yahoo strategy

[wallstreetsedge]

you can pick up yahoo and sell the feb 27.50 call making 3.8% or if you buy it on margin it's 7.6% inside of 14 days

[Rambis]

how is this a strategy?

what happens when it falls?

[wallstreetsedge]

are you not keeping up with the news?

[Rambis]

Why bother?

The news is already factored into the current price.

My point is that I dont see how a simple position applied to a hot stock becomes a "strategy". Strategy implies planning. I asked, "what if it goes down?" If this were truly a "strategy" than you would have a plan for this.

[BetonBeer]

you can pick up yahoo and sell the feb 27.50 call making 3.8% or if you buy it on margin it's 7.6% inside of 14 days

I see the logic in it.


how is this a strategy?

what happens when it falls?

Are you talking about if the merger doesn't happen? I think if that bad news comes out it will be past Feb 15. anyways so it wouldn't really matter.

[netwrangler]

you can pick up yahoo and sell the feb 27.50 call making 3.8% or if you buy it on margin it's 7.6% inside of 14 days
I like the concept behind this trade. Immediately after a stock goes 'in-play', and especially when it isn't clear what the final 'play' will be, the volatility of the stock [and the stock's options] go up. Strategically, that's a very good time to sell a call. The call is probably 'overpriced'.

how is this a strategy?

what happens when it falls?Here are the numbers I ran to analyze the FEB 27.50 and FEB 25 covered call trades. The assumption here is that the share price will remain above the strike price for the next two weeks and the options will be exercised.

2628

Notes:

The "GeeWhiz" column is just the "gain %" times 24 'half-months'. I suppose I could have multiplied by 26 'fortnights' just as well. This is yields a very rough approximation of an annual return. In general, I think 'annual return' figures on two-week trades are misleading. Calling it an annual return implies you could duplicate this trade every two-weeks for a year — not likely. Hence I use the term "GeeWhiz". I include this number here, though, to emphasize that - for two glorious weeks - you are getting a much better return on you money that you could in a MoneyMarket account.


I included the FEB 25 option [option 2 in the table] to address the question, "What happens if it falls?" If the price falls far enough, you will lose. The FEB 27.50 option gives you protection to $26.57. The FEB 25 option gives you protection to 24.57, but you are accepting a lower maximum gain. In either case, you need to set stops to bail out if the price starts seriously falling. In a covered call position, you need to buy back the call first before you can sell the stock.


My figures in the table are not the same as WSE's figures in the initial post. I don't think that matters. We were running the numbers at different times and were therefore looking at different prices for the stock and the FEB 27.50 option. I have no reason to question WSE's math. Indeed, my figures and his are directionally supportive of one-another.
What is important here is that the numbers on Monday will be different again. WSE has pointed out a possible trade and I have shown a way to analyze it. But whether it really is a good deal will depend on Monday's numbers. If the call option premiums shrink...oh, well, it was a good thought but we missed the window. I'll be looking on Monday. I might very well do this trade.


My figures are before any fees or commissions. They need to be factored in.

are you not keeping up with the news?My guess, WSE, is that you felt Rambis was challenging your strategy. Figured that otherwise you wouldn't have answered the way you did.
I took his post as a real question.

BTW: I hope my analysis is, at least, not in conflict with your analysis. I figure we are thinking along the same lines. When I first saw your OP I thought, "Good idea!"

[BetonBeer]

Net- Nice nice breakdown for the explanation!! Informative as always.

[netwrangler]

:D

[Keventerprises]

I like the concept behind this trade. Immediately after a stock goes 'in-play', and especially when it isn't clear what the final 'play' will be, the volatility of the stock [and the stock's options] go up. Strategically, that's a very good time to sell a call. The call is probably 'overpriced'.

Here are the numbers I ran to analyze the FEB 27.50 and FEB 25 covered call trades. The assumption here is that the share price will remain above the strike price for the next two weeks and the options will be exercised.

2628

Notes:

The "GeeWhiz" column is just the "gain %" times 24 'half-months'. I suppose I could have multiplied by 26 'fortnights' just as well. This is yields a very rough approximation of an annual return. In general, I think 'annual return' figures on two-week trades are misleading. Calling it an annual return implies you could duplicate this trade every two-weeks for a year — not likely. Hence I use the term "GeeWhiz". I include this number here, though, to emphasize that - for two glorious weeks - you are getting a much better return on you money that you could in a MoneyMarket account.


