Very busy today, but I wanted to let you know what I was doing on the stock front, just in case. Jacksonian Core Holding favorite TBT is butting against an intermediate term significant fibonacci line (61.8%) at right about $50.35, so I am trying to sell some calls against that position. I like to go “next month out” on those, because it gives me the benefit of some time decay without being so far out that a nice move down doesn’t demolish the actual price like I would like. I chose the June $51’s, which I got some sold at $2.05, and am looking at the rest at about $1.90-ish.
If you are not familiar with options, I’d recommend a number of these, but tops on the list would be McMillan’s book, and then John Murphy’s. Murphy covers other things besides options as well, and he’s a decent writer.
Remember that if you are a true options rookie, you should be sure to get the proper authorizations from your broker before attempting to trade. Don’t worry, there’s no IQ test, and I’m thankful for that.
All that said, covered calls — the name of the above described strategy of selling calls against a position you already own — are the least risky of options strategies, as you already own the stock to “give back” should the call writing go against you. For myself, whenever I write a covered call, I must be sure that I am willing to sell that stock at “price X” — which is the strike price plus any premium I received for selling the call.
So you see a covered call’s upside is income (taxable at regular income rates, unless you sell LEAPs and hold them more than a year), and their only downside is a sale at less than your optimal price at the point of expiration. Since you are selling your stock at a price higher than it is today, your “loss” is only an opportunity cost, though you might find it just as painful as taking a loss on a poor stock.
You can also sell put options if you are looking to purchase a stock but you believe the price is likely to go up. If you sell at a good enough premium, you may end up purchasing the stock at a lower price than the strike you sold the put at. Take the example of the June MON 90 puts, currently being bid at $5.20. If you have sufficient margin to buy 1000 shares of Monsanto, you may want to sell those 10 puts today. You will collect $5200, less commissions today. Throw that in your bank account. If MON continues to rise, and is over $90 by June expiration, you keep the money.
However, if MON is between $84.80 and $90 — you have a nice choice in front of you. You can purchase the MON shares at a discount — because you can now put your $5200 premium to work in lowering your total 1000 share buy price, or you can simply buy the put back prior to exercise, netting the difference in your premium (plus a bit of interest on the carry). Not too bad, no? Of course, you start running into losses below $84.80, but if you were planning on buying MON anyway, you’ve got $5200 as your down payment.
Again, be sure to read up about options before jumping into this pool, but the above are reasonable ways to use options to your long term advantage, without taking a ridiculous amount of risk. Be sure to consult with your financial advisor before taking that first decision, though.
Updates: I added some ANV (PPT: Sell) today on this pullback, and am looking hard at EXK (PPT: Buy) (thanks Chanci) and some SSRI (PPT: Buy) (thanks, Mr. Sachs) as well. I am almost embarrassed to add that I jumped on some ABK (PPT: Sell! Sell! You fool, seeelllllll!) in the low 1.30’s too, just for a lark.
Caveat: If you follow me into any of the above strategic plays, there’s an off chance your vintage Swatch collection will be confiscated by the Ebay Internal Security Forces and tossed into the smelter.
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