Comments on: RHO: Why Interest Rates Effect Our Option Premiums https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/ Learn how to invest by selling stock options. Sat, 19 Sep 2015 11:33:11 +0000 hourly 1 By: Put-Call Parity and Synthetic Trades: Understanding Option Pricing | The Blue Collar Investor https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-24291 Sat, 19 Sep 2015 11:33:11 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-24291 […] interest rates increase call values and decrease put […]

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By: Alan Ellman https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21264 Mon, 24 Nov 2014 15:18:32 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21264 In reply to Adrian.

Adrian,

Regarding your “put” Qs:

1- When we sell OTM puts we are selling the buyer the right to sell their shares to us. We do not necessarily own those shares to do this unless we are okay with possibly owning more shares. Please advise if am understanding this question correctly.

2- If the S&P (or any stock or ETF) is trending sideways, moving averages are rendered weak indicators. One would buy puts as an insurance policy against a downturn but an upturn is equally as likely. I also look at the VIX, economic reports and chart technical of the underlying security. I do not hang my hat on only the chart of the S&P 500, although I do recognize it as an important factor to consider.

3- A stock with mixed technicals is more aggressive than an ETF with better technicals. My decision is based on overall market assessment and personal risk tolerance. For example, I would opt for the stock in my accounts and for the ETF in my mother’s.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21221 Wed, 19 Nov 2014 22:38:36 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21221 Premium members:

This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

For your convenience, here is the link to login to the premium site:

http://www.thebluecollarinvestor.com/member/login.php

NOT A PREMIUM MEMBER? Check out this link:

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I hope to see as many BCIers as possible this Friday @ Caesar’s Palace Las Vegas, Nevada.

Alan and the BCI team

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By: Alan Ellman https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21220 Wed, 19 Nov 2014 20:43:47 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21220 In reply to Lin.

Lin,

The strategy that will benefit us most when share price rises significantly is the mid-contract unwind exit strategy (detailed in pages 264 – 271 of the Complete Encyclopedia….). This is where the entire position is closed as time value approaches zero.

When we roll out or out-and-up, we wait as expiration approaches because the near term option premium will have little time value left and our option debit for buying back the option will be minimal from a time value perspective. The next month premium is not impacted as much as the near term option. due to the nature of theta for near-the-money strikes.

I will rarely roll up in the same month because we are paying dollar-for-dollar of intrinsic value and then depending on continued share appreciation to benefit…too risky.

To sum up: Consider the mid-contract unwind in the middle of a contract and rolling strategies as expiration approaches.

Alan

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By: Lin https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21219 Wed, 19 Nov 2014 20:34:30 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21219 Alan,

If the stock we bought is keep going up, which way is better to do the rolling out and up

1. wait as close to the expiration Friday as possible

or

2. do the rolling out and up (buy to close and sell higher strike the next month) as soon as the market value is over the strike price?

or

3. do rolling up (buy to close and sell higher strike the same month)?

any guideline for above three scenarios?


thank you

Lin

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By: Alan Ellman https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21218 Wed, 19 Nov 2014 17:47:52 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21218 In reply to Keith.

Keith,

You should be very proud of your accomplishment of generating a 17% annualized return. You beat the market and you are still relatively new using this strategy. If you aren’t going to pat yourself on the back for a job well done then I will…CONGRATULATIONS!!!

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/rho-why-interest-rates-effect-our-option-premiums/#comment-21216 Wed, 19 Nov 2014 17:30:43 +0000 http://www.thebluecollarinvestor.com/?p=10298#comment-21216 In reply to Adrian.

Adrian,

1- Think of buying a protective put as buying insurance, like car insurance for example. Once you buy a car (stock) when should you be insured? At the time of the purchase or 2 weeks later. If your trading style is to have downside protection for a covered call trade then why not be protected for the entire contract?

2- Price charts are extremely important tools but not the only ones that should dictate our trading decisions. If a stock price is channeling sideways, moving averages are not as useful. In a volatile or bear market I would lean to ITM strikes when a chart is not in a trend. However, in a strong bull market, I may use OTM strikes even for a stock price consolidating. Personal risk tolerance also plays a role. When in doubt, use an ITM strike and opt for the more conservative approach.

(As my team and I pack for our trip to Las Vegas for our Money Show presentation, I have made a note to re-visit your other questions when I return).

Alan

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