Comments on: Defensive Call and Put Positions in Bear and Volatile Markets https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/ Learn how to invest by selling stock options. Fri, 06 May 2016 15:09:37 +0000 hourly 1 By: Nate https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43471 Fri, 06 May 2016 15:09:37 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43471 Catherine,
In Alan’s example the position actually made $1.80 in option premium. So my question is do you not want the position taken from you because you want to keep the shares long term or is it because you think you will lose money?

If it’s to keep the position look at Alan’s example and you can see that since you don’t have the obligation to sell the shares at the strike after buy back your shares are worth the higher current price. And you really aren’t down in the position. The problem comes since you have so much time to expiration the shares could go back down by January then you don’t have the buffer of the option premium.

My guess is that you don’t mind getting called away since you wrote an ITM option, as long as you don’t lose money. In this case you actually made money sooner without having to wait till expiration. In this situation use the mid contract unwind exit strategy. Use Alan’s example above and just sell the shares and the profit is yours to keep. Since you don’t have an obligation at the strike you can now sell the shares at the higher current price. If you do the calculation you will find that the difference between the strike sold and the current price is more than a $1,200 gain. Anything over $1,200 in Stock appreciation is your profit to keep. The $1,200 comes from 1,800 to buy back minus the 600 received to sell.

Nate

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43458 Fri, 06 May 2016 12:05:48 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43458 In reply to Catherine.

Catherine,

If the strike is in-the-money even by $0.01, it will be exercised after expiration unless you buy back the option. Early exercise is rare but possible especially when there are dividends distributed. The amount you will “lose” when buying back an option is the time value only. Here’s an example:

Stock price: $52
Sell $50 call for $4
Stock price now $60
Cost to close: $10.20
Share maximum value: $50 due to option obligation
Buying back option: Debit of $10.20
Share value now moves up to $60 from $50
Net loss: $0.20 per share; not $10.20

Alan

]]>
By: Catherine https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43456 Fri, 06 May 2016 12:03:08 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43456 I’m very new at this, and would like to learn all I can before going further with covered calls.

Unfortunately, I wrote a very ill-advised one a few months ago. The strike price was $4 below what I paid, and the expiry date was close to a year out. Although I would like to find a means of exit, it would cost too much to buy the call back. The premium I had received was about $600, and now the cost would be $1,800. I’m just hoping the buyer won’t exercise their right to buy the stock in January.

But I guess we learn the best lessons from our mistakes!

With much appreciation…
Catherine

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43335 Thu, 05 May 2016 16:10:09 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43335 In reply to Brett.

Brett,

The percentage applies to the entire premium. This works because of fact that in-the-money strikes have higher Deltas than at-the-money and out-of-the-money strikes and premium will decline faster for strikes with intrinsic value.

Alan

]]>
By: Brett https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43327 Thu, 05 May 2016 13:26:04 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43327 Alan,

When you talk about the 20%/10% guideline are you refering to just the TV component of the premium, or the entire premium price?

Kind regards,
Brett

]]>
By: Alan Ellman https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43321 Thu, 05 May 2016 12:11:06 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43321 In reply to Laurie.

Laurie,

I cannot give specific financial advice in this venue but I’m happy to share some general comments:

1- Spinoffs and mergers create some unknown factors for both the underlying securities and the associated options. We do not know how the market will respond to the “new company” We do not know how option pricing and liquidity will be impacted.

2- Fundamental and technical analysis will be effected but we do not know in which direction and by how much…could be a positive or negative result.

3- To fully understand the “deal”, go to this link:

http://www.cboe.com/publish/TTStockSM/16-296.pdf

Alan

]]>
By: Laurie https://www.thebluecollarinvestor.com/defensive-call-and-put-positions-in-bear-and-volatile-markets/#comment-43319 Thu, 05 May 2016 12:03:03 +0000 http://www.thebluecollarinvestor.com/?p=13731#comment-43319 PNK was bought up by GLPI and then the company was div-ied up into a new PNK and GLPI. I had a call on the old pink. I now hold 85 shares of GLPI with 1 option contract on it, and “new PNK” fraction with no option. Should I sell the remnant and just play the GLPI option like it is the one I originally selected?

]]>