In August I took an open position on my existing holding of FAST.
I've owned the stock for some time, have double digit gains, feel
that this level is unsustainable given the soft market and need to
take some profits to offset some unfortunate losses, ie. capture
the gains tax free. I wanted to use covered calls to close the
position so I can learn about option writing and do it in a manner
that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered
Calls". It talks about what can happen after taking the position
and some of the actions you can consider based upon realistic
events.
1) Stock stays or drops, I can let the option expire worthless, or
2) Stock goes over strike, I can be exercised if the option is ITM
at strike date/price, or
3) I can purchase the option back in a couple of different
manners.
No action on my part for the first two, just let it happen.
Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout,
rollout and up or rollout and down. Wow, who knew! I'll leave it
to the Cool Guy to go over the different terms but suffice to say,
they all involve buying back the covered call. I was interested
in the "unwind" which is buying back the covered call and selling
the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations (FAST
got two shocks up in the last week - Bernanke QE3 and then a
positive manufacturing report Monday), it may be cost effective to
buy back the covered calls and sell the stock at the market
price. You have to do the math, but the Cool Tool Covered Call
Spreadsheet - "Closing the Option" tab already does most of it for
you.
This is what I get today around 1pm PST:
BTC 4x 10/20/2012 44.00 C @ 1.60
Net STO $752.80 Cost to Close $651.20 Net $101.60 for
an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is
$45.86. If I buy back the calls, it nets me $101.60. I then sell
the 400 shares of FAST at $44.54 for a net $17,807, total net =
$17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades.
However, it is worth the educational experience to me to ride this
out some more and see what develops with the position. If FAST
continues to be above 44.00 but below 45.86, I'll get called away
and make money. If it goes down, I'll expire worthless or may be
able to buy the calls back at a gain and write another call for
November. If the stock goes way up into 46-47 range, I'll do
these calculations again and see if the "unwind" is the better
plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Susan Tanoe on
Thanks Malcolm on the update. It is really interesting seeing how others decide to close out their positions. I have never tried unwinding a position but it makes sense. I will watch to see what you decide and read up some more on these variations on closing an option.
Susan
On Thu, Oct 4, 2012 at 4:47 PM, Malcolm Myles <malcolm@mmyles.com> wrote:
An update on my FAST position.
In August I took an open position on my existing holding of FAST. I've owned the stock for some time, have double digit gains, feel that this level is unsustainable given the soft market and need to take some profits to offset some unfortunate losses, ie. capture the gains tax free. I wanted to use covered calls to close the position so I can learn about option writing and do it in a manner that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91 Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered Calls". It talks about what can happen after taking the position and some of the actions you can consider based upon realistic events.
1) Stock stays or drops, I can let the option expire worthless, or 2) Stock goes over strike, I can be exercised if the option is ITM at strike date/price, or 3) I can purchase the option back in a couple of different manners.
No action on my part for the first two, just let it happen. Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout, rollout and up or rollout and down. Wow, who knew! I'll leave it to the Cool Guy to go over the different terms but suffice to say, they all involve buying back the covered call. I was interested in the "unwind" which is buying back the covered call and selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations (FAST got two shocks up in the last week - Bernanke QE3 and then a positive manufacturing report Monday), it may be cost effective to buy back the covered calls and sell the stock at the market price. You have to do the math, but the Cool Tool Covered Call Spreadsheet - "Closing the Option" tab already does most of it for you.
This is what I get today around 1pm PST: BTC 4x 10/20/2012 44.00 C @ 1.60 Net STO $752.80 Cost to Close $651.20 Net $101.60 for an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is $45.86. If I buy back the calls, it nets me $101.60. I then sell the 400 shares of FAST at $44.54 for a net $17,807, total net = $17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades. However, it is worth the educational experience to me to ride this out some more and see what develops with the position. If FAST continues to be above 44.00 but below 45.86, I'll get called away and make money. If it goes down, I'll expire worthless or may be able to buy the calls back at a gain and write another call for November. If the stock goes way up into 46-47 range, I'll do these calculations again and see if the "unwind" is the better plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Dan Hess on
Malcolm
This year presents some extra tough decisions regarding taxes. No
one knows for sure what the LTCG or dividend tax rates will be in
2013. I see this as perhaps the last year one may take LTCG and
only pay the 15% federal tax rate. On the other hand losses may
be more desirable next year if rates do rise.
