts when I think AMZN or NOK or RIMM or whatever have gone way too high, so carry on.

    [ Edited: 23 October 2011 09:40 PM by DawnTreader ]

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Teamâ„¢
    Thanks, Steve.

         
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    Posted: 03 September 2011 06:47 PM #1

    blaze biscuits - 03 September 2011 09:12 PM

    I’m not really one for doing numbers like that.  I pay attention to what the Analyst numbers are and all of that but I don’t ‘do’ numbers myself.  I have very limited time as it is, especially with fall semester having just started.

    +1
    seems easier to let the peeps interested in that do their thing and then combine all the data points as appropriate.

         
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    Posted: 03 September 2011 07:12 PM #2

    StillLong - 03 September 2011 07:14 PM

    Getting back to options here:

    One of the things I’ve been reading about is bull call spreads.  And it got me thinking about a slight variation:

    If you held shares of aapl would it not be similar to a bull call spread to:
    1. buy a call at strike price x and then
    2. sell covered calls at a strike price greater than x to offset the premium on the purchased call? 

    Unless I’m way off it seems like some of the benefit of a bull call spread but since the call you’re writing is covered your upside is unlimited.  I googled all over for a description of a similar play and found nothing.  which makes me think there’s something wrong with this idea.

    My thinking is that if you’re willing to part with some of your underlying shares at a given price this is worth considering.

    And just to put one more interpretation on your scenario…  This is analogous to “legging into” a bull call spread, where yes, ideally, you sell the short leg (higher strike) for an amount greater than the price you bought the long leg (lower strike); so essentially you have nothing invested in the spread.

    If you simultaneously hold shares, yes, either the shares OR the long call will cover the short call; so either the shares OR the long call will have unlimited potential upside.

         
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    Posted: 03 September 2011 07:17 PM #3

    Blaze, ahem.  Lest you forget, we’ve already snagged you for our Skype traders group.  (Read: I called dibs!!! :D )

         
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    Posted: 03 September 2011 07:26 PM #4

    kloot - 03 September 2011 09:47 PM
    blaze biscuits - 03 September 2011 09:12 PM

    I’m not really one for doing numbers like that.  I pay attention to what the Analyst numbers are and all of that but I don’t ‘do’ numbers myself.  I have very limited time as it is, especially with fall semester having just started.

    +1
    seems easier to let the peeps interested in that do their thing and then combine all the data points as appropriate.

    +2

    My husband’s the corporate finance guy; I’m strictly investments and trading.  Neither of us relishes the other’s realm. wink

         
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    Posted: 03 September 2011 08:10 PM #5

    lovemyipad - 03 September 2011 10:26 PM
    kloot - 03 September 2011 09:47 PM
    blaze biscuits - 03 September 2011 09:12 PM

    I’m not really one for doing numbers like that.  I pay attention to what the Analyst numbers are and all of that but I don’t ‘do’ numbers myself.  I have very limited time as it is, especially with fall semester having just started.

    +1
    seems easier to let the peeps interested in that do their thing and then combine all the data points as appropriate.

    +2

    My husband’s the corporate finance guy; I’m strictly investments and trading.  Neither of us relishes the other’s realm. wink

    letting others do it is right.  Blowing out the consensus (actually the Whisper numbers) is what make the stock pop anyways.  Actually, its the forward guidance moreso.. but you guys get my point.

         
  • Posted: 03 September 2011 08:15 PM #6

    lovemyipad - 03 September 2011 10:12 PM
    StillLong - 03 September 2011 07:14 PM

    Getting back to options here:

    One of the things I’ve been reading about is bull call spreads.  And it got me thinking about a slight variation:

    If you held shares of aapl would it not be similar to a bull call spread to:
    1. buy a call at strike price x and then
    2. sell covered calls at a strike price greater than x to offset the premium on the purchased call? 

    Unless I’m way off it seems like some of the benefit of a bull call spread but since the call you’re writing is covered your upside is unlimited.  I googled all over for a description of a similar play and found nothing.  which makes me think there’s something wrong with this idea.

