Tag Archives | covered call writing

How Should a Beginner Approach Option Trading?

The following question seems rather tame, but it addresses a very important issue:

Is there a correct syllabus for new option traders?

Hello Mark,

I’ve just starting to read your Rookie’s Guide book, bought from Amazon. I also read several other options books, while doing my paper trading with OptionXpress with thinkorswim platform.

I also have joined an options course and what they teach are very basic, which is just Buy To Open (Call / Put) and Sell To Close (Call / Put) and pay attention to the candlestick chart for entry point. So making profit from that simple strategy. What do you think of that strategy? They didn’t teach any strategies mentioned on many options books.

Candlestick Charting

Candlestick Charting

But after reading couple of books on options, they all teach the Covered Calls as basic strategy, which from my understanding that one investor has to have real stocks in order to make the options trading. Do I need to buy real stocks? Is that true?

How about if we only open an options account, and didn’t have a real stocks to trade in that Covered Calls strategy? And why I can’t trade the Covered Calls in optionsXpress? Please help me.

Thanks in advance,
Aldo Omar

Paper trading is an excellent idea. It teaches you how to handle your broker’s platform and it gives you experience learning to make critical decisions — entering and exiting positions.

However, this course is a disgrace, in opinion. I do not care how respectable the course giver is, but these lessons are almost guaranteed to see their students go broke when using options. Unless they explain that the course is designed only to teach you something about options and that “buying to open and then selling to close” is NOT a strategy that you ever want to adopt, they are doing you a great disservice. I hope this course is free because it is not worth even that much.

  • First; A trader, and especially a new trader, cannot be expected to know how to use Candlestick charts. It is extremely difficult to “pay attention to” charts and come away with useful information. Think of this way: Candlestick charting is well-known and used my millions of traders around the world. Despite that, the data is clear: The average individual investor does worse than the S&P 500 index. The average mutual fund manager — someone who ears big bucks to pick winning stocks and beat the market averages — cannot beat the averages. Do not get trapped into believing that you can read one or two books on charting and know how to sue the charts. My conclusion is that it is far more difficult to pick entry points than your course teachers suggest.
  • Second; You are learning the simplest of all strategies, and that is a good thing because one should begin with the most basic concepts of options. However, it should have been mentioned as often as possible that buying to open and then selling to close is a death wish. Unless you (A. O.) have a proven track record of predicting which stocks will rise and fall, then you must not — for your financial well being — believe that you can suddenly start trading options and become a successful stock picker. Life does not work that way and using Candlesticks will not turn you into a successful stock picker. The professionals cannot predict stock direction on any consistent basis, and neither can you
  • Third; Even if you work diligently and learn to read the charts successfully, there is more to “buy to open” than simply picking a stock and correctly forecasting the direction of the stock price. Did they teach you that buying out-of-the-money options is not a viable strategy? Did they teach you to pay attention to the implied volatility of the options? In fact, did you learn anything at all about volatility and how crucial it is to an option trader? I assure you of this: If you but out-of-the money options and if you buy them when their prices are relatively high, you will ruin your trading account, even when you get the stock direction right. My advice: If you are going to play the “buy to open” game, at least stick with options that are already several points in the money when you buy them.
  • Fourth; I know that advanced strategies cannot be dumped into the lap of a beginner. Building a sound foundation in option basics comes first. But that is no reason to teach a strategy where the vast majority are guaranteed to fail.
  • Fifth; Yes, covered call writing is a sound basic strategy and yes, it does involve the purchase of stock (in multiples of 100 shares). However, it is still a bullish strategy and the covered call writer can still lose a lot of money if the market takes a dive. Obviously you lack the cash to buy stock. That is okay because there are other ways to use options to generate exactly the same profit/loss profile as writing covered calls. You will get to that in Chapters 13 and 14 in the book that you are reading (The Rookie’s Guide to Options; 2nd edition).
  • Last; The whole idea about using options is to hedge (reduce) risk and still give yourself a good probability of earning a profit on any given trade. Buying options based on Candlestick chart reading is not one of the paths to success. Sure some people can do it, but you don’t want to count on being one of them. Covered call writing is “better” for the new trader – but only when he can afford the downside risk. However, there are other strategies that I would recommend for you. At the top of the list is “credit spreads.” But please have patience. Don’t jump to the chapters on this and related strategies. Go through the lessons at your own pace and if possible, resist the temptation to trade until you feel comfortable.

Aldo,
I hate that course and the sad fact is that this is popular stuff taught by many people.