It is not only the president who decides what the rates will be
but also the Congress and Senate. Obama has said his LTCG tax
rate would be 20% while Romney has said 15%. However since the
current Bush Tax cuts sunset on 12/31/12 if nothing is done the
20% rate will be effective 1/1/2013. It is hard to predict what a
lame duck Congress may or may not do.
Thus while each presidential candidate has stated what they prefer
the question is what will be the makeup of the Senate and House in
2013? It is fairly clear if all 3 bodies are controlled by either
Republicans or Democrats what the tax rates are likely to be, but
there seems to be a likely split making the future rates unclear.
A split would suggest some compromise position that is hard to
guess what it may be.
In the meantime I have taken some 2012 LTCG's and depending upon
the Nov 6 election if it seems the 20% LTCG rate is coming then I
may do a lot more selling in2012 of stocks with gains to take
advantage of the 15% rate while holding any losses that are rather
small at this point.
For those retired it is good to remember taking a lot of capital
gains may result in your Medicare premiums doubling or tripling. I
recall this kicks in at about $170K for a joint return. With
rising Medicare premiums this can be shocking.
Of course taxes are a personal thing and each of us must look at
our specific tax situation to decide what makes best sense for our
specific situation.
Dan
On 10/4/2012 4:47 PM, Malcolm Myles wrote:
An update on my FAST position.
In August I took an open position on my existing holding of
FAST. I've owned the stock for some time, have double digit
gains, feel that this level is unsustainable given the soft
market and need to take some profits to offset some unfortunate
losses, ie. capture the gains tax free. I wanted to use covered
calls to close the position so I can learn about option writing
and do it in a manner that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
Net income was $752.80
I've been reading a document from Charles Schwab "Managing
Covered Calls". It talks about what can happen after taking the
position and some of the actions you can consider based upon
realistic events.
1) Stock stays or drops, I can let the option expire worthless,
or
2) Stock goes over strike, I can be exercised if the option is
ITM at strike date/price, or
3) I can purchase the option back in a couple of different
manners.
No action on my part for the first two, just let it happen.
Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout,
rollout and up or rollout and down. Wow, who knew! I'll leave
it to the Cool Guy to go over the different terms but suffice to
say, they all involve buying back the covered call. I was
interested in the "unwind" which is buying back the covered call
and selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations
(FAST got two shocks up in the last week - Bernanke QE3 and then
a positive manufacturing report Monday), it may be cost
effective to buy back the covered calls and sell the stock at
the market price. You have to do the math, but the Cool Tool
Covered Call Spreadsheet - "Closing the Option" tab already does
most of it for you.
This is what I get today around 1pm PST:
BTC 4x 10/20/2012 44.00 C @ 1.60
Net STO $752.80 Cost to Close $651.20 Net $101.60 for
an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is
$45.86. If I buy back the calls, it nets me $101.60. I then
sell the 400 shares of FAST at $44.54 for a net $17,807, total
net = $17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades.
However, it is worth the educational experience to me to ride
this out some more and see what develops with the position. If
FAST continues to be above 44.00 but below 45.86, I'll get
called away and make money. If it goes down, I'll expire
worthless or may be able to buy the calls back at a gain and
write another call for November. If the stock goes way up into
46-47 range, I'll do these calculations again and see if the
"unwind" is the better plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Elliott, Ron on
Malcolm:
Your analysis of the FAST unwind possibility appears sound to me. Another way of looking at the unwind is to do an APR calculation on the remaining time value of the Call. I believe these were your numbers as of this afternoon:
$44.54 share price
$44.00 call (Oct 20 expiration)
BTC premium of $1.60
So the time value portion of the premium is $1.60 - $.54 = $1.06. The APR for that time value, share price, and expiration is about 54% [($1.06/$44.54)x (365/16)}. That's pretty high, so the conclusion is the same one you arrived at (i.e., don't do the unwind now, but keep watching it). But if, for example, the premium now happened to be $.70 instead of $1.60, then the APR would be only about 8% and you might say it would be worth it to close out your position by doing an unwind (BTC for $.70 and sell the stock for $44.54). I've ignored commissions/fees in these calculations, but of course they should be factored in.
Again, this is simply an alternative way of framing the same analysis that you did. I think that folks should use whatever approach makes the most sense to them.
--Ron
From: cool_club@bivio.com [mailto:cool_club@bivio.com] On Behalf Of Malcolm Myles Sent: Thursday, October 04, 2012 3:48 PM To: cool_club@bivio.com Subject: [cool_club] Update on FAST position
An update on my FAST position.
In August I took an open position on my existing holding of FAST. I've owned the stock for some time, have double digit gains, feel that this level is unsustainable given the soft market and need to take some profits to offset some unfortunate losses, ie. capture the gains tax free. I wanted to use covered calls to close the position so I can learn about option writing and do it in a manner that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91 Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered Calls". It talks about what can happen after taking the position and some of the actions you can consider based upon realistic events.
1) Stock stays or drops, I can let the option expire worthless, or 2) Stock goes over strike, I can be exercised if the option is ITM at strike date/price, or 3) I can purchase the option back in a couple of different manners.
No action on my part for the first two, just let it happen. Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout, rollout and up or rollout and down. Wow, who knew! I'll leave it to the Cool Guy to go over the different terms but suffice to say, they all involve buying back the covered call. I was interested in the "unwind" which is buying back the covered call and selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations (FAST got two shocks up in the last week - Bernanke QE3 and then a positive manufacturing report Monday), it may be cost effective to buy back the covered calls and sell the stock at the market price. You have to do the math, but the Cool Tool Covered Call Spreadsheet - "Closing the Option" tab already does most of it for you.
This is what I get today around 1pm PST: BTC 4x 10/20/2012 44.00 C @ 1.60 Net STO $752.80 Cost to Close $651.20 Net $101.60 for an APR of 5% (not really great)
If I just let the call be exercised: Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is $45.86. If I buy back the calls, it nets me $101.60. I then sell the 400 shares of FAST at $44.54 for a net $17,807, total net = $17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades. However, it is worth the educational experience to me to ride this out some more and see what develops with the position. If FAST continues to be above 44.00 but below 45.86, I'll get called away and make money. If it goes down, I'll expire worthless or may be able to buy the calls back at a gain and write another call for November. If the stock goes way up into 46-47 range, I'll do these calculations again and see if the "unwind" is the better plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Paul Madison on
Ron's analysis is spot on! I really do not like to look at Rolls until the last day or two of the contract. The reason for that is because the time premium is down to a very little.
When I get a chance I will do either a post or a Cool_Club session on Rolls which is a more advanced topic.
The main thing I will reiterate right now is if you are considering buying back an option at a loss then you may want to rethink how you are choosing your Call Strike levels. You are not sticking with the game plan of being happy being called away which in my mind is critical for this to work.
Your analysis of the FAST unwind possibility appears sound to me. Another way of looking at the unwind is to do an APR calculation on the remaining time value of the Call. I believe these were your numbers as of this afternoon:
$44.54 share price
$44.00 call (Oct 20 expiration)
BTC premium of $1.60
So the time value portion of the premium is $1.60 - $.54 = $1.06. The APR for that time value, share price, and expiration is about 54% [($1.06/$44.54)x (365/16)}. That's pretty high, so the conclusion is the same one you arrived at (i.e., don't do the unwind now, but keep watching it). But if, for example, the premium now happened to be $.70 instead of $1.60, then the APR would be only about 8% and you might say it would be worth it to close out your position by doing an unwind (BTC for $.70 and sell the stock for $44.54). I've ignored commissions/fees in these calculations, but of course they should be factored in.
