Thanks for the quick response. I am placing an order for your book specially now that we have the discount code. Thank you.
Now I understand the reason for the price difference on the deep calls.
Funny that after sending you the email TBSI had a sizeble drop and now the $12.90 call is worth $7.70 but surprisingly the time premium is now $2.33 vs $1.81. As you will learn, this is predictable, not surprising. As an option moves more and more into the money, it's time premium shrinks. And as it moves less and less into the money, it's time premium increases. But you already knew that if you think about it. When you wrote last time, the 60 call had more time premium than the 50 call.
I guess this is the trade off for the drop. Thanks for the questions you posed which made me think I should probably trade to get the most return for the money and perhaps use cash to buy the stock itself if I like it that much.The questions were designed to make you think. Glad you have done so. I should see options as their own investment vehicles instead of a way of buying a stock. A agree with that. At first I saw as buying a stock at a deep discount It's not a deep discount. In fact, you pay a premium to buy options, hold them, and then exercise. The benefit of buying options is that if the stock tumbles, your loss is limited. i.e., if the stock drops way below the strike, you lose less owning the cheap option rather than the expensive stock. so when I buy it I would have that much more cushion later in a case it drops on a stock I plan to hold for a long time but I see your point on making money on the time left on the option. You are not 'making money' on that time premium. In fact you lose money because you paid more time premium when you bought the option than you can collect when you sell it (after holding it for a while). It is not so much an issue of not having the money but just putting a little on an option instead of buying it out right an have potentially higher losses while owning it. Yes - if you buy the option to limit losses, that's fine. If you buy it, intending to hold and exercise, that's not as good of a strategy. If you want to stay long options, you can sell your old call (when you deem it appropriate) and 'roll into' another call with a longer expiration. In other words you could have sold the June 50 and bought the Jul 60 and collected some cash while doing so. Options are versatile and there are many choices.
Regarding the puts, when I feel that a stock is going to stay about the same or go up I sell put options because I receive the premium where if I buy the call options it is
money out of my pocket. I understand that if the stock drops below the put option strike price that it will cost more to buy back the option or even more if I'm put the actual shares. I calculate my breakeven points and buy my put options if it gets too close. Buying back at some point makes sense. Must control risk. At the same time I try to sell naked calls (but ready to buy the stock if it gets to close in that direction) to spread the risk. Many brokers do not allow the sale of naked calls, and it is riskier than naked puts. If the put goes bad, then the call should offset some of the bad and vice versa. True, but the offset is usually insufficient to make the combination trade profitable. It seems a lot harder to let money go than getting it and hopefully the stock goes up and the put option becomes worthless. Sure, but hoping and wishing are not good investment techniques. You have a decent understanding of what you are doing, but the book will clarify some points for you. It seems to me that most of the time in order for buying a call option to be worth while, the option has to be at or very near the money. Yes, most of the time. Buying out of the money options is a poor strategy, yet many investors adopt it, dreaming of riches. I don't like to go out more than 2 month on any options. That's a personal choice and very reasonable. Although I have a couple of LEAPS calls and puts that are doing well (NE).
Regarding the cost I pay $10.75 in commissions for one option $11.50 for 2, etc. so percentage wise it varies depending on how much premium I collect. That is obscene. Far too much to pay. Consider this: If you sell an option for $100, considering that you may want to buy it back st some point, your broker gets $21.50, reducing your sale price to $79.50. That's terrible. Unless you love this broker, consider moving - or negotiating with them. Or trading 2-lots instead of one.
If a put option that I sold is way out of the money, then for the most part I just let it expire and therefore saving from paying commissions for buying it back. If it's price is too close that it could go either way, I set triggers to buy them back automatically. Ok. Your choice.
Going back to TBSI, I think the stock was oversold and will rebound therefore I sold new put options and also bought a couple of in the money calls. I understand that if I'm
wrong then potentially I would need to buy back the puts and my calls would become worthless.
As I mention before I started to invest in LEAPS do you feel these are better options than the shorter term ones? NO. Not for most buyers.
I bought a Jan09 57.50 NE call for $8.96 on 4/28 and today it is worth $14.10 and NE close at $66 today. My original intention was to exercise the option if the stock is still significantly above $57.50 but now that you have mentioned the money that can be made on the time left on it, I will most likely trade the option but is there a good point when you can expect the most return for time? The closer it gets to the date the less money it can be made on the time, right? Yes, time premium erodes over time. The amount of time premium in the option is directly proportional to the square rook of time. Thus, a 4-month option has twice the time premium of a one-month option and a 9-month option has twice the time premium of a 3-month option. These are not exact figures because of other factors that go into the pricing of an option (you will read about that in The Rookie's Guide to Options).
I also sold 2 Jan09 55.00 NE puts for $5.68 each on 4/28 and they are worth $3.78 today. I used the money received here to buy the call. A reasonable, bullish way to trade. I'm hoping the stock continues to do well so that the call option goes up in value and the puts go down. I think I knew that. :-) In your opinion how risky is this strategy? It's bullish. It's as risky as owning the stock. You will learn how to reduce the risk (and the reward potential) of such investments in the book (by opening spreads, instead of what you are doing.)
Thanks for all your help and I'm looking forward to reading your book. Good luck and I hope it goes well.
-- Mark D. Wolfinger The Rookie's Guide to Options: The Beginner's Handbook of Trading Equity Options http://www.mdwoptions.com
Thanks so much for your time in responding. I just placed
my order for the book and looking forward to learning from