Read full story · Comments are closed

Beware of swindlers

On a personal level, one part of the options business that truly bothers me is that it its filled with people who want to take your money. I politely refer to them as hypesters, but a better term is swindler.

Swindle: Use deception to deprive (someone) of money or possessions. (source: Google search)
Fraud: Wrongful or criminal deception intended to result in financial or personal gain(source: Google search)

I don’t know the difference between deception and criminal deception, but these hypsters feel like criminals to me.

These swindlers publish stories that are so outrageous, that I am amazed that anyone on the planet could fall for it. Or is that just me being naive? Tell a good story, repeat it a few times, and the customers flock to you. Maybe ‘flock’ is an exaggeration, but people come to you, begging you to take their money.

There’s nothing special about the options trading business. The liars and cheats are present in every business, dreaming up scams to separate people from their money. It makes me angry.

Here’s one example, chosen via search:

Do you generate less than 20% profit every month in your trading account?… If you answered yes, what I’m about to share with you could change your life forever…

That profit can vary but if you do it right you should be able to generate at least a 20% profit each month – yea that’s right, I said each MONTH.

I don’t know whether to laugh at the nonsense or cry for the victims. He says you SHOULD be able to generate AT LEAST 20% EACH month. And how do we accomplish this miracle: By writing covered calls. If he were to say that it’s possible to earn 20% when things go your way for an entire month, I’d agree with the statement. But ‘should’ and ‘each’? Has he never seen a down market? Does he believe that VIX is always 100?

It’s beyond belief. But I’m sure he sells his costly software and courses to the gullible. $1,000 invested for one year, growing at 20% per month compounded, becomes $8,900. Do it for six years and you’d earn one half-billion dollars.

Sure, I omitted commissions and assumed taxes could be paid with other funds, but here is someone who would have you believe that this is the minimum result you SHOULD anticipate. How can making these statements not be against the law?

I recently claimed that a skilled options trader – someone who exercises good risk management skills has a reasonable chance (but it’s not a cinch by any means) to earn 20% in one year. Mark, who blogs at option pit recently held a webinar through the option club.com and suggested that 13% is a reasonable annual expectation. So who is to be believed? The 20% per month boaster, or two experienced traders and teachers?

The Banks also play the game

It’s not bad enough to be cheated by random individuals. What chance does the naive person have when the banks openly overcharge for structured products- or options in disguise. One simple example is described by the Amsterdam Trader.

971
Read full story · Comments are closed

You are not using options? II. Is covered call writing for you?

Recent commentary on this blog suggests that it is important to examine option strategies from more than a single perspective.

As a true believer that options can work wonders as risk-reducing investment tools, I often lose sight of the fact that most investors don’t use options and have a very negative opinion of them. When writing about a given strategy – or any options related idea – it’s important to consider why non-option users don’t want to be bothered with options.

Definition

A covered call position consists of owning 100 shares of stock and selling one call option. In simplistic terms this means that the stock owner has collected a cash premium and in return, accepts the obligation to sell that stock – with certain restrictions – to the call owner. These are the basic requirements (the nitpicker can find things that are not exactly accurate, but they are good enough to clearly define the option contract.

  • The stock is to be sold at the strike price of the option, and at no other price
  • The decision to purchase must be made before the option expires
  • The decision (whether to buy the shares) is made by the option owner
  • The option seller plays no role in the decision
  • Once the option owner exercises the call and the option seller has been assigned an exercise notice, the transaction is final and cannot be reversed

Risk

If the stock undergoes a severe price decline, you, the covered call writer can incur a large loss. The loss is almost as large as that of any other stockholder, but by writing the call, your loss is reduced by the premium collected.

Thus, there is substantial market risk, when the market declines.

Sacrifices

Writing covered calls is a simple trade. The writer gains something in exchange for something else.

The covered call writer accepts a cash payment upfront. That’s referred to as the premium, and is the price paid by the call buyer to the call seller. That cash premium belongs to the option seller and is his/hers to keep forever.[NOTE: If you decide to repurchase that call option, you pay the then current premium. That has nothing to do with the premium that you collected when you sold the option]

The call buyer gets something intangible in return for the cash payment. He/she gets to collect every penny of the stock option value – above the strike price. If the stock is not trading higher than the strike price when the market closes for trading on expiration Friday, then the option has no value and expires worthless. The option seller’s obligations are canceled.
seFor example, if the option has a strike price of $40, and if the stock is $43 when expiration arrives, then the option owner has the right to buy stock at $40 and sell it at $43. In practice, the call owner is better off selling the call option and not bothering with the exercise process. The call owner, now the exerciser, then sells stock at the higher price, keeping every penny of the difference.

