Comments on: Overnight Millionaire or Victim of the Rig? Plus: My Readers Pick their Favorite Stocks https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/ Learn how to invest by selling stock options. Thu, 05 Jan 2012 20:48:36 +0000 hourly 1 By: Eric R https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-140 Wed, 20 Aug 2008 03:05:00 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-140 Hi Alan –

An extreme example of selling ITM strikes was a trade on POT I noticed back in July. The day before expiration the July 210 was selling for 6.10. POT was trading at 213 so there was over $300 of time value with only one day left! And because there was little time left until expiration the risk of the stock moving the wrong way was much less. Anyway, just wanted to share this with the rest of the group.

Thanks

Eric R

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By: admin https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-139 Wed, 20 Aug 2008 00:33:17 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-139 Email Question from Chris:

I’ve been ‘studying up’ on covered call writing and I’ve got most of it down except for the logic behind writing calls that are in the money. I’ve been looking at a few sites that list covered calls that are in the money to sell against the stock. But, when writing a covered call that is ITM and that option can be exercised at any time, wouldn’t that result in an automatic loss in the stock position? For example, today PAY was trading at 15.69 (ask) and the 12.50 Sept strike is at 3.60 with 31 days to go. If this option is sold against the stock someone could call the option away from you and this would result in a loss of $3.19 per share for ‘me’. Unless the reasoning here is because the volatility is high inflating the option premium and the $360 gained from the option write is greater than the $319 loss (on 100 shares) resulting in a gain of $41 ($360 – $319) per option sold.

In this case my intention would not be to hold the stock at all but to bank the $41 difference. If the stock drops below 12.50 at any time before or at expiration I keep the entire premium from the call write and keep the stock. My break even would be 15.69 – 3.60 = 12.09 and a loss would start accumulating at 12.08 and lower. I think I have this correct so let me know if I have all my ducks in a row.

Thanks again,
Chris

My Response:

Chris,

Your assessment is generally correct. When we sell ITM strikes, we assume that their will be share assignment unless we initiate an exit strategy ( see Chapter 11 in my book).

The option premium consists of intrinsic value and time value. The time value is your profit. The intrinsic value offsets the loss in the sale of the stock and gives us downside protection. I love selling ITM strikes in a volatile market such as we have now. I also make sure that I only sell options on the greatest performing stocks both fundamentally and technically.

I posted your question because I have received many similiar queries regarding ITM Strikes. Because of this, I have decided to devote a special section of my upcoming webinar series (October 23rd and 25th) to this topic.

Alan

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By: admin https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-138 Sun, 17 Aug 2008 23:30:09 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-138 To Eric:

The one major difference between a stock and an ETF is that with an ETF you are always going to come back to ownership of that security. It could be right after expiration Friday, half-way through the next contract period or the subsequent contract period. With an individual stock, if it no longer meets our system criteria, we may never own it again or at least until it “earns” its way back onto our watchlist.

Alan

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By: admin https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-137 Sun, 17 Aug 2008 23:25:22 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-137 To Barry:

1- Thanks for CALM- I have added it to my watchlist and will give it consideration for my buy-sells this contract period.

2- I have no problem if you decide to add more technical indicators to your analysis. There was a time when I evaluated up to 6 or 7 different indicators but decided that it was too time-consuming and not essential for success. That’s how I ended up with the four I present in my book and DVDs. I have more of a concern for those who under-analyze and buy stocks only because they were told to. Certainly, that’s NOT the case with you. I do feel that the Stochastics indicator along with the other 3 is more than adequate for tremendous success in your investment decisions.

For my readers who are not familiar with RSI, let me give you the definition along with a re-iteration of that of Stochastics:

RSI- A momentum indicator that measures the magnitude of a stock’s recent gains to the magnitude of its recent losses. The indicator oscillates between 0 and 100. Readings below 30 are considered oversold. Readings above 70 are considered overbought.

Stochastics- A momentum indicator that measures the price of a security relative to the highy/low range. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold. Readings above 80 are considered overbought.

In the event that MACD and Stochastics are not in agreement, I tend to sell in-the-money strikes. Using RSI as a tie-breaker may be another approach.

Thanks for sharing your ideas with us.

Alan

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By: Eric R https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-136 Sun, 17 Aug 2008 19:41:12 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-136 Hi Alan –

So basically you are saying to treat an ETF exactly the same as company stock when using your system? I guess I was thinking that since an ETF, like the Q’s, is somewhat less of a risk since it is instant diversification that I should hold it even through a downturn. Anyway, thanks again for all your assistance. Looking forward to your webinar.

Eric

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By: Barry Bergman https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-135 Sun, 17 Aug 2008 17:10:01 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-135 Alan, A question…

Have you considered adding RSI to the selection criteria. In my mind it makes sense because you could have a “tie” with the MACD and Stochastics. The RSI could be the “tie breaker.” StockCharts has room for a third indicator. Am I over analyzing? What has been your experience?

Thx,

Barry

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By: Barry Bergman https://www.thebluecollarinvestor.com/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-134 Sun, 17 Aug 2008 17:06:51 +0000 /blog/overnight-millionaire-or-victim-of-the-rig-plus-my-readers-pick-their-favorite-stocks/#comment-134 Alan,

Take a look at CALM.
IBD = A+
Scouter = 8
Chart = “Beautiful”

I sold the Sept $45 call

Barry

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