    My thinking is that if you’re willing to part with some of your underlying shares at a given price this is worth considering.

    And just to put one more interpretation on your scenario…  This is analogous to “legging into” a bull call spread, where yes, ideally, you sell the short leg (higher strike) for an amount greater than the price you bought the long leg (lower strike); so essentially you have nothing invested in the spread.

    If you simultaneously hold shares, yes, either the shares OR the long call will cover the short call; so either the shares OR the long call will have unlimited potential upside.

    Thanks to everyone who replied.

    I just watched the CNBC thing you all were talking about on the web.  It’s pretty much exactly what I was talking about, except I didn’t think to write two calls instead of one to fully cover the cost of the purchased call.

    So let’s make sure I’m clear on this:  I hold enough shares to write the two calls as covered.  So I sell two Dec-410s for about $2600.  I buy a Dec-380 for 2500.

    If aapl shoots on past 410 in October my 200 shares get called away.  I was ok with that or I wouldn’t have written those calls in the first place.  But what I was trying to ask:  I still have unlimited earning power on the purchased 380 call - right ?  So to figure out my true profit I have to consider the lost opportunity had I held onto the 200 underlying shares - correct?

    If aapl shot on past 410 to say, 420.  That’s up 40 from the 380.  What do you think that call would be trading for in October with aapl at 420? 

    Without this trade the underlying shares would have gained $8000.

    But with this trade I don’t get the full $8000, I give up $2000.  How do I figure out what the Dec-380 would be trading at in October if the underlying is at 420?  Seems like it would definitely be more than the $2000 I’m giving up by having the shares called away at 410.

    lovemyipad used the term “legged in” which I suppose is what I should have been googling for.  But this is just two separate transactions with the broker, two level-2 transactions, right?

    Here is a link to the show everyone was talking about.  I wonder how many people enter into the exact trades they describe on the show? 
    http://video.cnbc.com/gallery/?video=3000043380

         
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    Posted: 03 September 2011 08:16 PM #7

    lovemyipad - 03 September 2011 10:17 PM

    Blaze, ahem.  Lest you forget, we’ve already snagged you for our Skype traders group.  (Read: I called dibs!!! :D )

    I know..  I will hook up with that when I get back to this full time.  I have had a financial ‘fall-out’ with an item I was counting on and it seems I will have to work more over the next 3 months to make up for it.  I wont really be at this stuff fulltime until mid November. 

    Then..  its all trading all the time..  until spring time!

    I shall join you guys!!  if you guys haven’t taken a good look at PCLN for day trading, maybe one of you should..  I don’t know if it would work well with the indicators you guys use..  but with the Accel bands and the %R it is AWESOME..  weeklies too.. and a very high dollar stock, which obviously gives you fat moves.

         
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    Posted: 03 September 2011 08:43 PM #8

    StillLong - 03 September 2011 11:15 PM

    I just watched the CNBC thing you all were talking about on the web.  It’s pretty much exactly what I was talking about, except I didn’t think to write two calls instead of one to fully cover the cost of the purchased call.

    One of the calls will be sold on the shares..  and one of the calls is going to act as the “short” call (the one you sold) on the spread.  You will, in effect, have 1)a covered call (100 shares w/ a call written @ 410) and 2) a bull call spread (380/410 - which can be worth a max of $3000 if apple is over 410 @ expiration)

    StillLong - 03 September 2011 11:15 PM

    So let’s make sure I’m clear on this:  I hold enough shares to write the two calls as covered.  So I sell two Dec-410s for about $2600.  I buy a Dec-380 for 2500.

    If aapl shoots on past 410 in October my 200 shares get called away.

    If you buy one of the 410’s WITH the 380 in a spread..  then you should not be called away on 200 shares.. only 100.  The spread is going offset both strikes/calls.  The 410 will be ‘secured’ by the 380.  You can buys spreads like that without shares to back anything up.

    StillLong - 03 September 2011 11:15 PM

      I still have unlimited earning power on the purchased 380 call - right ?

    Yes


    StillLong - 03 September 2011 11:15 PM

    If aapl shot on past 410 to say, 420.  That’s up 40 from the 380.  What do you think that call would be trading for in October with aapl at 420?