Without the call sale, those profits would go to the original stockholder. However, by selling the call option, those profits have been transferred to the call owner.

Note: The option owner does not have to hold that option until it expires. He/she may sell it at any time. More than that, it is almost always better for the call owner to sell, rather than exercise that option.

Benefits

Stock prices do not always rise

When you write, or sell, an option that is out of the money (the strike price is above the current stock price), most of the time the option expires worthless.

Most of the time you earn extra profits (or reduce losses) when writing covered calls. But not every time. Part of the time the call buyer makes money that could have been yours. However, we never know when stocks are going to rise and when they will not.

By writing the call option, you agree to accept a cash payment – now – and agree to let someone else have profits above a certain price point.

This is a simple agreement. Many people find it attractive. It works on the principle that a bird in the hand is worth two in the bush. And it’s perfectly acceptable to believe in,and practice that way of thinking.

It’s also reasonable to seek huge profits – that do occur every once in awhile. It’s okay to take your chances on owning the stock without a hedge. After all, you did research when deciding which stock to own, and if you believe that your research will pay dividends, if you believe that you have a special talent for picking winning stocks,then of course you will not want to give up those potential profits. You will not write covered calls.

However, if you believe, as I do, that the ability to outperform the market with stocks election is limited to a small minority of investors and traders, then you may feel that accepting the option premium that comes your way when writing covered calls is beneficial.

There is no right or wrong here. There is only the decision: Do you want to trade possible profits – profits that may never arrive or profits that may be huge – for the option premium that comes when selling calls? It’s a personal decision. It depends on your reasons for investing. Some people seek steady growth, others seek to get rich quickly.

The purpose of this post is to clarify the situation for investors who don’t really understand how this strategy is supposed to work and what the covered call writer stands to gain or lose. The rest is up to you.

Please note: I believe there are less risky methods that involve adopting similar strategies. Those come with less risk and less reward. Again, they are not for everyone.

I believe the following is obvious. Nevertheless, please understand that nothing in this post should be taken as a recommendation to adopt this, or any other option strategy. I am presenting my opinion because it may prove to be helpful when it comes to using options. The final decisions are yours alone. Do not thank me for profits earned nor blame me for money lost.

947
Read full story · Comments are closed

Condors vs. Iron Variety

Mark: If you will, address an options trading question (maybe a rookie question) to which I’ve never found an answer.

What is the benefit of selling iron condors (bull put spread/bear call spread) over buying condors (bear spread/bull spread – puts or calls, but not both)? The profit/loss graphs of the IC and the condor are identical. Clearly, with the IC the cash remains in your account and is increased by the premium collected rather than paying for the condor and collecting a profit (hopefully) later on, but the interest earned on the funds is, at least presently, negligible. Also, it appears that there might be a slightly greater premium for an IC over a condor, but I don’t have enough of a statistical sample to draw that conclusion.

So, why are iron condors so popular while non-iron condors are rarely mentioned? Thanks, as always, for your wisdom.

Cliff

That’s a very interesting question and the truth is I don’t know.

I believe it’s a trader mindset. I believe that most traders prefer to have the cash in their account (iron condor), rather than pay cash for a position (condor). In this situation, the positions are equivalent and there is no theoretical advantage to trade one over the other.

However, there is a practical consideration. Because the trader anticipates that all options will expire worthless (obviously only when the trade is held though expiration), there is an extra reward for winning: There are no exercise/assignment fees to pay.

When the condor buyer wins, one of the spreads is completely ITM while the other is worthless. That requires payment of one exercise fee and one assignment fee. We know that some brokers do the right thing and provide exercise and assignment at no cost to the customer. However, that is not a common situation. Thus, all things being equal, the iron condor is better by the amount of fees saved.

More on mindset

Covered call writing is very popular among rookie traders. It’s easy to learn and nearly all brokers allow their novice traders to adopt that strategy. Selling cash-secured puts is the equivalent strategy, and adds cash in the trader’s account, but most brokers don’t allow their beginners to make that play. That’s true despite the fact that the trades are 100% equivalent.

Where does trader mindset come into the picture? I can’t be certain, but I feel that most traders who get used to writing covered calls never make the effort to switch to selling puts – even when their broker would give them permission. There is a certain comfort in trading a familiar strategy.

I believe it’s the same with condors. More books are written on iron condors, more bloggers use iron condors as topics, and thus, people who adopt this strategy begin with the iron condor and never make the change.

