Howdy TK ----
I was thinking about a trading strategy --- before I pull the trigger, figure I'll run it by y'all, in the likely case I'm missing something ...
Let's say I sell an ITM put option --- why? Because I don't have a lot of money in my account, and ... this low-dollar underlyer doesn't have any OTMs available ... just bear with me ....
Sell to Open
1
Contracts
AONE Put
AONE Jan 18 2014 1.00 Put
Limit 0.80
Day
Est. Option Reqs:
Creates Naked Put:
$100.00
Est. Trade Value:
$80.00
Est. Commission:
$5.60
Estimated Fee:
$0.04
Net Trade Value:
Credit:
$74.36
Funds required for this trade:
$25.64
---
okay so there's a $74.36 credit to my account, sweet ... then within minutes or days or whatever I will get assigned those shares, and have to spend $104.95 to take them on ...... my account will be down .. 104.95 - 74.36 = -30.59 .....
But then I can just turn around and sell those shares ... say they're still at .77 ... (maybe they'll go up or down a bit, okay) .... I can gain about $72.05 by selling the shares ... in the end, I've netted 72.05 less 30.59 equals ===== $41.46
That would work, wouldn't it? And instead of 1 contract I could do 10 ..... ?? what am I missing?
Thanks folks.
Joe
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you need margin to sell calls and puts
1. You will not get assigned early with that much time premium in the option.
2. The option is not very liquid and the spread is terrible (the stock price is already an option).
3. There is a reason the stock is under 1.00.
Read some other threads about low funds and penny stocks.
2. The option is not very liquid and the spread is terrible (the stock price is already an option).
3. There is a reason the stock is under 1.00.
Read some other threads about low funds and penny stocks.
Yes, you would be a winner as long as the stock remains above $0.20. But there a number of things wrong with this strategy.
First, this option won't get exercised by the put-buyer until January 2014. The buyer has no motivation to exercise the contract before then.
Second, if the stock sits below $0.20 on the date the put-buyer decides to exercise, you will lose money.
Third, TradeKing charges extra commission on the buying and selling of stocks under $2.00 (which would hurt you when you try to sell the stock you've been assigned).
And fourth, if I'm not mistaken, TradeKing requires that you are holding, in cash, the amount needed to purchase the shares until they are exercised. Basically, for each put you sold, you would have to set aside $100.00 (and $104.75 for the first contract).
So basically, if you sold one put today, it would tie up $24.75 (capital needed to buy the stock - capital earned from selling the put) for approximately 18 months, with no guarantee of what the yield would be when the contract is finally exercised. