Isn't the reason the option hasn't been exercised
early that there is still time value left? No matter how much the stock is
above the strike price, as long as there is some time value an option
holder could net more money by selling the option to someone else (getting
the intrinsic value *plus* the time value) rather than exercising the option
(getting only the intrinsic value).
-Jim Thomas
So my trade is still on and my only puzzle is why haven't I been
called away early? After all, the price is over $6 above my strike
price, why hasn't someone snapped up that difference? I looked at it on
the back of a napkin and figured it this way: If you were to exercise
the options: buy at $4080, buy the stock at 39.29 for $23,574 and then sell
the stock for a profit (at Friday's close) for $27,708... you would net (no
commissions) $54... Come and get me Nassim Taleb! You billionaire
radical you!
Malcolm Myles on
Ron & Jim,
Schwab list the option as 6.80 bid, 7.30 ask. Midpoint is 7.05
which is what they calculate values with for an intrinsic value of
7.03, time value of 0.02, Delta .9772 (which I understand means
that the option has a 97% probability of being filled. Being so
far ITM, the time value has dwindled to nothing already.
I think my napkin is correct. The trade to exercise the option
just doesn't have any value in it - all intrinsic value. I don't
know enough to know how spreads and/or multi legs would affect the
options.
Final nut for me is that I keep $803 and may keep $1877 by Jan 19
which is how I worked it out ahead of the trade. The biggest risk
was getting called away before the ex-dividend date but thinking
about that now, I see that the money probably wasn't in that trade
either as the premiums just aren't there for FAST.
November savings statement... 30 days... similar amount... $4.87!
I'm a happy Cool Clubber!
Malcolm
On 12/29/2012 6:30 PM, Elliott, Ron wrote:
Malcolm:
Thanks
for updating us on your in-the-money covered call trade.
I'm responding to your question about why someone hasn't
snapped up the difference (I've highlighted those comments
in yellow below). I'm not an expert on this stuff, but
fortunately there are people reading this who can correct
any mis-statements I make J.
I'm
quite sure that a trader would not be able to make that
zero-risk $54 on a 600-share trade - that would mean that
the call option has a NEGATIVE time value (i.e., selling for
less than its intrinsic value). The computers that look for
arbitrage opportunities in the market won't let that
situation develop. Since the stock closed Friday at $46.18,
the $39.29 call option would have an intrinsic value of
$6.89 and could almost certainly not be bought for less than
that. Looking at option tables doesn't mean a whole lot
when the market is closed, but currently my broker's web
page is showing bid and ask prices of $6.80 and $7.30 (a
pretty wide spread). No seller is going to sell the option
at $6.80 at Monday's open, unless he/she: (a) makes a
mistake; (b) is sure that the stock price is simultaneously
moving down by AT LEAST a dime (probably a lot more than
that, since there are still almost 3 weeks till expiration);
or (c) has it as part of some hedge or multi-leg spread
strategy that has an element that sort of counters/offsets
the sale of this call.
Right
or wrong, that's my attempt at an explanation.
I had four events that I worked out that I would have to
watch for with my option trade. Two of those events have
passed without ill effect: I've passed through the
Ex-Dividend date without being Called and I've collected the
special dividend I was hunting for with this trade... $300
in the bank.
Recently, since Dec 10, the stock, inexplicably, has had a
really good run up - closed Friday at $46.18 - a lot of
women must have bought bags of nuts and screws for their
honeys! Everyone is happy!
My option position, however, has swelled to a hefty $6.80
premium... not going to be buying that back anytime soon!
In order to buy back the 6x, it would cost me $4,080... Ha!
Take my 600 shares Mr. Market on or before January 19th and
I'll be happy with my "cut".
My parents broker was a great guy. Toby never once failed
to tell me when I bragged about a stock that he had gotten
in at $1. It took some time, but I finally figured out that
it isn't what the stock has done or how clever you think you
are, it is what is left in your account and not the "what
ifs" that matter. FAST has obviously taken off and broken
key resistance lines. It may suffer with all the stocks as
the market drifts down or falls down in January, but it has
been a positive gainer in December and may continue up in
January. I 'could have" just sat on the stock, made the
dividend and rode the stock to $46... "could haves" come
with very nice 20/20 rear view mirrors. I followed
the first rule: Don't loose money. And I obeyed the second
rule: Obey rule #1. I didn't "loose" an unexpected 12.5%
gain ($3,078) in stock appreciation because I sold away that
potential gain with my writing of the calls. You
can't loose what you don't have.
Net profits in my account so far: $1577 premium and $300
special dividend = $1877 (what I had calculated). Risk -
well, I don't think my 600 shares are going to be worth less
than my strike price even if there is a significant
correction in the stock from Friday's close - I get called
away in 15 days at 39.29/sh (in which case, my net profit
drops to $803 after selling stock at strike). Or I could
get stuck with a pretty nice stock on which I can write more
covered calls which isn't bad IF the price drops below my
strike. Still have options.
So my
trade is still on and my only puzzle is why haven't I been
called away early? After all, the price is over $6 above
my strike price, why hasn't someone snapped up that
difference? I looked at it on the back of a napkin and
figured it this way: If you were to exercise the options:
buy at $4080, buy the stock at 39.29 for $23,574 and then
sell the stock for a profit (at Friday's close) for
$27,708... you would net (no commissions) $54... Come and
get me Nassim Taleb! You billionaire radical you!
Fastenal has low premiums and trades those premiums in $0.50
strike increments. It isn't a volatile stock based on its
option premiums, or isn't supposed to be, another reason to
own this stock for the long haul (I have shares not
optioned).
That's all that's fit to print or read on this overcast,
Winter day. Hope everyone enjoys one last Long Full Moon
night tonight (longest full moon of the year was last night
- closest full moon opposite the Winter Solstice). We had
tired jack rabbits and cold, hungry quail in the yard this
morning... Werecoyotes kept everyone up with long
serenades... I thought it was another Twilight movie but no
vampires.
Malcolm
On 11/23/2012 5:02 PM, Malcolm Myles
wrote:
Dudes & Dudettes,
Against cautionary advice... The Trade is on.
Logic: Fastenal announced a $0.50 special dividend payable
Dec 21 (Dec 7 ex-dividend). In order to put the cash
position of my portfolio to work and to capture the short
term return, I took the following position - a Buy-Write.
B 600 FAST @ $41.05 and STO 6x FAST 01/19/13 (59
days) 39.79 CC @ $2.65
(strike price will be reduced (as well as stock) by
$0.50 to 39.29 on Dec 21, used for calculations)
Here's my analysis:
Option expires in January with stock just
below strike price, ie worthless:
(+premium+dividend+stock) I keep the premium, I collect
the dividend on the 600 shares and I have 600 shares of a
company I'm very happy to own (basis is still way below
market due to other shares already holding). STO more CC.
Option expires in January and the stock is
20-30% below the strike price: (+premium+dividend+stock)
ditto, FAST is going to be awesome in five years and I
have the premium and dividend. Maybe don't sell CC for a
while.
Option price drops to below the strike price
after ex-div date: (+premium+dividend-premium+stock) I
keep the premium, I collect the dividend, I BTC the option
trade and write another out father for my purchase price
of 41 - IF the COOL Tool shows it as profitable.
Stock goes like a rocket to 55 and I'm called
away on my shares: (+premium-net cost of stock) I keep
the premium, I collect my strike price for stock (back
into cash) and I watch my remaining shares get very
pricey. Dividend may be icing or just a wish.
Option get exercised before expiration
because someone wants the dividend more than me:
(+premium-net cost of stock) I keep the premium, the stock
is called away. I've calculated that my net gain will be
$503.40 (I consider this to be the worst case scenario)...
no dividend for me.
Underlying: Cash... $24,638.95 (portfolio cash position)
Net premium for CC is $1,577 (out long, deeper in the money,
going for the premium)
Dividend will be $300 (cherry on top)
Net cost of stock (purchase-strike price) -$1073.90
(includes commissions)
I've looked at it longer and from
different angles than any trade I've ever done. I just don't
see a negative risk (okay, Climate Wierding intentionally
ignored.) - I either have my cash or I have my stock.
I don't believe the company will go down 20% without the
rest of the market falling off the fiscal cliff and if it
does, I'll have spent a good portion of my cash to get into
a position not at the bottom (like I haven't done that
before!). I'll use the remaining to go-a-hunting.
I don't think it will go to 55 due to a Santa Rally (Dude,
if you buy your wife a sack of screws... you're nuts! But
Duddettes, you buy your nut a sack of screws, you'll have
started something!)
I do think I stand to make $503 at a minimum (premium-net
cost of stock) with the potential of $1,877 (at an APR of
47%) in 57 more days and sleep well for 56 nights!
I know its off season, but I can't shake the feeling I just
hit a stand up triple into the alley by the arches at
AT&T Park!
What the heck, I did hit a triple! And it was fun as hell to
see the opportunity, work through the problem with my COOL
Club education and support, put it on and watch how it winds
up!
Hope everyone had a great Thanksgiving... To the leftovers!
Malcolm
ps My most favorite literary line in a book I ready 40 years
ago:
Everything in this book may be wrong. (bonus Karma
points if you know the book AND author).
Jim Thomas on

I see it this way. Someone who already owns the option has two choices for getting
rid of it.
(1) Exercise the
options. Buy 600 shares at 39.29 (strike price) and sell them at
46.18 (market price) for a profit of $4,134.
