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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Jake..I am long MON. What would be a good call to sell vs. my position? Many thanks…
Jake, I like the selling of puts to in effect get a better price but I prefer to buy calls and puts in various combinations to:
1. work the leverage for a long or short play with less capital required.
2. Hedge a standard long or short position. I did this a month ago when I bought SLW, I also bought a $7.50 put to hedge my bed. The put was much less money than the purchase capital.
3. A strangle or straddle where you buy the call and put of the same security betting it will go somewhere. This has worked very well in this market the last few months where I felt confident the market would do something, just not sure what 🙂
‘Cat —
That depends upon whether you want to milk the position, or are willing to sell it soon, etc.
If you don’t mind getting rid of it, you can effectively “Sell it today” for $92.40 by selling the appropriate May $90 calls against your position.
This in effect, guarantees you a sale price $2.55 above today’s close if MON closes above $90 by May 15th.
If you think MON is going to be below 90 by that date, you will have “earned” the premium free and clear — this is the sold call’s hedge function against a downturn. Admittedly this is no solace if MON goes to $70, but….
If you would rather “milk the stock” you can sell further out at higher strikes… for example, the October 100’s are selling at $5.60 on the bid ($5.90 asked). That means you could sell those calls today, and bank the premium for a little less than six months. You will either keep the premium or sell your stock at $105.60 at that point. Again, no solace if MON is $120+ at the time.
The nice thing about the longer time frame is you get more time decay, or “theta” that works to your advantage all other things remaining constant.
So if MON stays in the $90 to $100 range, the premium in the option you sold will decrease as we approach October, until it reaches a point you may wish to buy back the option before expiry (because it’s less than what you got paid for it originally) and then start the process all over again by selling farther out options.
In this way, we can bank coin off a stable position for years on end.
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Relax Caveman… this is “Foot in the water” stuff. I am not advocating complicated options strategies as investments.
Not yet at least. 😉
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I think what you do is more complicated than what I do 😉
But perhaps I can do some peanut gallery posts on some option stangles, my favorite.
Nice post. Thanks..
On another note, how ’bout those Red Sox? Yeeaahh!!
Fawk the Sawx.
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Jake…many thanks for the info above!
Jake, Very nice post. Joba on fire.
Yogi — it’s about time!
lol.
WC — yw.
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