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]

Originally Posted by 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

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]

Originally Posted by 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

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'.

Originally Posted by Rambis

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.



Notes:

1. 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.
   
   
2. 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.
   
   
3. 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.
   
   
4. My figures are before any fees or commissions. They need to be factored in.

Originally Posted by wallstreetsedge

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]

[Keventerprises]

Originally Posted by netwrangler

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.

Attachment 2628

Notes:

1. 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.
   
   
2. 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.
   
   
3. 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.
   
   
4. 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]

Originally Posted by Keventerprises

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.