(2) Sell the options (6 contracts) at $7.05 for a
profit of $4,230.
Given those two choices, why would anyone pick
(1)?
Schwab list the option
as 6.80 bid, 7.30 ask. Midpoint is 7.05 which is what they calculate
values with for an intrinsic value of 7.03, time value of 0.02, Delta .9772
(which I understand means that the option has a 97% probability of being
filled. Being so far ITM, the time value has dwindled to nothing
already.
I think my napkin is correct. The trade to exercise the option
just doesn't have any value in it - all intrinsic value. I don't know
enough to know how spreads and/or multi legs would affect the
options.
Final nut for me is that I keep $803 and may keep $1877 by Jan
19 which is how I worked it out ahead of the trade. The biggest risk was
getting called away before the ex-dividend date but thinking about that now, I
see that the money probably wasn't in that trade either as the premiums just
aren't there for FAST.
November savings statement... 30 days... similar
amount... $4.87! I'm a happy Cool Clubber!
Malcolm
On 12/29/2012 6:30 PM, Elliott, Ron
wrote:
Malcolm:
Thanks
for updating us on your in-the-money covered call trade. I'm
responding to your question about why someone hasn't snapped up the
difference (I've highlighted those comments in yellow below). I'm not
an expert on this stuff, but fortunately there are people reading this who
can correct any mis-statements I make J.
I'm
quite sure that a trader would not be able to make that zero-risk $54 on a
600-share trade - that would mean that the call option has a NEGATIVE time
value (i.e., selling for less than its intrinsic value). The computers
that look for arbitrage opportunities in the market won't let that situation
develop. Since the stock closed Friday at $46.18, the $39.29 call
option would have an intrinsic value of $6.89 and could almost certainly not
be bought for less than that. Looking at option tables doesn't mean a
whole lot when the market is closed, but currently my broker's web page is
showing bid and ask prices of $6.80 and $7.30 (a pretty wide spread).
No seller is going to sell the option at $6.80 at Monday's open, unless
he/she: (a) makes a mistake; (b) is sure that the stock price is
simultaneously moving down by AT LEAST a dime (probably a lot more than
that, since there are still almost 3 weeks till expiration); or (c) has it
as part of some hedge or multi-leg spread strategy that has an element that
sort of counters/offsets the sale of this call.
Right
or wrong, that's my attempt at an explanation.
I had four events that I worked out that I would
have to watch for with my option trade. Two of those events have
passed without ill effect: I've passed through the Ex-Dividend date
without being Called and I've collected the special dividend I was hunting
for with this trade... $300 in the bank.
Recently, since Dec 10, the
stock, inexplicably, has had a really good run up - closed Friday at $46.18
- a lot of women must have bought bags of nuts and screws for their
honeys! Everyone is happy!
My option position, however, has
swelled to a hefty $6.80 premium... not going to be buying that back anytime
soon! In order to buy back the 6x, it would cost me $4,080...
Ha! Take my 600 shares Mr. Market on or before January 19th and I'll
be happy with my "cut".
My parents broker was a great guy. Toby
never once failed to tell me when I bragged about a stock that he had gotten
in at $1. It took some time, but I finally figured out that it isn't
what the stock has done or how clever you think you are, it is what is left
in your account and not the "what ifs" that matter. FAST has obviously
taken off and broken key resistance lines. It may suffer with all the
stocks as the market drifts down or falls down in January, but it has been a
positive gainer in December and may continue up in January. I 'could
have" just sat on the stock, made the dividend and rode the stock to $46...
"could haves" come with very nice 20/20 rear view mirrors. I
followed the first rule: Don't loose money. And I obeyed the second
rule: Obey rule #1. I didn't "loose" an unexpected 12.5% gain ($3,078)
in stock appreciation because I sold away that potential gain with my
writing of the calls. You can't loose what you don't have.
Net
profits in my account so far: $1577 premium and $300 special dividend
= $1877 (what I had calculated). Risk - well, I don't think my 600
shares are going to be worth less than my strike price even if there is a
significant correction in the stock from Friday's close - I get called away
in 15 days at 39.29/sh (in which case, my net profit drops to $803 after
selling stock at strike). Or I could get stuck with a pretty nice
stock on which I can write more covered calls which isn't bad IF the price
drops below my strike. Still have options.
So my trade is still on
and my only puzzle is why haven't I been called away early? After all,
the price is over $6 above my strike price, why hasn't someone snapped up
that difference? I looked at it on the back of a napkin and figured it
this way: If you were to exercise the options: buy at $4080, buy the
stock at 39.29 for $23,574 and then sell the stock for a profit (at Friday's
close) for $27,708... you would net (no commissions) $54... Come and
get me Nassim Taleb! You billionaire radical
you!
