Thank you for volunteering your time to teach us options trading. I have been blessed by it and now, I’m trying to place an order and begin trading. I have 2 questions :
1. In your presentation, ALGN was at $35.28 when you made a sell-to-open covered call with strike price at $38. Eventually you bought it back using buy-to-close. My question is: when that trade was assigned (filled), did you get the underlying stocks back at $38 or your original price (you bought it at $24.20 in Jan 2012)?
2. When you bought back the options (buy-to-close), did your enter the “type” of trade as “call” or “put”? In my Etrade platform, it asked me if it was a call or put options that I wanted to do. I didn’t know what to do with that.
I hope my questions are clear and I look forward to hearing from you. Thank you.
Glad you are enjoying the COOL_Club sessions, it is fun to share this technique.
First thing I would say is that if the "jargon" is still a bit confusing then that is a great reason to start with a Virtual Trading System like the one at Options Industry Council (http://www.optionseducation.org/en.html). Maybe that is what you are trying to do at e-Trade.
In your note it seemed as though you might think that "filled" and "assigned" mean the same thing but they are totally unrelated. "Filled" is a term meaning that an order you placed has been completed on that day. When you put in a limit order to "Sell-To-Open" an option it is considered "filled" when there is a matched buyer who does a "Buy-To-Open" at the same level as yours.
Assigned is different. It is a term that is used when an option you have sold has been exercised. As a seller of a CALL, when we get "assigned" that means that we sell our stock at the strike price. If we are a seller of a PUT and it gets assigned that means we "buy" the stock at the strike price.
Once you have sold an option (a call in our ALGN example) then you as the seller of the option are obligated to sell your stock at the strike price. In our example the strike price was $38. As long as you leave the option open, you have an obligation to sell at that price up until the expiration date. However, even though you are obligated to sell, the actual stock sale does not happen unless the option is exercised. In most cases this does not happen until the expiration date. Even then, for a Covered call, the sale will only happen if the stock price is equal to or above the strike price. If it is not, it will expire worthless.
The bottom line is that nothing happens to your underlying stock unless your option is exercised.
You do not have to keep an option open until its expiration date. You can close it by "Buying-To-Close" . Once you do that, you are closing the position and are no longer obligated to sell your stock. That is what we did in our ALGN example. First, we "Sold-To-Open" at $.75 and then eight days later we "Bought-To-Close" at $.15. Once we did that we have removed our obligation and we can do whatever we want with our stock. We could go ahead and sell it if we wanted to, or just continue to hold it. What I often do is look to "sell" a CALL again for a later expiration date. Because the option was never exercised (or assigned) our stock was never sold.
If you originally Sold a call to open your position, you will Buy a call to close it. This might be what makes this confusing. It is the opposite of what you do with stocks. With a stock, you Buy to open your position and sell to close your position.
An easy trick when you are ready to Buy-To-Close is to look at a listing of your open positions at your broker. Usually there is a link at the end of each line that says "Trade". If you click on this it will bring up a trade screen with the ticker already entered. Select Buy-To-Close and fill in the quantity and the price that you want to buy at.
On Wed, Aug 1, 2012 at 10:47 PM, Ivan Hodiny <email@example.com> wrote: