Options: Low Cost Investing

[scifos]

I would just say this: if you are going to make any play other than a covered call, (i.e., selling a call on a stock you already own), then because of your inexperience I would enter a small position first. Make small moves until you gain confidence and experience.

I'll try to post some options plays from time to time.

From what I understand, options are the most versitile investment vehicle. That said, beginners can get way too complicated and in over their head fast.

[skiracer]

Peanuts; if I were you, I'd set up quotetracker free charting (www.quotetracker.com) and open up intraday charts for all those stocks you're interested in trading options for.

That way, you'll get a good idea of how the options move relative to the stock. You will see where there is an edge as far as support and resistance, and where you can afford to be patient and slow, and where you have to react quickly and not mess around. Sometimes you've just got to bite the bullet and get out. Remember, if you're long options, they are a depreciating product, and sometimes you just have to sell what you think is valuable for whatever the market wants to pay for them. Options often run opposite to what you think they should....so this is why I strongly strongly urge you to paper trade them for several months before you jump in and start selling call options. Newborn is a pro, and while he optimistically recommends you start by selling a covered call, I'd disagree and tell you to get your head around the basics first. Watch price action on enough of them and witness how they act relative to expiry, and volatility, and you'll be well off dude.

Be patient with your entries. I repeat; BE PATIENT. Let price come to you for your entries. And don't get greedy when trying to sell them. One must consider volume traded, and how significant the support/resistance is for the underlying. If it's a major support/resistance break, then your move will be more rewarding; especially when you have bought your options when no-one else wanted them. Or if you're selling calls, you wanna be selling them when everyone wants them and the price has been bid up to resistance areas....and then buy them back again when stock price has just about finished dropping to/approaching support levels...and nobody wants them. Supply/demand and where you are relative to the money are very important.

Few random thoughts there to help. Good luck.

Personally I think it's way out of line to even suggest to someone who has never traded a common call or put, who knows nothing about volitaility, implied volitaility, time erosion or many of the other factors that effect how options work, to jump right in and suggest selling a covered call right off the bat. I would think the proper advice would be like Spike states to investigate them and learn alot more about them first. I hate paper trading anything but in this case it makes sense to get some mileage under your belt first.
Another thing is that unless you are able to sit and watch the screen all day anything other than buying a normal call or put could be disastourous as with the exotic strategys you MUST be there to watch and protect you positions which could be wiped out in no time at all.
But experience is the best teacher and some individuals need that rude awakening about a subject to learn, which btw, is how I had to do it.

[New-born baby]

Personally I think it's way out of line to even suggest to someone who has never traded a common call or put, who knows nothing about volitaility, implied volitaility, time erosion or many of the other factors that effect how options work, to jump right in and suggest selling a covered call right off the bat. I would think the proper advice would be like Spike states to investigate them and learn alot more about them first. I hate paper trading anything but in this case it makes sense to get some mileage under your belt first.
Another thing is that unless you are able to sit and watch the screen all day anything other than buying a normal call or put could be disastourous as with the exotic strategys you MUST be there to watch and protect you positions which could be wiped out in no time at all.
But experience is the best teacher and some individuals need that rude awakening about a subject to learn, which btw, is how I had to do it.

Ski,
A covered call is very safe. How could Peanut lose money on a covered call?
Peanut already owns the stock. The only question is whether or not $50.70 is enough money by April 21.

Sure, Spike's and your advice is very good. Study is always good advice. But imo I didn't think taking an extra $70 out of the system was bad

[dmk112]

You mean low cost way of speculating.......and I am speculating with VIX May 12.50 calls expecting the VIX to spike to 18+ near term.

18?? LOL the market would have to crash, it 1st has to get through resistance at 13.5, 13.75, and 14.50. But I wouldn't call June 'near term'

[spikefader]

18?? LOL the market would have to crash, it 1st has to get through resistance at 13.5, 13.75, and 14.50. But I wouldn't call June 'near term'

Historically VIX has been at levels of 18 during corrections that wouldn't be considered 'crashes'. VIX is a quirky thing for sure, but I think it's entirely possible that a quick correction in the market would send VIX over 18.00. Right now there is potential for it...doesn't mean it will happen, but it's still possible.