Fastenal has low premiums and trades those premiums in
$0.50 strike increments. It isn't a volatile stock based on its option
premiums, or isn't supposed to be, another reason to own this stock for the
long haul (I have shares not optioned).
That's all that's fit to
print or read on this overcast, Winter day. Hope everyone enjoys one
last Long Full Moon night tonight (longest full moon of the year was last
night - closest full moon opposite the Winter Solstice). We had tired
jack rabbits and cold, hungry quail in the yard this morning... Werecoyotes
kept everyone up with long serenades... I thought it was another Twilight
movie but no vampires.
Malcolm
On 11/23/2012 5:02 PM, Malcolm Myles
wrote:
Dudes & Dudettes,
Against cautionary
advice... The Trade is on.
Logic: Fastenal announced a $0.50
special dividend payable Dec 21 (Dec 7 ex-dividend). In order to put
the cash position of my portfolio to work and to capture the short term
return, I took the following position - a Buy-Write.
B 600 FAST @
$41.05 and STO 6x FAST 01/19/13 (59 days) 39.79 CC @ $2.65
(strike price will be reduced (as well as stock) by
$0.50 to 39.29 on Dec 21, used for calculations)
Here's my
analysis:
Option expires in January
with stock just below strike price, ie worthless:
(+premium+dividend+stock) I keep the premium, I collect the dividend on
the 600 shares and I have 600 shares of a company I'm very happy to own
(basis is still way below market due to other shares already holding).
STO more CC.
Option expires in January and
the stock is 20-30% below the strike price:
(+premium+dividend+stock) ditto, FAST is going to be awesome in five
years and I have the premium and dividend. Maybe don't sell CC for a
while.
Option price drops to below
the strike price after ex-div date:
(+premium+dividend-premium+stock) I keep the premium, I collect
the dividend, I BTC the option trade and write another out father for my
purchase price of 41 - IF the COOL Tool shows it as
profitable.
Stock goes like a rocket to
55 and I'm called away on my shares: (+premium-net cost of stock)
I keep the premium, I collect my strike price for stock (back into cash)
and I watch my remaining shares get very pricey. Dividend may be
icing or just a wish.
Option get exercised before
expiration because someone wants the dividend more than me:
(+premium-net cost of stock) I keep the premium, the stock is called
away. I've calculated that my net gain will be $503.40 (I consider
this to be the worst case scenario)... no dividend for me.
Underlying: Cash... $24,638.95 (portfolio cash position) Net
premium for CC is $1,577 (out long, deeper in the money, going for the
premium) Dividend will be $300 (cherry on top) Net cost of stock
(purchase-strike price) -$1073.90 (includes commissions)
I've looked at it longer and from different angles than
any trade I've ever done. I just don't see a negative risk (okay, Climate
Wierding intentionally ignored.) - I either have my cash or I have my
stock.
I don't believe the company will go down 20% without the
rest of the market falling off the fiscal cliff and if it does, I'll have
spent a good portion of my cash to get into a position not at the bottom
(like I haven't done that before!). I'll use the remaining to
go-a-hunting.
I don't think it will go to 55 due to a Santa Rally
(Dude, if you buy your wife a sack of screws... you're nuts! But
Duddettes, you buy your nut a sack of screws, you'll have started
something!)
I do think I stand to make $503 at a minimum
(premium-net cost of stock) with the potential of $1,877 (at an APR of
47%) in 57 more days and sleep well for 56 nights!
I know its off
season, but I can't shake the feeling I just hit a stand up triple into
the alley by the arches at AT&T Park!
What the heck, I
did hit a triple! And it was fun as hell to see the opportunity, work
through the problem with my COOL Club education and support, put it on and
watch how it winds up!
Hope everyone had a great Thanksgiving... To
the leftovers!
Malcolm
ps My most favorite literary line in
a book I ready 40 years ago:
Everything in this
book may be wrong. (bonus Karma points if you know the book AND
author).
Malcolm Myles on
Thanks Jim! I hadn't considered the "buyer" side of the option.
I'm still learning and you just showed me a gap and filled it with
the same comment. I've just been considering how the trade affects
me and not how the buyer may consider my trades. I'll have to
include this when I plan out my trades.
My guess is that the options will probably just ride out to
expiration given my napkin analysis and your 1) and 2) below.
Thanks!
Malcolm
On 12/30/2012 9:43 PM, Jim Thomas wrote:
I see it this way. Someone who already owns the option
has two choices for getting rid of it.
(1) Exercise the options. Buy 600 shares at 39.29
(strike price) and sell them at 46.18 (market price) for
a profit of $4,134.
(2) Sell the options (6
contracts) at $7.05 for a profit of $4,230.
Given those two choices, why
would anyone pick (1)?