I included the FEB 25 option [option 2 in the table] to address the question, "What happens if it falls?" If the price falls far enough, you will lose. The FEB 27.50 option gives you protection to $26.57. The FEB 25 option gives you protection to 24.57, but you are accepting a lower maximum gain. In either case, you need to set stops to bail out if the price starts seriously falling. In a covered call position, you need to buy back the call first before you can sell the stock.


My figures in the table are not the same as WSE's figures in the initial post. I don't think that matters. We were running the numbers at different times and were therefore looking at different prices for the stock and the FEB 27.50 option. I have no reason to question WSE's math. Indeed, my figures and his are directionally supportive of one-another.
What is important here is that the numbers on Monday will be different again. WSE has pointed out a possible trade and I have shown a way to analyze it. But whether it really is a good deal will depend on Monday's numbers. If the call option premiums shrink...oh, well, it was a good thought but we missed the window. I'll be looking on Monday. I might very well do this trade.


My figures are before any fees or commissions. They need to be factored in.

My guess, WSE, is that you felt Rambis was challenging your strategy. Figured that otherwise you wouldn't have answered the way you did.
I took his post as a real question.

BTW: I hope my analysis is, at least, not in conflict with your analysis. I figure we are thinking along the same lines. When I first saw your OP I thought, "Good idea!"

Thanks always Net and KT! So, selling a Call in this case has better potential than buying a Put? I can see that the price of a Feb 16 27.50 Call is twice that of a Put at the same strike price, so you see and are expecting more room for movement on the price of Calls vs. Puts?

Why do you need to buy back the Call before you can sell the stock? Also if the price stays up around where it is until after the Option expires, why will the Option change in value, and what stop levels do you recommend?

Thank you both very much!!

[netwrangler]

Thanks always Net and KT! So, selling a Call in this case has better potential than buying a Put? I can see that the price of a Feb 16 27.50 Call is twice that of a Put at the same strike price, so you see and are expecting more room for movement on the price of Calls vs. Puts?

Why do you need to buy back the Call before you can sell the stock? Also if the price stays up around where it is until after the Option expires, why will the Option change in value, and what stop levels do you recommend?

Thank you both very much!!Kev, regarding your questions, and in no particular order:

1) Why do you need to buy back the Call before you can sell the stock?
Owning the stock makes the call a "covered" call. If you sold the stock, the call would become a "naked" call. Unless you are cleared to sell "naked" calls [most of us aren't] your broker will not allow you to sell the stock before you buy back the call.

2) The $1.81 price of the FEB 27.50 option has two components.
The 'intrinsic value' of the option is $0.88. That's the difference between the share price of the stock and the strike price of the option.
The 'time value' of the option is $0.93. That's the difference between the price of the option [$1.81] and its intrinsic value [$0.88]. As the expiry date nears, the time value of the option decreases and only the intrinsic value is left.

3) I did not analyze the alternative of buying a put. In general, however, at times of increased volatility, all option prices [puts and calls] are inflated. At those times you are better off selling an option [put or call] rather than buying.

4) Setting stops on a covered call position is tricky. If I have the choice, I'd rather set alerts based on a decline in the price of the stock that focus my attention on the position, but allow me to make decisions about buying back the call and selling the stock in a real-time hands-on situation.
If I can't be at the trading window, I'd trigger a market order for buying back the call based on a decline in the stock price to a certain level. I'd trigger another market order to sell the stock if the price declined still further.
Exactly what trigger levels one would use depends on risk tolerance and an assessment of the position. On the one hand, I'd want to make sure I got out of a position that had gone south on me. On the other hand, I'd want to give this [admittedly volatile] position enough room to move around. It's really frustrating if you get stopped out of a winning position because you were too cautious.
In this case, I'd probably want to buy back the calls at the break-even point of the stock, and set a stop for the stock at 5% below the break-even price.
Note: If you buy back the calls, but retain the stock, you can resell the calls during a rally and make even more options premium bucks. [This works better with options that have more time left on them than 14 days, but could work here if the volatility remains high.]

Hope this helps.

[BetonBeer]

Thanks always Net and KT! So, selling a Call in this case has better potential than buying a Put? I can see that the price of a Feb 16 27.50 Call is twice that of a Put at the same strike price, so you see and are expecting more room for movement on the price of Calls vs. Puts?

Why do you need to buy back the Call before you can sell the stock? Also if the price stays up around where it is until after the Option expires, why will the Option change in value, and what stop levels do you recommend?

Thank you both very much!!

