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Old 06-29-2017,
5qXCgJayWH 5qXCgJayWH is offline
 
Join Date: Apr 2017
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Default Options question

am new to this and I have a question. I will omit commission fees for simplicity.

I bought 100 shares for BAC which were $5.17/share so they cost me $517.

Now when I look for how much I can sell BAC call options and it looks like this:

Expiration: Jan 18, 2014
Strike price: $7 - bid price $1.43

So that means that I could sell 1 contract (100 options) for $143 which would be 27.6% of $517 that I so far invested in BAC.

Obviously I'd have to hold this stock until 2014 and two things could happen: either it would surpass $7 and option would be exercised and it would be sold at $7 on 2014 which would mean the stock growth would be from $5.17 to $7 in roughly 2 years for me. Second option is of course it goes to zero then I lose 100% of my original $517 but at least retain $143 that I got from selling the option.

Am I mistaken somewhere or is that a win-win situation? Seems like I get instant 27.6% return on my investment and I'd just have to live with the fact that I may miss good profits if the stock were to go really up and if it goes down at least I retain $143.

Anything I am missing here?
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  #2  
Old 07-01-2017,
2YWRUmi3Fx 2YWRUmi3Fx is offline
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However, you're missing a lot, actually... not that you've got anything wrong in your analysis, but you're missing other opportunities.

1. If you are willing to call losing 70% of your investment a "win win", then you need lessons in capital preservation. Warren Buffets first rule: Don't lose money!
2. There are three scenarios in the covered call. a) above $7, and your stock is assigned and you get your max 27% in 2 years. b) stock is above $3.74 when the option expires, so you lose money on the stock, but make more on the option, so you are net positive c) stock is below $3.74, so you lose money on the trade.
3. BAC can go to zero. It's trying hard. I'm not sure I would buy stock in a company that is setting new all-time lows. Sure you are protecting it by 27%, but I wouldn't be willing to lose the rest of it.
4. Why go out 2 years on this plan. You can do covered calls monthly or quarterly, and make a lot more money. 27% in 2 years isn't really a good deal.
5. I've traded options for a while, and trained with many coaches, and taught classes online. I'm not sure I've ever heard of anyone selling a 2year covered call, planning to hold till assignment. (There is a collar strategy with far out short calls, but that's different).
6. The much more common approach would be to do monthly or quarterly. If you did monthly covered calls, you could perhaps get 35%/year.
7. We haven't even mentioned Put protection for a stock that is falling so rapidly.
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  #3  
Old 07-01-2017,
5a3Y55WTdt 5a3Y55WTdt is offline
 
Join Date: May 2017
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Awesome feedback by the way The reason I am betting on BAC is because I read lots of things online about it and it seems like it will either crash and burn or may double next year. Obviously, it is ridiculous to bet a lot of money based on something you learn online so I bought just a small amount (100 shares) just for experience. I am way too inexperienced to see how BAC will react next year in relation to the market, European crisis, etc.

By the way, Warren Buffet recently bought $5bn worth of BAC stock :mrgreen: I am sure he got much better deal than most of us but I still would wonder if he would invest in a stock that is aimed to go to $0?

I am still learning about options and I am a bit excited. I just looked at selling calls month to month and it may make sense to sell month by month but short-term ones sell for a LOT cheaper.
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  #4  
Old 07-02-2017,
0t1PjaZtFu 0t1PjaZtFu is offline
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Join Date: May 2017
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One more question for you since you seem to be quite knowledgable on the subject.

I currently use Merrill Edge (Bank of America's investment company) for investment (I just bought some more longterm stock).

However, I wanted to play around with selling naked calls/puts: obviously with smaller amount of money that I am okay with losing. I want to gain some experience.

My issue is that my current company requires $150,000 margin account if I want to write uncovered calls or puts. Is that normal?

I checked out options house and it seems like they require only $2k to open a margin account which I assume what allows you to write uncovered calls or puts? Am I on the right track here? Do I need to open an account with options house?
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  #5  
Old 07-03-2017,
1SNl47gxHs 1SNl47gxHs is offline
 
Join Date: May 2017
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The only people that it makes sense for is very experienced traders with gobs of money. Yes, $150,000 is normal. That's a measure of how much your broker wants in guarantees to let you do something that stupid. They fully expect you to screw up and lose a ton of money, so they will be holding $150,000 just so they don't end up in the hole. And oh, by the way, if you do blow through that $150,000, they will come after your house next. Bad Idea!

The reason that it is a really really bad idea is what happens if you decide to sell a naked call on BAC (since we're talking about them.) You sell the Jan12 6.00 Call for .30. When you sell an option, you are incurring an obligation. That obligation is that you are contractually bound to sell someone 100 shares of BAC for $6/sh. What happens, if Goldman Sachs comes along and thinks that Buffet is right, and since Buffet already owns a bunch of Goldman, there's great synergy. Goldman announces tomorrow after the close that they are going to buy BAC for $12/share. Since you are obligated to sell someone shares for $6, you have to go onto the open market tomorrow and buy shares for $12, and sell them for $6, losing $6 per share, or $600. So your innocuous naked call that was going to make you $30 ended up costing you $600. What if Goldman offers $26/sh. You just lost $2000.

Of course you can say, "that shouldn't happen". But if you are trading options, you need to know exactly how much you can lose. And that amount better be less than 3-5% of your account. If you sell a naked call, you can blow through a big chunk of your money in a hurry, and take a long time to recover.
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