Again, this is simply an alternative way of framing the same analysis that you did. I think that folks should use whatever approach makes the most sense to them.
In August I took an open position on my existing holding of FAST. I've owned the stock for some time, have double digit gains, feel that this level is unsustainable given the soft market and need to take some profits to offset some unfortunate losses, ie. capture the gains tax free. I wanted to use covered calls to close the position so I can learn about option writing and do it in a manner that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91 Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered Calls". It talks about what can happen after taking the position and some of the actions you can consider based upon realistic events.
1) Stock stays or drops, I can let the option expire worthless, or 2) Stock goes over strike, I can be exercised if the option is ITM at strike date/price, or 3) I can purchase the option back in a couple of different manners.
No action on my part for the first two, just let it happen. Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout, rollout and up or rollout and down. Wow, who knew! I'll leave it to the Cool Guy to go over the different terms but suffice to say, they all involve buying back the covered call. I was interested in the "unwind" which is buying back the covered call and selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations (FAST got two shocks up in the last week - Bernanke QE3 and then a positive manufacturing report Monday), it may be cost effective to buy back the covered calls and sell the stock at the market price. You have to do the math, but the Cool Tool Covered Call Spreadsheet - "Closing the Option" tab already does most of it for you.
This is what I get today around 1pm PST: BTC 4x 10/20/2012 44.00 C @ 1.60 Net STO $752.80 Cost to Close $651.20 Net $101.60 for an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is $45.86. If I buy back the calls, it nets me $101.60. I then sell the 400 shares of FAST at $44.54 for a net $17,807, total net = $17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades. However, it is worth the educational experience to me to ride this out some more and see what develops with the position. If FAST continues to be above 44.00 but below 45.86, I'll get called away and make money. If it goes down, I'll expire worthless or may be able to buy the calls back at a gain and write another call for November. If the stock goes way up into 46-47 range, I'll do these calculations again and see if the "unwind" is the better plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Mary Ann Davis on
Hi Malcolm,
Congratulations on your success with FAST - buying low and selling high. And just some thoughts on FAST and how to gain additional monies on your remaining shares.
There are literally many option opportunities on FAST for selling covered calls which you can see by looking at multiple expiration dates. Check what is available for the current month, plus additional expiration dates to see what month and strike works best. As of 9:21 CDT, Oct 5th, there are the following strikes, premiums and deltas available for consideration for FAST.
IF you have a positive outlook for
FAST, and are willing to hold while the price appreciates, and your goal is to sell near its 3 yr high price of 54.61 then sell the strike with the lower premium and lower probability of being called. Hmm, so how could we do that? By selecting the lower delta in each of the above strikes, you will most likely continue to hold FAST while collecting the premium. Remember, there are never any guarantees that will be true! The higher delta will earn you a higher premium with a higher probability of being called away. So the choice is yours.
Select the shortest time to expiration to earn the highest possible return. Check it out using the CC Cool Tool.
Just for fun, I looked to see how far out I would need to go to reach the 3 yr high price, and that would be May 18, 2013 where you could sell a 55 strike @ .70 with a delta of .148. Of course, by
then, it could have made a new high! You can see this price action on stockcharts.com looking at a 6 month daily and a 3 yr weekly chart.
Mary Ann
Join me at InvestEd 2013 Investor Education at Its Best(TM) June 7-9, 2013 Wichita,
Kansas
From: Malcolm Myles <malcolm@mmyles.com> To: cool_club@bivio.com Sent: Thu, October 4, 2012 3:48:10 PM Subject: [cool_club] Update on FAST position
An update on my FAST position.
In August I took an open position on my existing holding of FAST.
I've owned the stock for some time, have double digit gains, feel
that this level is unsustainable given the soft market and need to
take some profits to offset some unfortunate losses, ie. capture
the gains tax free. I wanted to use covered calls to close the
position so I can learn about option writing and do it in a manner
that will be rewarding regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered
Calls". It talks about what can happen after taking the position
and some of the actions you can consider based upon realistic
events.
