Comments on: ETF Index Tracker Proposed Strategy: A Risk-Free Investment? https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/ Learn how to invest by selling stock options. Fri, 08 Sep 2017 23:15:36 +0000 hourly 1 By: spindr0 https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125882 Fri, 08 Sep 2017 23:15:36 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125882 In reply to Nagesh.

Nagesh,

ITM calls are more likely to be exercised early if they have very little time premium left in them.

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125807 Fri, 08 Sep 2017 12:21:39 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125807 In reply to Nagesh.

Nagash,

Technically, our ITM options are “American Style Options” which can be exercised by the option holders AT ANY TIME until 4 PM ET on expiration Friday. Practically, however, options are rarely exercised early because the option buyers are better off selling the option rather than exercising it and selling the stock. When options are exercised early, it is usually related to an ex-dividend date.

Selling the option results in capture of intrinsic value + time value Exercise and selling the stock results in capture of intrinsic value only.

Expect all options that are in-the-money by $0.01 or more to be exercised the Saturday after expiration Friday. Keep in mind that we can avoid exercise by buying back the ITM option prior to 4 PM ET on expiration Friday.

Alan

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125712 Thu, 07 Sep 2017 20:29:00 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125712 In reply to Harini.

Harini,

Here are some general guidelines that have application to covered call writing and put-selling:

1- My personal preference is to use Monthly options that expire on the 3rd Friday of the month. Some of our members prefer Weeklys that expire every Friday.

2- The best time to enter these positions is within the first few days of a contract (the Monday or Tuesday after expiration).

3- Southwest: First we must determine if this is a stock we want to keep in our portfolio or are we willing to sell. If keep, stay with out-of-the-money strikes. If not, in-the-money strikes will work (101 shares will allow the sale of 1 contract).

4- In general, airline stocks are not the best securities for option-selling because they provide monthly capacity reports that act like earnings reports and create risk. If you plan to hold LUV for the long haul, writing calls is okay.

5- Selling puts is generally reserved when we don’t yet own the shares. They give the right to the option buyer to sell their shares to us. If we sell a put our position in that stock can increase and will have no impact on the shares we already own. Buying a put, on the other hand, will offer downside protection on this declining stock.

6- At this time, 2 points are most important:

A. It doesn’t matter what we paid for a stock in the past. Our current decisions are based on current price.

B. Take your time…we shouldn’t start selling options until we have mastered the 3 required skills (stock selection, option selection and position management). Once we have achieved this level of education we now will have years and decades to benefit.

Alan

]]>
By: Nagesh https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125710 Thu, 07 Sep 2017 20:03:34 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125710 Hi Alan,

I have a question about ITM covered calls,are ITM options exercised all the time?

If yes,when will these options will be exercised ?

Is it before the expiration cycle or at the the time of expiration?

Thanks,
Nagesh

]]>
By: Roni https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125686 Thu, 07 Sep 2017 15:05:07 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125686 In reply to Jay.

Hi Jay,

that’s a win win situation you have with your “other’s” account.

If you are right you win, and if she is right you will both be happy that she wins.

Way to go my friend, keep it up.

Roni

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125675 Thu, 07 Sep 2017 13:37:17 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125675 In reply to MarioG.

Mario,

Great question that me scratching my head as well regarding the discrepancy in dividend and strike. Then I realized that EDU was an American Depository Receipt (ADR), a foreign company trading on US exchanges. The stock certificates are held by a bank that charges a deposit fee in cases of special dividend distributions. In this case, it appears that fee is $0.02 per share making the net of the dividend distribution $0.43, not $0.45.

Plain vanilla, anticipated, recurring dividends don’t change strikes because market-makers know they’re coming and the option pricing factors the ex-date into the value of the options…calls decrease in value and puts increase in value because stock price will go down on the day of the ex-date by the amount of the impending dividend.

Alan

]]>
By: MarioG https://www.thebluecollarinvestor.com/etf-index-tracker-proposed-strategy-a-risk-free-investment/#comment-125672 Thu, 07 Sep 2017 13:27:49 +0000 http://www.thebluecollarinvestor.com/?p=15903#comment-125672 In reply to MarioG.

Jay,
Thanks for being so forthright….It’s embarrasing to myself when you repeat it again a second time. That is what I am trying to avoid.

You are right. Not a time to do things with haste. I look at the trade a few times to make sure something obvious is not right for the trade. Like having 3 contracts and 200 shares (Probably will be rejected) or having 300 shares and 2 contracts!

Mario

]]>