They are talking about writing covered calls. Say you own 100 shares of yahoo you could sell 1 contract for every 100 shares you own of yahoo at a given strike price for a premium whatever the premium is you get to keep. If the stock price stays the same the contract will most likely expire worthless and you keep the stock and the premium, if the stock price goes up significantly and the option is exercised you are obligated to sell the shares at the strike price and you still get to keep the premium. If the stock price drops you keep the premium and the option will expire worthless but if the stock price drops too much you will lose money on the stock. So when writing covered calls you want to pick a stock that won't fluctuate in price much or at least down, if it goes up you will still make money you will just limit your upside. When you write a covered call you are giving someone the option to buy 100 shares of that stock for every contract at a specific price and you must own that stock to be able to cover it in case the option is exercised, but at any time you can buy the contract back for either a profit or a loss and that removes your obligation to sell the stock at the given price. I suck at explaining things and that probably makes no sense. Here is a good explanation of covered calls - http://www.investopedia.com/articles/optioninvestor/071201.asp

[netwrangler]

They are talking about writing covered calls. Say you own 100 shares of yahoo you could sell 1 contract for every 100 shares you own of yahoo at a given strike price for a premium whatever the premium is you get to keep. If the stock price stays the same the contract will most likely expire worthless and you keep the stock and the premium, if the stock price goes up significantly and the option is exercised you are obligated to sell the shares at the strike price and you still get to keep the premium. If the stock price drops you keep the premium and the option will expire worthless but if the stock price drops too much you will lose money on the stock. So when writing covered calls you want to pick a stock that won't fluctuate in price much or at least down, if it goes up you will still make money you will just limit your upside. When you write a covered call you are giving someone the option to buy 100 shares of that stock for every contract at a specific price and you must own that stock to be able to cover it in case the option is exercised, but at any time you can buy the contract back for either a profit or a loss and that removes your obligation to sell the stock at the given price. I suck at explaining things and that probably makes no sense. Here is a good explanation of covered calls - http://www.investopedia.com/articles/optioninvestor/071201.asp
BB,
In this case, I see this as a pure premium play.

Yes, we are talking covered calls here. But the concept is short term. We want the call to be exercised. All we care about is getting the premium on the option - oh, and getting our money back on the stock.

[wallstreetsedge]

net,

i didnt take it as a challenge. i think ive mentioned it before that i cant always be on the chat to answer right away especially if its lengthy, normally it has to be after the close but i leave the office about 6 or so, therefore i cant really answer until that time or later.

net, i know for some reason a lot of you guys have conflicts with me b ut thanks for answering the question for me lol


ALSO....
if anyones interested, i also created a covered call calculator a while back that you can use in excel. i just need to edit it because i also have other info factored in there such as commissions. but basically all you need to do for it is plug in the following...

stock price
number of shares you want to buy
option premium
option strike price
expiration date

and basically itll show you...
how much you make if stock stays flat
how much you make if stock gets called
break even price
% gain if its cash or % gain if its margin
how many days to make that %
monthly % return

it also takes into account margin interest

if anyones interested, let me know and ill edit it to remove the commission so you can use it and make life easier

[Keventerprises]

net,

i didnt take it as a challenge. i think ive mentioned it before that i cant always be on the chat to answer right away especially if its lengthy, normally it has to be after the close but i leave the office about 6 or so, therefore i cant really answer until that time or later.

net, i know for some reason a lot of you guys have conflicts with me b ut thanks for answering the question for me lol


ALSO....
if anyones interested, i also created a covered call calculator a while back that you can use in excel. i just need to edit it because i also have other info factored in there such as commissions. but basically all you need to do for it is plug in the following...

stock price
number of shares you want to buy
option premium
option strike price
expiration date

and basically itll show you...
how much you make if stock stays flat
how much you make if stock gets called
break even price
% gain if its cash or % gain if its margin
how many days to make that %
monthly % return

it also takes into account margin interest

if anyones interested, let me know and ill edit it to remove the commission so you can use it and make life easier

I'd be interested in seeing that. I've donated a few Premiums by buying Puts.

[wallstreetsedge]

haha no problem kev, send me a message with your email or give me a call later on my cell

[netwrangler]

net,

i didnt take it as a challenge. Good, it wasn't meant as one.

If anyone wanted the deal WSE and I were discussing, you had to act quickly this morning. I was a little too late when I got in and I missed it. As the day progressed, the call premium came back to 'market' and the trade was not as appealing as when WSE flagged it originally.

