Comments on: Option Premiums: How Intrinsic Value Protects Time Value https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/ Learn how to invest by selling stock options. Thu, 27 Mar 2014 09:03:14 +0000 hourly 1 By: Adrian https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18804 Thu, 27 Mar 2014 09:03:14 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18804 Thanks again for all your replies, for my 3rd question I probably should have asked also if alright to roll-out a stock if the price above the 20dEMA but not trending higher, but instead channelling s/ways, with mixed MACD, etc indicators? (This happened with 1 of my papertrades but I decided just to rollout.)

Anyway your answers have given me a bit more clarity to know that even if price is under a resistance area, that as long as I find all chart technicals positive then it seems alright to buy shares and put on a trade.
More questions to come soon. Thank you

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By: Alan Ellman https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18800 Wed, 26 Mar 2014 16:44:14 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18800 In reply to Adrian.

Adrian,

My responses:

1- I handle my technical analysis differently for a 4-week cc position than I do a longer term strategy. I also encourage our members to use the technicals they are comfortable with but I’m happy to share the ones that I use and how I use them. If a stock is uptrending, trading above it’s 20-d EMA with bullish MACD and stochastic oscillator indicators and confirmed by volume, I have no issue entering a 30-d position with that security. I will, in fact, use bullish OTM strikes if the overall market is also bullish. When using stocks trending up but with mixed confirming indicators I will favor ITM strikes unless the market is red hot in which case I will still take a bullish OTM position.

2- I base my strike price selection on 3 factors:

– the 4 technical indicators mentioned above
– overall market assessment based mainly of review of the weekly economic reports
– personal risk tolerance

3- This would be an unusual chart pattern with a stock dropping below its EMA but confirming indicators bullish. If this were to arise, I would probably allow assignment and move to another security the following week after expiration…less risk.

4- Rolling down is used to mitigate losses or turn losses into gains. I normally roll down to an ATM (near the money) strike. If share value continues to decline, you can always roll down again or close the entire position and move the cash into another security. I check the news on the stock (finviz.com) and compare depreciation to overall market performance. I take a more bearish stance if the stock is significantly underperforming the overall market (go further ITM or sell the stock).

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18796 Tue, 25 Mar 2014 11:29:03 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18796 In reply to Phil.

Phil,

Your math is excellent with one minor correction.

The initial (and final in this case) return is the time value of the option premium sold:

$3.30 = IV ($2) + TV ($1.30)…TV is $1.30 = 3% for 1-month.
We use the IV of $2 to “buy down” our cost basis from $46 to $44.

After expiration, although share price is $44.01, we collect $44 because of our option obligation to sell @ $44.

After expiration, you have $4400 per contract to establish new cc positions the following month. You also have the choice to roll the option prior to 4PM ET on expiration Friday.

(Profit is $130, not $131)

Alan

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By: Phil https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18795 Tue, 25 Mar 2014 11:17:51 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18795 Alan,

I believe a particular Stock Price is going to decrease in the next Month. I’ve been looking at STO Call for a 1-Month ITM Option and want to make sure I understand the outcome.

• Purchase Price = $46.00 ($46.00 x 100 shares = $4600.00)
• Strike Price = $44.00
• Option Premium = $3.30 ($3.30 x 100 shares = $330.00)

Entering the information into the Multiple Tab of the Elite Calculator, it indicates the following:

• Intrinsic Value = $2.00
• ROO = 3.0%
• Downside Protection = 4.3%

Based on my calculations, I get the following:

• My initial Cost = -$4600.00
• Option Premium I receive = $330.00

If the Stock Price stays above my Strike Price at Expiration, I must sell my Stock at $44.00. Assume at Expiration, the Stock Price was $44.01, thus called away. The financial result would be:

• Initial Cost = -$4600.00
• Option Premium = $330.00
• Settlement Sum = $4401.00
• Net Profit = $131.00 (-$4600.00 + $330.00 + $4401.00 = $131.00)

Are my calculations correct? An alternative would be to apply an Exit Strategy prior to Expiration.

Thank you for your time and effort regarding my question.

Phil

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By: Adrian https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18794 Tue, 25 Mar 2014 05:14:35 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18794 Alan, thanks for your replies here, and I was a bit surprised on that you would buy near a resistance level. I have observed a few stocks on the recent report that look to be at a resistance level, and am wondering if on my papertrades I should wait a few days for a possible breakout, or use a pullback for entry.

1. So my 1st question, if you have no problem to buying near resistance areas, then does this mean you wouldn’t always be looking for a break above some pivot high, channel high, or even a previous days high before buying?(I thought this may be a better entry)?

My next questions I have are about positioning strikes, and then rolling them.
2. Would you if possible, try and position your strike prices around the support/resistance levels, like for instance just above a support level as price goes down(for a rolldown),etc?
3. If the chart is mixed at expiration I know it’s best to roll-out the strike price, but would you still consider rolling out if the price is below the moving averages (or just one of them), yet the other indicators are positive?
4. And when rolling down the strike prices, then how do I decide on if my rolldown I do should be ITM, ATM, or OTM,- what do you think are the reasons for making the best decision here?

Alright well I’ll get back to selecting some stocks to try. Thanks for all your help.

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By: Alan Ellman https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18793 Mon, 24 Mar 2014 20:35:11 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18793 In reply to Adrian.

Adrian,

Glad you’re enjoying the process. My reponses:

1- If trend is up and technicals are showing positive upward momentum, I have no problem taking on a 30-d obligation.

2- With mixed technicals I am more likely to select an in-the-money strike whether its MACD histogram or stochastic oscillator showing a bearish signal. In a bull market environment, I overlook mixed technicals in many cases and still favor out-of-the-money strikes.

3- Sell ITM strikes and take full advantage of time value before “theta” rears its ugly head.

4- Run calculations on near-the-money strikes but don’t pull the trigger until the calculations meet your goals. Move on to another security if need be. Beta is a secondary factor…implied volatility is more important.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/option-premiums-how-intrinsic-value-protects-time-value/#comment-18790 Mon, 24 Mar 2014 06:23:20 +0000 http://www.thebluecollarinvestor.com/?p=9386#comment-18790 Hi Alan, I am back from my break and have found some more questions to ask for using the running list, and they are:-
1. Are you willing to buy a share off running list if everything seems good about it and price trending higher,- but happens to be under a resistance level?
2. When choosing between stocks with mixed technical indicators, are you more likely to be in favour of buying the one with the ‘MACD up’ but ‘Slow Stochastics down’, rather than the other way around, – or no difference to your choice?
3. If I am wanting to buy a share off the ‘mixed indicators’ list, then is it best to wait for all the indicators to be positive before buying, or can I buy straight away and sell ITM options?
4. Also if the beta says ‘n/a’ you had told me to check the ATM option return, but if the price is halfway between strike prices(or not quite close to one of them), then do I calculate to closest strike price anyway,- or wait until price moves closer?

I’m starting to really enjoy the subscription to the premium reports, and articles from my last few months now. Thanks

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