Charlie's recommendations for learning about Options

[bigbrown]

Thanks for all the information!

 

[charlie]

bigbrown...

Let me say first things first......The brokers love collars because they make TWO commissions instead of one commission. Depending which broker you are using, options pricing look something like the following....$40 for the first contract, then $1.40 for each additional contract. In a collar, on 100 hundred shares, you'd be selling one contract of covered calls and buying one contract of puts. This would equal $80 in commissions, which now boost's the cost of the stock to $36.80 (35.70+$0.80 commission per share). That's an exspensive $34 stock!

The main key here (other than making your broker rich) is do you want to sell the stock in six months, or is this a long term by and hold. If it's a long term by and hold and you have done your homework, then the put is a needless expense.

Lets take UPS. I know I'm in it for the long term and my homework indicates that it's an extremely strong stock. Despite this, I also know that the share price will vary up and down based on market conditions and the business climate.

Using the example in your post, here's what you can do using covered calls only:

Buy 100 Shares XYZ @ ($34 per share)= +34
Sell 1 Six Month 40 Call = -2
Net debit=$32

Now, the net cost of your stock is $32, or you have just protected yourself down to $32 (a 6% decrease). You have also just put $200 into your pocket for the next six months, unless the stock rockets up to $40 or above (a 17.6% increase in 6 months) and is called. Then you have made an $8 profit ($6 on the stock and $2 on the covered call, or a 24% profit). If we let the options expire worthless, take the two dividends =$50 minus the one covered call option of $40 and you've made another $10.

Now.....6 months later, whatever the share value is, you sell another $2 covered call. Your original share cost drops to $30 per share and the above is repeated.

If your holding the stock as a long term investment and do the above, the $34 stock actually pays for itself in 8.5 years ($34/$4 per year). Again, this is without commissions and dividends.

Just another way of looking at it. Hope it helps..........

Charlie

 

[charlie]

Here's an example of what can be done with UPS using covered calls. This is going to be a very short term and conservative example.

I'm going to write (sell) 100 contracts (10,000 shares) of covered calls on long term buy and hold UPS stock.

Near the close of the market on Friday:

Share value = $60.80
FEB 03 Strike price = $65
FEB 03 Bid Price = $0.15

This option will expire on Feb. 21st. I'm making an educated guess that the price of UPS will not be above $65 on Feb. 21st, 2003. Commission = $40 for the first contract + $1.40 for each additional contract.

10,000 shares x $0.15 = $1500
$40 + ($1.40 x 9) = $52.60 Commission

$1500 - $52.60 = $1447.40 Net gain

The $1447.40 is deposited into your money market account at your brokerage.

One more example a little further out:

March 03 $65 strike = $0.40. Expires on March 21st, 2003.

10,000 x $0.40 = $4000
$40 + (9 x $1.40) = $52.60

$4000 - $52.60 = $3947.40 to the money market account.

Lets see how these play out..............

Charlie

 

[charlie]

On my last post I didn't calculate the commisions right. Instead of $1.40 x 9 it should read $1.40 x 99.

This equals $178.60 in commissions.

The net money in your pocket for February 2003 = $1321.40 and for March = $3821.40.

Sorry for the confusion.

Regards............Charlie

 

[bigbrown]

Thank you for sharing all of your knowledge. I'm setting up a faux covered call to monitor on paper before venturing into the real market. I've gotten more information here than my broker gave me when trying to sell me a collar. This has been very helpful.

 

[lr1937]

Thanks for all the good information and keep it coming especially Chralie and Traveler. Like bigbrown I will do a faux call. Parleevoo bigbrown. Never thought I would do any fauxing around.