WSE, I have respect for your knowledge of trading, of options, and of the market.
I figure that you are using your posts on the OTF to troll for new clients for your primary business.
I don't have a problem with that. You have a right to make a living.

I do suggest, however, that you may be making "fuzzy" posts to avoid having your posts deemed "wrong" as events unfold.
I encourage you to make your posts more specific and less 'fuzzy'. Let's accept that all of us can be wrong. Your more specific [not to say 'courageous'] would benefit the OTF. I'll bet it would glean you more prospective clients in the process. :wink:

I have no doubt that your are right more often than you are wrong.

[wallstreetsedge]

net, unfortunately i dont really get too much time to put up posts.. so theyre normally really brief. also i dont really get that much free time to explain a lot of different things im working on so i try to keep it general so when others ask questions, others can answer it

if you wanna keep up with a play fro feb expiration, you can sell the 30's but it only ends up being 2.8 in a cash acct or 5.6 in a margin... but in my opinion its a little overbought here

what you could also do if you wanna take on the risk a bit longer is sell the mar 27.5 and walk away with about 4% cash or 8% margin



some other good alternatives for people who have level 3...you can create a spread here

buy feb 20 for 9.50
sell feb 30 for 0.70, making 7.35% in 11 days

[Rambis]

buy feb 20 for 9.50
sell feb 30 for 0.70, making 7.35% in 11 days

this again assumes no downside potential. @ close of business according to yahoo finance:

feb 20 @ 9.40

feb 30 @ .71

so both positions have lost for a combined
-1.25% in one day.

If it settles where it is at now you will profit so I guess in that way you are starting out ahead of the game...I think that is what you were trying to say..

this is basically the same as the covered calls...the timing gamble..interesting

[Keventerprises]

BB,
In this case, I see this as a pure premium play.

Yes, we are talking covered calls here. But the concept is short term. We want the call to be exercised. All we care about is getting the premium on the option - oh, and getting our money back on the stock.

[/QUOTE]They are talking about writing covered calls. Say you own 100 shares of yahoo you could sell 1 contract for every 100 shares you own of yahoo at a given strike price for a premium whatever the premium is you get to keep. If the stock price stays the same the contract will most likely expire worthless and you keep the stock and the premium, if the stock price goes up significantly and the option is exercised you are obligated to sell the shares at the strike price and you still get to keep the premium. If the stock price drops you keep the premium and the option will expire worthless but if the stock price drops too much you will lose money on the stock. So when writing covered calls you want to pick a stock that won't fluctuate in price much or at least down, if it goes up you will still make money you will just limit your upside. When you write a covered call you are giving someone the option to buy 100 shares of that stock for every contract at a specific price and you must own that stock to be able to cover it in case the option is exercised, but at any time you can buy the contract back for either a profit or a loss and that removes your obligation to sell the stock at the given price. I suck at explaining things and that probably makes no sense. Here is a good explanation of covered calls - http://www.investopedia.com/articles...tor/071201.asp
BetonBeer is online now[/Quote]

I appreciate what you both have to say. Truth is sometimes stranger than fiction. It is initially foreign to most logic that I can sell something that I don't own, and when it goes down, I make more, although I like the prospect of selling calls, because I've donated a few Premiums already on puts.

[wallstreetsedge]

what i would say to do is this... if youre not too familiar with playing with options.. learn the basic concept of covered calls and just mix it in with your equities to begin

lets say you own aapl at 125 just because you like it... aapl runs to 140 and you think it ran out of steam and is falling back... i would say sell the 135 or 140 calls and when aapl pulls back, buy them back for a profit. let aapl run back up and sell calls again

i mainly sell covered calls as pure premium plays but when a good opportunity arises like i mentioned above.. then i go for it

owning 100 shares vs 10000 shares, then i wouldnt really say to go for it because the benefits may be a bit small

[netwrangler]

what I would say to do is this... if you're not too familiar with playing with options.. learn the basic concept of covered calls and just mix it in with your equities to begin

....
For all the folks who are thinking about 'getting in to options', these are words to live by.
Covered calls are an excellent way to get started.

[Keventerprises]

For all the folks who are thinking about 'getting in to options', these are words to live by.
Covered calls are an excellent way to get started.