In the condor case, it’s correct not to make the change, but writing covered calls is not a good idea when the trader understands the equivalence of selling cash-secured puts. What’s the edge? Fewer commission dollars per trade. To me, the other, and more important point is that it’s far easier to exit prior to expiration. when the stock rises above the strike, OTM puts become cheap (eventually) whereas it’s not easy to trade ITM, higher priced call options as a combination with stock.

Exiting not only locks in the profit, but it frees cash for another trade.

931
Read full story · Comments are closed

Sharing what we learn: Pay it Forward

Today only, there is a special promotion for the first 24 (as in 24 karat) people who become Gold Members at Options for Rookies Premium. The bonus is a guarantee of that their membership fee ($37/month) will never increase. I believe this to be an extreme value and am offering it a a pre-launch promotion. Please read the details.


In a recent comment, Mike offered his best advice to Wayne who had described his experience with writing covered calls.

Wayne,

I read thru your covered call example and as I see it you never calculated what the cost basis was for your stock after you sold the call. This would have helped you determine what strike price you should choose for your next covered call if the first had expired. Always keep in mind where your profit and loss zones are each time you place a trade.

Once you stock dropped in price you continued to sell ITM calls (I assume to try to collect the most premium). A better strategy would have been to sell OTM calls knowing what your cost basis is for the underlying and allowing for the stock to recover. The premiums may be smaller but the risk of losing money would be less. You never know when or for what reason the market will change direction in either a positive or negative way. Bookkeeping to me is an important part of a winning strategy. I hope this helps.
I have learned a ton from Mark’s books , blogs and questions he has answered for me. I just hope that I can pay it forward.

Mike

Mike,
I understand the rationale behind your advice. In fact it’s the advice that most traders believe is helpful, intelligent, and the ‘best’ path to follow.

This is one place where I part company with that majority.

1) “This “would have helped you determine what strike price you should choose for your next covered call.”

This seems to be good advice. In fact, it’s terrible advice and leads far too many traders down the path towards decreased earnings. More than that, when these traders earn less than anticipated, there is no logical way for them to discover the error of their ways – because it all seems so logical.

Wolfinger’s Truth: or my trading philosophy

  • Cost basis and other such data are for record keeping only. They must be IGNORED when trading
  • Always choose the best available trade – at the time the trade decision is made
  • Translation: Pretend you are opening a new position. Ignore the fact that it is rolling an existing position
  • NOTHING ELSE matters. It there is no good call to write, then don’t write one. Decide whether to sell or keep the stock
  • This applies to all strategies, not only to covered call writing

2) “Always keep in mind where your profit and loss zones are each time you place a trade”

Wolfinger’s Truth

  • Only think about your profit and loss zones or break-even point when you write your trade plan and decide whether to enter into the trade
  • Once you own the position your goal is to
    • Forget the past
    • Evaluate all positions as they exist today
    • Manage risk based on the current situation
    • Own a portfolio that meets your current portfolio requirements: future profit and loss potential, risk vs. reward, etc.
    • Make money today, tomorrow and into the future
    • It makes NO DIFFERENCE whether you earn $500 nursing a losing trade that gets you back to even or whether you earn $500 with a new, better (more likely to succeed) trade. It’s the same $500
  • Spending time and effort on a losing trade, trying to recover losses is inefficient
  • Spending time and effort on a new position – one that you prefer to own (when compared with that losing trade) – is efficient and offers an improved chance of increasing the value of your account
  • Increasing account value – without increasing risk – MUST be your goal
  • Thinking about break-even points or maintaining profits from older positions – does not do anything of value for you – except that it allows you to believe you are more successful.
  • Avoiding losses makes you feel good. That’s a psychological boost
  • Earning more money makes you feel good. It should make you feel even better and be an even larger psychological boost
  • 3) “A better strategy would have been to sell OTM calls knowing what your cost basis is for the underlying and allowing for the stock to recover.”