1) Stock stays or drops, I can let the option expire worthless, or
2) Stock goes over strike, I can be exercised if the option is ITM
at strike date/price, or
3) I can purchase the option back in a couple of different
manners.
No action on my part for the first two, just let it happen.
Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind, rollout,
rollout and up or rollout and down. Wow, who knew! I'll leave it
to the Cool Guy to go over the different terms but suffice to say,
they all involve buying back the covered call. I was interested
in the "unwind" which is buying back the covered call and selling
the stock in the same order at the same time.
When a stock price jumps rapidly and above your expectations (FAST
got two shocks up in the last week - Bernanke QE3 and then a
positive manufacturing report Monday), it may be cost effective to
buy back the covered calls and sell the stock at the market
price. You have to do the math, but the Cool Tool Covered Call
Spreadsheet - "Closing the Option" tab already does most of it for
you.
This is what I get today around 1pm PST:
BTC 4x 10/20/2012 44.00 C @ 1.60
Net STO $752.80 Cost to Close $651.20 Net $101.60 for
an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of $45.86
The number I need to exceed to make the unwind be profitable is
$45.86. If I buy back the calls, it nets me $101.60. I then sell
the 400 shares of FAST at $44.54 for a net $17,807, total net =
$17,908.65 or $44.77/share... near miss.
I'd still be making a pretty decent profit on the trades.
However, it is worth the educational experience to me to ride this
out some more and see what develops with the position. If FAST
continues to be above 44.00 but below 45.86, I'll get called away
and make money. If it goes down, I'll expire worthless or may be
able to buy the calls back at a gain and write another call for
November. If the stock goes way up into 46-47 range, I'll do
these calculations again and see if the "unwind" is the better
plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Malcolm Myles on
Hi Paul,
My investment plan is Learn. So, when I found out about Rolls, I
read up on them and looked to see if it would apply to my
position. I'm happy to be called away at 44.00 on my calls, and
I'm happy to buy back my calls at a profit and roll up or down
(once I learn the rules) as the profits decide. Money seeks the
highest return.
I'm also not straight in the head on the implications of knowing
the time premium vs the intrinsic premium of the option. I know
the definitions, just don't have a intuitive feel for the impact
of their changes. Time and practice.
Please add to the future lesson plan - Beta and Delta. Mary Ann
mentioned delta and I only know it from physics as the symbol of
change as in, its not F=Ma that kills you, its the Delta a!
Thanks,
Malcolm
On 10/5/2012 6:06 AM, Paul Madison
wrote:
Ron's analysis is spot on! I really do not like to look at
Rolls until the last day or two of the contract. The reason for
that is because the time premium is down to a very little.
When I get a chance I will do either a post or a Cool_Club
session on Rolls which is a more advanced topic.
The main thing I will reiterate right now is if you are
considering buying back an option at a loss then you may want to
rethink how you are choosing your Call Strike levels. You are
not sticking with the game plan of being happy being called away
which in my mind is critical for this to work.
Your
analysis of the FAST unwind possibility appears sound to
me. Another way of looking at the unwind is to do an
APR calculation on the remaining time value of the
Call. I believe these were your numbers as of this
afternoon:
$44.54 share price
$44.00 call (Oct 20 expiration)
BTC premium of $1.60
So
the time value portion of the premium is $1.60 - $.54 =
$1.06. The APR for that time value, share price, and
expiration is about 54% [($1.06/$44.54)x (365/16)}.
That's pretty high, so the conclusion is the same one
you arrived at (i.e., don't do the unwind now, but keep
watching it). But if, for example, the premium now
happened to be $.70 instead of $1.60, then the APR would
be only about 8% and you might say it would be worth it
to close out your position by doing an unwind (BTC for
$.70 and sell the stock for $44.54). I've ignored
commissions/fees in these calculations, but of course
they should be factored in.