[spikefader]

Ski,
A covered call is very safe. How could Peanut lose money on a covered call?

It all depends on the issue of course, but I've seen many situations where a gap up and strong bullish short-term run on a stock can leave a seller of a call scrambling to avoid losses. And usually when it happens it's so fast that you don't have a chance to cover the short call position until losses are already in your face. USG was one such situation in January where selling covered calls lost big money.

[Jim Smith]

I would never advocate a covered call strategy.....You give up too much upside for very little downside protection...

[New-born baby]

It all depends on the issue of course, but I've seen many situations where a gap up and strong bullish short-term run on a stock can leave a seller of a call scrambling to avoid losses. And usually when it happens it's so fast that you don't have a chance to cover the short call position until losses are already in your face. USG was one such situation in January where selling covered calls lost big money.

$pike,
Just so I understand . . . this is what I mean by a 'covered call."
You own 100 shares of USG that you bought at $80. You sell a call for the next month for someone to buy USG from you at $85 for a fee of $1.75 per share. USG gaps up to $95. You have to sell your shares at $85+1.75 or $86.75.

That's what I mean by a covered call. And of course I would say that "I bought the stock at $80, sold at $86.75, so I didn't lose money." Sure, I didn't get $95 for the stock. But I didn't lose money.

Are you saying that if I didn't get $95 that I lost money? I think that's what your saying, so I am asking if I am reading you right.

[New-born baby]

I would never advocate a covered call strategy.....You give up too much upside for very little downside protection...

I would disagree with you. There's much more protection that you might think. Here's an example:

1. SIRF--paid $37.17 per share
2. Sold $40 APR call for $1.20.
3. Stock dips to $36.00--I'm in the red!
4. Sell a $35 call for $1.40. Stock continues to slide toward $35.
4. Sold $30 APR call for $5.60=$.40 more than the stock is worth at $35.20.
5. Covered $35 call at $.65, profit of $.75. Covered $40 call at $.40 for a profit of $.80. I am now sitting very safely in the black $30 call+ $5.60 +.80 + .75=37.55. In the black all the way down to $30 now. IF SIRF can stay above $30! lol
But I am not only in the black, but I took no loss on this red monster. Options offer some protection if you move quickly.

Better, I swapped out the $30 calls for $35 calls because that offered another .40 profit if SIRF is above $35 next Friday. Then swapped out of the $35 calls for .10 gain today and sold the $40 calls for $2.05 today. IF SIRF can stay at this level or higher, I have a nice profit now of about $3.

[Adam]

Covered calls.

$pike, I guess its same question as NBB. Are you considering money left on the table as a loss? That would mean $8.25 per share left on the table.

[skiracer]

$pike,
Just so I understand . . . this is what I mean by a 'covered call."
You own 100 shares of USG that you bought at $80. You sell a call for the next month for someone to buy USG from you at $85 for a fee of $1.75 per share. USG gaps up to $95. You have to sell your shares at $85+1.75 or $86.75.

That's what I mean by a covered call. And of course I would say that "I bought the stock at $80, sold at $86.75, so I didn't lose money." Sure, I didn't get $95 for the stock. But I didn't lose money.

Are you saying that if I didn't get $95 that I lost money? I think that's what your saying, so I am asking if I am reading you right.

Well you wouldn't have participated in the gains but you did own the stock initially. What changed and what caused you to miss out on the gains? The covered call did. Of course this is only one example but it happens all the time with covered calls. When you took the stock position initially did you buy the stock because you liked it to go up or did you see a situation where the premium for writing the covered call was higher than what you thought it should be and that the stock was cheap proportionally. Writing the covered calls requires to many variables to fall into place to collect all the way around. Here's a decent explanation of them and the reasoning behing using them.




Just buying the stock and writing a covered call to grab the premium as an extra isn't what it is all about. The strategy requires alot more of a plan taking into consideration the implied volatility, time erosion, and and what you are really trying to do with the play. It is very hard to win both sides with this play an I would have to agree with both Spike and Jim with their takes on it.
You explanation of your play on SIRF is a great example of what not to expect a newbie to contemplate or to understand how to do with this type of situation, especially if they have had no exposure to any type of experience with options.
If I owned a stock at $80 an it went to $95 I would want the $15 gain before anything else. Leaving the $8.50 on the table as in your example is a loss of capital in my opinion.