    Wolfinger’s Truth:

    • Mike, you can never tell anyone else what would be a better strategy for that person. All you can do is explain what works for you, why it works for you, and then allow the other trader to make his/her own decision
    • ‘Allowing’ the stock to recover is the great bullish myth. Stocks do not always recover Or they take so long to recover that waiting for that to happen represents a huge opportunity cost elsewhere
    • It is far better to earn $1,000 from a new position over the next six months, rather than carefully manage that old position and earn that same $1,000 over a three-year period. Traders who are so pleased with themselves for eliminating the loss from a given trade never recognize the opportunity cost
    • Writing OTM calls is a more bullish than writing ITM calls, and it’s nor right for you to tell anyone to be more bullish than he/she wants to be

    4) “but the risk of losing money would be less”

    Wolfinger’s Truth:

    • When you write OTM calls instead of ATM or ITM calls, the probability of losing money – during the lifetime of the call being written – INCREASES
    • The Truth: It is not the matter of profit vs. loss that determines risk. It’s the size of the profit and loss that is far more important. Writing OTM calls earns a profit less often than writing ITM calls. It also results in larger losses when the stock declines. True it can result i larger profits, but you were writing about less risk of losing money

    and

    Mike: I’m glad you shared your thoughts. Traders have different approaches to trading and adopt different trading philosophies.I know what I preach is best for me and I’m anxious to share it. I know that it makes perfect sense to me. I offer it in this spirit: consider Wolfingr’s Truth and decide whether it makes sense to you. This is the philosophy behind my teaching methods at Options for Rookies Premium.

    920
Read full story · Comments are closed

Covered Call Writing: Only for the Wealthy?

Originally published Feb 25, 2011 at InvestorPlace

I recently heard an options trading investor suggest that writing covered calls is a strategy that can be utilized only by investors with a big pile of cash.

That is simply not true. Writing covered calls is a strategy that can generate solid returns and is in no way restricted to traders with large accounts. As a long time option educator, I know that options investing and trading can be confusing. Nevertheless, I never heard anyone suggest that investing in stocks is only for the wealthy.

Put simply – to write covered calls, the investor must own at least 100 shares of stock. There are many quality stocks which trade between $20 and $40 a share. Surely buying 200 shares of a $35 stock and writing two calls is not a situation reserved for the wealthy. It requires less than $7,000. While that may be a significant sum for many investors, it hardly separates the wealthy from the non-wealthy investor.

For purposes of diversification, it’s more efficient to own a few stocks rather than only one, and I’d advise people with smaller portfolios to begin by investing in index funds, while steadily adding money to their accounts. When there’s enough value in the account, and if the investor prefers to handle his/her own trades rather than continue to use index funds, then that’s the appropriate time to begin writing covered calls. $20,000 should be more than enough – and yes, I recognize that many investors begin using options with far less capital.

Alternative strategy: Sell put spreads

When a trader recognizes the large downside risk associated with owning stock (with or without writing covered calls), he/she may feel much safer by using alternative bullish strategies. One easy to understand strategy is the sale of out-of-the-money put spreads.

The maximum profit may be limited to the cash collected, but the maximum loss is drastically reduced, and is far less than that associated with owning stock. Any trader who is happy to earn profits with reduced risk should prefer the sale of put spreads to the purchase of stock and the subsequent writing of call options.

Translation: Selling put spreads is preferable for conservative investors who want to limit downside risk. There is no suggestion that everyone should adopt this method rather than own stocks.

For example – when a trader sells a 5-point spread, the XYZ Nov 50/55 put spread — the maximum loss is $500, less the premium collected. Additionally, the margin required to hold the trade is only $500, far less than paying the $2,500 margin required to own 100 shares of a stock priced at $50.

Recognize that there is no need for great wealth to trade this strategy on a small scale. Note those words: ‘small scale.’ The biggest risk associated with this play is the inability to recognize the possibility of losing the maximum ($500, less premium collected). That encourages the not-yet-educated options player to sell 10 of these spreads instead of buying 100 shares. To that trader, each position has $5,000 at risk. There is little chance of losing the entire $5,000 when owning shares, but the chances of losing that (almost) $5,000 from the sale of 10 put spreads is far greater than zero. That’s the risk – selling too many spreads.

To trade options with less capital, it’s advisable to look for risk-reducing spreads. And it’s necessary to trade an appropriate quantity of spreads.

917
Read full story · Comments are closed

Meet our Readers: Wayne

Like many beginners, when I started trading options, I sold covered calls, then cash secured puts. Then buying calls and puts. I remember in those days, I often said to myself, “covered call writing is such a wonderful strategy because at the end of every month the calls expire worthless and I’d sell another call and collect the premium. I can do this month after month!”

