I am considering buying Rio Tinto at $151.70/share and selling the NS option at $25 per contract. The NS contract
states $2280.61 cash in lieu of shares, 100 shares of RTP. Does this mean I sell the shares at $150 per share plus I
have to pay $2,880.61? This sounds like I need to stock to drop to make money. Is this right?
Any time you do a buy-write (covered call), you don't want the stock to decline.
Here is the CBOE circular for this specific distribution: http://www.cboe.com/publish/TTStockSM/09-251.pdf
You did not mention it, but I assume the strike price for these calls is 150. When assigned an exercise notice, you
must deliver your 100 shares of stock, and as you stated, $28.8061 cash per share. In return, you are paid the strike
price, or $150 per share. Thus, if assigned (and the option is almost ATM today, so you may not be assigned), you collect $121.19 per share
The Aug 150 call option is trading near $25. That's $25 per share, not $25 per contract. It's $2,500 per contract.
In that case, you pay $151.70 for the stock, less the option premium of $25, and have a net cost of $126.70 per share.
You do not want to pay 126 and sell for 121.
Something is wrong here and I don't know what it is. This option is trading under parity (under it's intrinsic value) and I do not know why. That's one of the dangers of getting option quotes after hours. There may be an error - you want to look at live quotes before trading this issue. Is this stock going to pay a big dividend soon - perhaps tomorrow?
By the way. I note that the bid/ask spread in this call is $2 wide. YOU DO NOT want to consider selling at the bid price. You must do much better than that.
Unless you can figure out what's going on, why do this?
Here's my bottom line: If I don't understand what's happening I will not make the trade. I suggest one of three alternatives:
Trade the RTP regular options instead. Choose your
Sorry I cannot do better with the answer.
Sell the Aug 150 (NS) Put instead. That gives you the equivalent
position. You may not understand it, but at least you see the cash
premium you are collecting. I would not do this either because
something isn't right.
Forget this stock and find another.
Mark D. Wolfinger