Comments on: Mechanics of LEAPS https://www.thebluecollarinvestor.com/mechanics-of-leaps/ Learn how to invest by selling stock options. Sun, 29 Nov 2015 13:02:41 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24934 Sun, 29 Nov 2015 13:02:41 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24934 In reply to Tom.

Hi Tom,

Time remaining until expiration will have an effect on Delta. Looking at the same strike, an in-the-money call with longer time until expiration (LEAPS especially) will always have a lower Delta than the same strike call with less time until expiration. It is just the opposite for out-of-the-money calls; the call with a longer amount of time until expiration will have the higher Delta than the option with less time. Have a look at the chart below showing a $60 stock and the arrow highlighting delta of the ITM $50 strike for 3 expirations. CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

Alan

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By: Tom https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24933 Sun, 29 Nov 2015 13:00:49 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24933 In the example of the stock is an ATM leap option. If you buy a 75 delta leap option ITM how does the intrinsic value effect your calculations?

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By: Alan Ellman https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24877 Fri, 20 Nov 2015 17:52:34 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24877 In reply to Bob.

Bob,

I write my calls within the first 2-3 days of a 4-week contract and within the first 5-7 trading days of a 5-week contract. The reason (as you pointed out) is that theta or time value erosion is logarithmic for near-the-money strikes so at the end of a contract there is very little time value to capture unless we are dealing with a highly volatile stock. Writing early in the contract also allows us more time for exit strategy execution if the need and opportunities arise.

Alan

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By: Bob https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24876 Fri, 20 Nov 2015 17:48:49 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24876 Hi Alan,

Do you do the vast majority of your Buy/Writes at the beginning of a new option period or do you open up positions each week of the quarter.

The reason that I ask is that the last two weeks of the option month we see the most rapid decline in option values. It would seem to me that this would be the least risky period to sell options.

Thanks for your help and guidance.
Bob

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By: Alan Ellman https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24875 Fri, 20 Nov 2015 17:46:50 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24875 Irving,

As I type FB is trading at $107.46 and the “bid” for the Dec. $95.00 call is $12.70, leaving $0.24 of time value. This means that the option buyer will generate $24.00 more per contract by selling the option as opposed to exercising it..intrinsic value is captured while time value is lost. It is unlikely (although possible) that exercise will occur one month prior to expiration especially since there is no dividend issue with FB.

One choice you have is to wait closer to expiration and re-evaluate.

Another approach if you are extremely bullish on FB would be to buy back 5 contracts and not write calls on those 500 shares and leave the other as is.

Nice trade!

Alan

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By: Irving https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24874 Fri, 20 Nov 2015 10:23:20 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24874 I have been watching your videos and learning about Covered call writing. I have a question and need some guidance about my current holding. I purchased 1000 shares FB at $79.07 and the sold the $95 covered calls DEC 18’15 for $2.48. Since I have a nice profit, do I roll-up and out roll-up, or just let it get assigned.

Thank you in advance for your help.

Irving

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By: Alan Ellman https://www.thebluecollarinvestor.com/mechanics-of-leaps/#comment-24873 Thu, 19 Nov 2015 21:48:18 +0000 http://www.thebluecollarinvestor.com/?p=12912#comment-24873 NKE tomorrow:

I know many of our members have NKE in their portfolios. After hours, the company announced a share buyback, an increase in its dividend and a 2-for-1 stock split (12/23). Look for a nice pop in share price tomorrow prior to contract expiration.

Alan

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