Again,
this is simply an alternative way of framing the same
analysis that you did. I think that folks should use
whatever approach makes the most sense to them.
In August I took an open position on my existing holding
of FAST. I've owned the stock for some time, have
double digit gains, feel that this level is
unsustainable given the soft market and need to take
some profits to offset some unfortunate losses, ie.
capture the gains tax free. I wanted to use covered
calls to close the position so I can learn about option
writing and do it in a manner that will be rewarding
regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
Net income was $752.80
I've been reading a document from Charles Schwab
"Managing Covered Calls". It talks about what can
happen after taking the position and some of the actions
you can consider based upon realistic events.
1) Stock stays or drops, I can let the option expire
worthless, or
2) Stock goes over strike, I can be exercised if the
option is ITM at strike date/price, or
3) I can purchase the option back in a couple of
different manners.
No action on my part for the first two, just let it
happen. Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind,
rollout, rollout and up or rollout and down. Wow, who
knew! I'll leave it to the Cool Guy to go over the
different terms but suffice to say, they all involve
buying back the covered call. I was interested in the
"unwind" which is buying back the covered call and
selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your
expectations (FAST got two shocks up in the last week -
Bernanke QE3 and then a positive manufacturing report
Monday), it may be cost effective to buy back the
covered calls and sell the stock at the market price.
You have to do the math, but the Cool Tool Covered Call
Spreadsheet - "Closing the Option" tab already does most
of it for you.
This is what I get today around 1pm PST:
BTC 4x 10/20/2012 44.00 C @ 1.60
Net STO $752.80 Cost to Close $651.20 Net
$101.60 for an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of
$45.86
The number I need to exceed to make the unwind be
profitable is $45.86. If I buy back the calls, it nets
me $101.60. I then sell the 400 shares of FAST at
$44.54 for a net $17,807, total net = $17,908.65 or
$44.77/share... near miss.
I'd still be making a pretty decent profit on the
trades. However, it is worth the educational experience
to me to ride this out some more and see what develops
with the position. If FAST continues to be above 44.00
but below 45.86, I'll get called away and make money.
If it goes down, I'll expire worthless or may be able to
buy the calls back at a gain and write another call for
November. If the stock goes way up into 46-47 range,
I'll do these calculations again and see if the "unwind"
is the better plan.
Conclusion: go back to reading, walk the dog, etc.
Malcolm
Paul Madison on
Leaning is always a good plan for all of us, especially since things are always changing.
I agree a session on Delta would be good and it should come ahead of Rolls as it is more broadly applicable.
The only Beta I am aware of is the measure that is used for individual stocks and is not directly related to options. It is a measure of a stock's long term volatility and it is relative to the overall market. So a stock with a Beta of 1 has roughly the same volatility as the broad market. A stock with a Beta greater than 1 is more volatile than the market and less than 1 is less volatile. There are some different approaches to calculating Beta so it is important when comparing Beta values for different companies that you use the same source to make sure the numbers are consistent.
Unless someone can tell me that there is a Beta that I should be aware of with options (which is quite possible) then I think we will leave that one alone for now.
As always, I appreciate the posts from all of you, as that is what makes this a great community.
On Fri, Oct 5, 2012 at 2:32 PM, Malcolm Myles <malcolm@mmyles.com> wrote:
Hi Paul,
My investment plan is Learn. So, when I found out about Rolls, I
read up on them and looked to see if it would apply to my
position. I'm happy to be called away at 44.00 on my calls, and
I'm happy to buy back my calls at a profit and roll up or down
(once I learn the rules) as the profits decide. Money seeks the
highest return.
I'm also not straight in the head on the implications of knowing
the time premium vs the intrinsic premium of the option. I know
the definitions, just don't have a intuitive feel for the impact
of their changes. Time and practice.
Please add to the future lesson plan - Beta and Delta. Mary Ann
mentioned delta and I only know it from physics as the symbol of
change as in, its not F=Ma that kills you, its the Delta a!