[dmk112]

...doesn't mean it will happen, but it's still possible.

That's my mindset when I play the lottery NOT the market.

[dmk112]

$pike,
Just so I understand . . . this is what I mean by a 'covered call."
You own 100 shares of USG that you bought at $80. You sell a call for the next month for someone to buy USG from you at $85 for a fee of $1.75 per share. USG gaps up to $95. You have to sell your shares at $85+1.75 or $86.75.

That's what I mean by a covered call. And of course I would say that "I bought the stock at $80, sold at $86.75, so I didn't lose money." Sure, I didn't get $95 for the stock. But I didn't lose money.

Are you saying that if I didn't get $95 that I lost money? I think that's what your saying, so I am asking if I am reading you right.

NB, why wouldn't you just buy the put?

[spikefader]

$pike,
Just so I understand . . . this is what I mean by a 'covered call."
You own 100 shares of USG that you bought at $80. You sell a call for the next month for someone to buy USG from you at $85 for a fee of $1.75 per share. USG gaps up to $95. You have to sell your shares at $85+1.75 or $86.75.

That's what I mean by a covered call. And of course I would say that "I bought the stock at $80, sold at $86.75, so I didn't lose money." Sure, I didn't get $95 for the stock. But I didn't lose money.

Are you saying that if I didn't get $95 that I lost money? I think that's what your saying, so I am asking if I am reading you right.

Hiya New-born. Thanks for the question; you prompted me to go over some numbers and clarify a few things.

I'm probably overly cautious about options because of my experience as a "buyer" of them and not a "seller". The two are very different as the seller has a distinct edge that a buyer doesn't have....and so I should again remind everyone that I am inexperienced in option "writing" so bear that in mind with any of my opinions.

NB, I do respect your ability to spot great call writing plays, and it's inspiring stuff I would probably be wise to defer to your option writing experience every time. And one of these days I am gonna get my head around covered calls because I'm perhaps overly hesitant.

In the past I've used moments of extreme volatility to scare me away from covered calls, thinking a huge pop in a call price is going to exceed the stock profit by a good margin. Perhaps I am only correct on that during extreme moments of volatility, but on the average the covered call is going to have you sitting comfortably........'covered'.

I guess I think of examples like USG back in January, where you did the USG covered call play, and I was concerned that the move against your call position from $9.90 to $26.00 (the next day's open) meant a losing proposition. Your call loss at the next day's open was -$1610 on 1 call.......while the stock profit at open was only $1200, so you were down -$400 on the play for every 100 shares of stock you owned at the next day's open. BUT....later in the day the position leveled out, then you ended $200-odd in profit for every 100 shares you owned by close....and I think that's what I missed back then, so thanks again for the prompting.

After going over the numbers again it seems that any "red" would only be for a short time and then the covered call position as an entire position is going to turn positive, especially with more complex call writing at clever points during the play, at resistance areas where exhuberance makes people "give" the writer so much premium.

I think I have been perhaps too concerned about lack of security with a covered call play?? I really need to focus on them more and learn that edge, cuz it seems to be a very clever strategy to make money, assuming one is patient and stalks the entries.

Best to ya dude, and thanks again.

[spikefader]

That's my mindset when I play the lottery NOT the market.

lol fair enough dmk. BUT, have a look at that chart again, and tell me it's not just a matter of time before we get a pop in volatility that sends VIX to 18.00 and over. All we need in the market is a decent bearish correction and we're there. That chart is only a few years old too....if you have a look at the 10-year chart for VIX you'll see that VIX prices were over 18.00 just about every day from mid-97 to mid-03. It was normal to have VIX up there.

And what has changed since mid-03??......VIX has "made a habit" of remaining below 18.00. Does it signal severe market complacency? Admittedly it's been a bull market for a few years, but I think the reason for low VIX goes deeper than that. And come the day that the markets feel real blood in the streets, the complacency reflected in that VIX chart is going to reveal itself with a massive spike in volatility that may well exceed levels of 42.00. 18.00 is kiddy stuff, and it's certainly not lottery ticket chances of getting there. It's just a matter of when and not if dude.

Best to ya!