    The volatility of the market will affect the price.  Where the VIX is at is going to be a key issue.  I think they have option calculators for that..  I could explain the way that I figure it out (which i started doing before I knew there was calculators) but it is much easier with a good option calculator.  Maybe some one here can help you with that.

    Be very careful with those plays..  make sure you read up really good and all that.  You seem like you are, so thats good.  I would think about maybe leaving 100 of those shares alone..  actually I would have calls/spreads instead of stock, but I don’t want to suggest that.  I would suggest thinking about simply leaving 100 shares alone.  The reason is that once apple starts to move over 404.. it’s going to move.  It will be at 425 faster than a lot of people realize.  And I wouldnt cap 200 shares at 410.  Maybe using 100 shares like that (or possibly selling a 425 or 420 instead, and then maybe moving that 380 up a few strikes.  I don’t know.  I’d have to think about exactly what I’d do.  I know I wouldn’t want to cap the upside on ALL my shares.

    When apple gets to 425 you could always sell a call at that point..  or something..  even though I don’t even think that is a good idea.  These things get REALLY creative the more you get into them.  Its fun.

    [ Edited: 03 September 2011 08:46 PM by blaze biscuits ]      
  • Posted: 03 September 2011 10:59 PM #9

    StillLong - 03 September 2011 11:15 PM

      I still have unlimited earning power on the purchased 380 call - right ?

    blaze biscuits - 03 September 2011 11:43 PM

    Yes

     

    Ok - you had me and then you lost me.  So if we see this now as essentially a bull call spread with an additional covered call thrown in:

    The 380 call I purchase is NOT really unlimited after all - because it’s being used to cover one of the 410s I’m writing.  But like you say, only 100 of my shares could possibly be called away, the other 100 in this play are covered by the spread.

    And again - thanks to everyone for their patience with someone who’s been on here less than a week.  Although I’ve been a frequent lurker…

         
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    Posted: 03 September 2011 11:21 PM #10

    Still Long, you can mix and match any way you like.  It’s like rock-paper-scissors:

    100 shares cover 1 short call (covered call)
    1 long call covers 1 short call of a higher strike (bull call spread)
    1 long call, all alone = unlimited potential upside
    100 shares, all alone = unlimited potential upside

         
  • Posted: 04 September 2011 10:59 AM #11

    lovemyipad - 04 September 2011 02:21 AM

    Still Long, you can mix and match any way you like.  It’s like rock-paper-scissors:

    100 shares cover 1 short call (covered call)
    1 long call covers 1 short call of a higher strike (bull call spread)
    1 long call, all alone = unlimited potential upside
    100 shares, all alone = unlimited potential upside

    Got it, thanks.

    I tend to agree with Blaze, I’m not willing to put 100 shares on the line right now, at this time of year.  The holiday run-up seems too promising to me.  BUT:

    I’ve held most of them since 2006, the majority bought for $60, some for much less.  And I have zero to show for them since aapl doesn’t pay a dividend.  I started looking at options in the first place because I’ve got nothing but paper profit after holding for 5 years.

    So I’ve been thinking about covered calls after the holidays, if aapl is around 425 and the stock might settle down or even get pushed way down like it did this past year.  With the hope of then selling some puts to get back in later.

    So many choices.  The variety of options plays is almost overwhelming.

         
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    Posted: 04 September 2011 11:29 AM #12

    StillLong - 04 September 2011 01:59 PM
    lovemyipad - 04 September 2011 02:21 AM

    Still Long, you can mix and match any way you like.  It’s like rock-paper-scissors:

    100 shares cover 1 short call (covered call)
    1 long call covers 1 short call of a higher strike (bull call spread)
    1 long call, all alone = unlimited potential upside
    100 shares, all alone = unlimited potential upside

    Got it, thanks.

    I tend to agree with Blaze, I’m not willing to put 100 shares on the line right now, at this time of year.  The holiday run-up seems too promising to me.  BUT:

    I’ve held most of them since 2006, the majority bought for $60, some for much less.  And I have zero to show for them since aapl doesn’t pay a dividend.  I started looking at options in the first place because I’ve got nothing but paper profit after holding for 5 years.

