I've been reading the book and I'm already trying some of the strategies you have written about and this is where the question comes in. I'm trying to write a cover call that looks like an excellent candidate.
I have 600 shares of AKS which as I write is 70.25. My avg cost is 68.18 per share. I would like to sell the Jun08 70 call which is trading at 2.40. This looks
very good to me specially since there's only a week to go. This means that there's a 2.15 time value to the option. My question is should the stock open at the same price on Monday what is the most likely price of this option if I dont pull the trigger today? Is there a calculation that I can use to come up with this number? I figure it should be less than today since there will only be 5 days left. Do options count weekends and holidays for time erosion or only business days?
Your average cost is not important. You own the stock today and should decide if you want to write covered calls based on today's stock and option prices.
It's difficult to estimate Monday's price, although I'll show you how to make an estimate (below). Anything can happen over the weekend. A war can start, there can be a terrorist attack somewhere. There may even be some spectacular good news. Barring anything that affects the whole market, if the stock is unchanged, you can expect the price to be lower on Monday.
Use a calculator to determine the price of an option. They are available on the internet. A good one is here: http://www.cboe.com/LearnCenter/OptionCalculator.aspx
If implied volatility remains constant, then the theoretical value of an option depends on the number of calendar days. Not trading days. Using a volatility of 54 (that makes the option worth 2.40 today), the option is worth 1.91 Monday, or about 50 cents lower.
Just a note - the option is priced this high for a reason and there may be some news pending before expiration. But, if you want to reduce downside risk, this is a reasonable option to write.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options