Thanks,
Malcolm
On 10/5/2012 6:06 AM, Paul Madison
wrote:
Ron's analysis is spot on! I really do not like to look at
Rolls until the last day or two of the contract. The reason for
that is because the time premium is down to a very little.
When I get a chance I will do either a post or a Cool_Club
session on Rolls which is a more advanced topic.
The main thing I will reiterate right now is if you are
considering buying back an option at a loss then you may want to
rethink how you are choosing your Call Strike levels. You are
not sticking with the game plan of being happy being called away
which in my mind is critical for this to work.
Your
analysis of the FAST unwind possibility appears sound to
me. Another way of looking at the unwind is to do an
APR calculation on the remaining time value of the
Call. I believe these were your numbers as of this
afternoon:
$44.54 share price
$44.00 call (Oct 20 expiration)
BTC premium of $1.60
So
the time value portion of the premium is $1.60 - $.54 =
$1.06. The APR for that time value, share price, and
expiration is about 54% [($1.06/$44.54)x (365/16)}.
That's pretty high, so the conclusion is the same one
you arrived at (i.e., don't do the unwind now, but keep
watching it). But if, for example, the premium now
happened to be $.70 instead of $1.60, then the APR would
be only about 8% and you might say it would be worth it
to close out your position by doing an unwind (BTC for
$.70 and sell the stock for $44.54). I've ignored
commissions/fees in these calculations, but of course
they should be factored in.
Again,
this is simply an alternative way of framing the same
analysis that you did. I think that folks should use
whatever approach makes the most sense to them.
In August I took an open position on my existing holding
of FAST. I've owned the stock for some time, have
double digit gains, feel that this level is
unsustainable given the soft market and need to take
some profits to offset some unfortunate losses, ie.
capture the gains tax free. I wanted to use covered
calls to close the position so I can learn about option
writing and do it in a manner that will be rewarding
regardless.
So...
Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
Net income was $752.80
I've been reading a document from Charles Schwab
"Managing Covered Calls". It talks about what can
happen after taking the position and some of the actions
you can consider based upon realistic events.
1) Stock stays or drops, I can let the option expire
worthless, or
2) Stock goes over strike, I can be exercised if the
option is ITM at strike date/price, or
3) I can purchase the option back in a couple of
different manners.
No action on my part for the first two, just let it
happen. Cool. Made money, did what I wanted.
Third is a thinker position - I can close-out, unwind,
rollout, rollout and up or rollout and down. Wow, who
knew! I'll leave it to the Cool Guy to go over the
different terms but suffice to say, they all involve
buying back the covered call. I was interested in the
"unwind" which is buying back the covered call and
selling the stock in the same order at the same time.
When a stock price jumps rapidly and above your
expectations (FAST got two shocks up in the last week -
Bernanke QE3 and then a positive manufacturing report
Monday), it may be cost effective to buy back the
covered calls and sell the stock at the market price.
You have to do the math, but the Cool Tool Covered Call
Spreadsheet - "Closing the Option" tab already does most
of it for you.
This is what I get today around 1pm PST:
BTC 4x 10/20/2012 44.00 C @ 1.60
Net STO $752.80 Cost to Close $651.20 Net
$101.60 for an APR of 5% (not really great)
If I just let the call be exercised:
Price + premium - assignment = per share proceeds of
$45.86
The number I need to exceed to make the unwind be
profitable is $45.86. If I buy back the calls, it nets
me $101.60. I then sell the 400 shares of FAST at
$44.54 for a net $17,807, total net = $17,908.65 or
$44.77/share... near miss.
I'd still be making a pretty decent profit on the
trades. However, it is worth the educational experience
to me to ride this out some more and see what develops
with the position. If FAST continues to be above 44.00
but below 45.86, I'll get called away and make money.
If it goes down, I'll expire worthless or may be able to
buy the calls back at a gain and write another call for
November. If the stock goes way up into 46-47 range,
I'll do these calculations again and see if the "unwind"
is the better plan.
Conclusion: go back to reading, walk the dog, etc.