I bought back my YHQBY Feb 16 $27.50 Calls today that I had sold as you speculated on Net, but I only bought them back because I had to because I wanted to sell my actual YHOO shares at $29.00. The calls went up almost 10%, but I was really only wanting to sell the Yahoo thinking it might go down, and I couldn't keep the (short/covered) calls with the shares. I thought I wouldn't have to own actual shares until I went to excersize the option. I suppose that's what you meant by Naked Calls, and I was not authorized just as you had said. What's the benefit if you have to own both the stock and short calls, it seems like a wash, one goes up and the other goes down, which is good as insurance, but in what case can you profit?

[BetonBeer]

I bought back my YHQBY Feb 16 $27.50 Calls today that I had sold as you speculated on Net, but I only bought them back because I had to because I wanted to sell my actual YHOO shares at $29.00. The calls went up almost 10%, but I was really only wanting to sell the Yahoo thinking it might go down, and I couldn't keep the (short/covered) calls with the shares. I thought I wouldn't have to own actual shares until I went to excersize the option. I suppose that's what you meant by Naked Calls, and I was not authorized just as you had said. What's the benefit if you have to own both the stock and short calls, it seems like a wash, one goes up and the other goes down, which is good as insurance, but in what case can you profit?

You collect the premium no matter what. If the the short call goes in the money and the option is exercised then you keep the premium plus the difference between what you bought the stock at and what the strike price was so you profit. If the stock just flatlines then you collect the premium and will keep the stock since the option most likley wont be exercised and you profit from the premium. If the stock drops, you are now down on the stock price, you still keep the premium and the option wont be exercised so you keep the stock and hopefully the premium you collected from it makes up for the decline in stock price. That short call showing on your page will go away after the option expires it is figuring in what you sold it at compared to what it is worth now in case u were going to buy it back before it expires.

[Keventerprises]

You collect the premium no matter what. If the the short call goes in the money and the option is exercised then you keep the premium plus the difference between what you bought the stock at and what the strike price was so you profit. If the stock just flatlines then you collect the premium and will keep the stock since the option most likley wont be exercised and you profit from the premium. If the stock drops, you are now down on the stock price, you still keep the premium and the option wont be exercised so you keep the stock and hopefully the premium you collected from it makes up for the decline in stock price. That short call showing on your page will go away after the option expires it is figuring in what you sold it at compared to what it is worth now in case u were going to buy it back before it expires.

Thank you! So, I shouldn't have bought back the Call option? I only did so because they said I had to in order to sell the stock shares. Next week the option would have expired without my having to buy it back?? Oh, I see said the blind man as he picked up the hammer and saw... At least I made a little, and learned alot, painlessly. I appreciate your input and help!

[netwrangler]

Thank you! So, I shouldn't have bought back the Call option? I only did so because they said I had to in order to sell the stock shares. Next week the option would have expired without my having to buy it back?? Oh, I see said the blind man as he picked up the hammer and saw... At least I made a little, and learned alot, painlessly. I appreciate your input and help!This is an example of why covered calls are a good way to learn about options.
Even if you don't get the strategy exactly right, you still don't get hurt that badly.

To recap — In my view, there are two ways to play a covered call:

As a way of swing trading around a long-term position. With this play, you try to sell the call at a peak and buy it back on a dip.
As a pure premium play. You could care less if the option is exercised. You are in the trade for the premium money.
The aapl trade that WSE described was a pure premium play. Yes, you wanted to wait until next Friday so you could keep the entire premium. And, yes, the odds are that closing your position now reduced your gain.

As a rule, you don't want to close a covered call position while the stock price is above the strike price. Also, as a rule, you don't want to close a position within a week of expiry. The time value of the option is in steep decline in the last week. The longer you can wait before buying it back, the better off you are. [And if you can avoid buying it back, so much the better.] The exception to this 'rule' is when you believe the stock is about to decline in value.

I've said, elsewhere, that writing covered calls is like being a 'month-trader'. Life is pretty ho-hum for three weeks, and then it tends to get more exciting as you approach expiry. Let's come back to this in a week and see what would have happened if you had held your position.

[wallstreetsedge]

kev.. to make it simple..


when a stock goes up, sell a call

when the stock goes down, buy it back (making a profit on the option)

when a stock goes up, sell a call

when the stock goes down, buy it back (making a profit on the option)

when a stock goes up, sell a call

when the stock goes down, buy it back (making a profit on the option)

lol

[aj14]

any thoughts on what we do now that the deal has been rejected by YHOO?

[wallstreetsedge]

i would sell it or sell some feb $25 calls or some mar $22.50 calls

risk to reward here isnt worth it.. the stock can go to 22 from here or go to 35... id rather play it safe here based on the technicals