But after using this strategy for a while, I have to say that this is not as “safe” of a strategy as some people believe. Yes, you sell your call; keep your premium no matter what happens to the stock. But the fact is you can lose a lot from your declining stock–much more than the premium can ever give you. Yes, in a declining stock you can keep selling lower and lower strike calls, but the loss from the stock would still be greater than the premium collected, or break-even at best. For example,

–bought SPY at 120 and sold the 119 call
–at expiration SPY closed at 114. Premium kept, long stock.
–sold the 112 call trying to collect higher premium in a declining stock
–at expiration SPY closed at 108. Premium kept, long stock.
–sold the 106 call trying to collect higher premium in a declining stock
–suddenly SPY went up and at expiration closed at 115
–assigned at 106

Overall, SPY was bought at 120 and assigned at 106, a loss of $14. Yes, I collected premium along the way, all ITM calls:
— sold 119 call when stock at 120 then,
–sold 112 call when stock at 114 then,
–sold 106 call when stock at 108.

Sorry, I couldn’t find the exact amount of the premium collected. But, I do not think it’s more than the $14 loss from the declining stock. Perhaps at best, it was a break-even. That is, I collected $14 in premium but then lost all of it from assignment at the end. (This message is not: assignment is bad.)

Well, even if it was a break-even, it still wasn’t a good experience: I put in all the time, effort and anticipation that I am using a very “safe” & “good” strategy, but at the end, it was just a break-even or a loss.

So, I just wanted to share with you about the experience that CCW is not without risk, especially when the stock plummets and suddenly shoots up. And the fact is, it is not uncommon nowadays to see a volatile market, so stock prices behaving in an unpredictable & erratic manner is not at all unusual.

Wayne

Read full story · Comments are closed

When not to exercise a call option

I generally take the approach that there is no such thing as a dumb question.  If you don't understand something, there's a good chance that others will also be in a quandary over the identical question.  However, I am reconsidering.  The second question below – and I have seen it many times – is truly a dumb question.

 

Mark,

Thanks for revisiting this topic.

What if I want to buy and sell calls but don't want to sell my current shares. Is there anyway to avoid this?

If I am selling covered calls, and the stock hits the strike price, isn't it almost a given that the stock will be called away from me and sold at the strike price?

Mike

***

To Mike,

1) Yes, there is a way to avoid selling the stock. One simple method is to hold the long stock shares in a different account.
Then if you are assigned an exercise notice you will still own the shares in one account and be short shares in the other account. You can repurchase those short shares whenever you want to do so and remain long the original shares
2) Of all the questions that I receive – and I appreciate each and every one of them – this specifc questions bothers me more than any other.  I get it repeatedly and cannot understand how that is possible. 
Warning: Anyone who asks this question should not be trading options.  Not now, and possibly not ever.
The most basic concepts of using options involves some consideration of how options are priced and what they are worth.  No one in his or her right mind would ever – and I mean ever – exercise a call option just because the stock 'hits the strike price.'
There are so many reasons why this is true that it painful to attempt to list them. Here are two.
a) Your question assumes that writers of call options only sell options that are out of the money.  Let me assure you that many traders sell options that are already in the money – and that means the stock has hit the strike price – even before the option was sold.
I, for one, would never write an out of the money covered call, preferring to always take the more conservative path of writing in the money call options. let me assure you that I have never been assigned the day I sold the options, even though the stock has already 'hit the strike price.'
Virtual guarantee

b) If the stock hits the strike price, it's almost a 100% guarantee that your option will NOT be exercised under those circumstances.
Do you want proof? Look at any stock that is above the strike price of a given call option.
For example, yesterday AAPL closed at $309.52. 
Look at the open interest for Nov 300 calls.  Is it zero?  Did everyone who was long that option exercise it when AAPL passed $300 on the way up?
Look at AAPL Nov 290 calls. Is the open interest zero?  Did everyone exercise his/her long AAPL Nov 290 calls when the stock moved past that price?
Is that open interest anywhere near zero? Does it look as if everyone who was long that option exercised?
Now kook at the price of the Nov 300 call.  If the call owner exercises he owns AAPL at $300 per share when it's trading $9.52 higher. Exercise and your call becomes worth $952.
Do you see that the call closed trading yesterday near $19?  If you sell that call, you collect $1,900.  Would you prefer to have $952 or $1,900?
Isn't it price far above the option's intrinsic value? Don't you understand that if the option were exercised the owner would lose every penny of that time premium?
If you do not understand every word of the explanation above you have no business trading options. You have no idea how options work and have zero chance – outside of good luck – to earn any money.
Learn the basics. Then trade.
3) I ask a favor: Where did you get the idea that the option would be exercised under the conditions stated? Please write again and tell me who is teaching people that this absurdity is within the realm of possibility.
816


Read full story · Comments are closed