    So I’ve been thinking about covered calls after the holidays, if aapl is around 425 and the stock might settle down or even get pushed way down like it did this past year.  With the hope of then selling some puts to get back in later.

    So many choices.  The variety of options plays is almost overwhelming.

    One strategy I would DEFINTELY look at right now is buying two put contracts on those shares.  Something nice and out the money, on whatever strike you want to ‘insure’ apple at. 

    If you don’t understand what all of that means then do a search on “using puts as protection” (or some search variance thereof)

    Maybe you already have them..  but if you don’t..  You, in effect, have a $75,000 asset right now that is not insured.  “we” would never do that with a brand new 75,000 car.. and there’s no reason to do that with stock either.  That’s too much money!  Especially if you’ve had them since $60 (and good job on that!)

    One thing to keep in mind is how the VIX will either jack the cost of those puts up, or knock it down.  I’m not saying to buy them now, I’m not saying to NOT buy them now..  I’m just saying that you should take a look at that method and also understand how the VIX will inflate/deflate that ‘protection’.. and then make a decision based on that, once the material is understood.

    Hopefully this is not confusing.. it maybe at first, but I assure you it is a very easy thing to comprehend and understand.  The hardest part would be an understanding of the VIX.  but even then you don’t need a really great understanding..  maybe just some firm knowledge of how much more those puts cost at a VIX spot of 16 vs. 24 vs. 32 vs. 40..  or something like that.

         
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    Posted: 04 September 2011 11:37 AM #13

    StillLong - 04 September 2011 01:59 AM
    StillLong - 03 September 2011 11:15 PM

      I still have unlimited earning power on the purchased 380 call - right ?

    blaze biscuits - 03 September 2011 11:43 PM

    Yes

     

    Ok - you had me and then you lost me.  So if we see this now as essentially a bull call spread with an additional covered call thrown in:

    The 380 call I purchase is NOT really unlimited after all - because it’s being used to cover one of the 410s I’m writing.  But like you say, only 100 of my shares could possibly be called away, the other 100 in this play are covered by the spread.

    And again - thanks to everyone for their patience with someone who’s been on here less than a week.  Although I’ve been a frequent lurker…

    yes.. that is confusing.  I meant that you would have unlimited 380 upside with YOUR scenario of writing two calls.. which would be two covered calls on your 200 shares.  Then the 380 would be a ‘solo’ option (i.e. not ‘mixed’ with a short call - a.k.a. a “spread”)

    sorry for the confusion..  I should of caught that variable.

    and your welcome.  your asking smart questions and your researching yourself too.. Your not just asking “what is a spread?”.  Any simple web search can answer that.

    Your good to go..  keep contributing.  I can wait to come back actively myself.  To both trading and the board.

         
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    Posted: 04 September 2011 02:54 PM #14

    StillLong - 04 September 2011 01:59 PM

    So many choices.  The variety of options plays is almost overwhelming.

    Indeed! smile

    If you haven’t already, do get your hands on OPTIONS FOR THE BEGINNER AND BEYOND by W. Edward Olmstead.

    For myself, I have almost always regretted every covered call I ever sold (short call/long stock).  While you may *think* you would be fine parting with your stock at whatever strike price, to actually *watch* that stock price soar higher after you’ve capped your return by selling that call…ugh.

    There are many ways to effectively pay yourself a cash or stock dividend on AAPL.  Covered calls are my LEAST favorite.

    Read the Olmstead book. wink

         
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    Posted: 04 September 2011 03:10 PM #15

    [quote author=“lovemyipad” date=”)

    If you haven’t already, do get your hands on OPTIONS FOR THE BEGINNER AND BEYOND by W. Edward Olmstead.


    Read the Olmstead book. wink

    I got the book based on your recommendation. It’s a great book. The thing I like is that he gives real life trading examples and how to actually carry out the trades.  Other books merely defined options strategies in a theoretical sense.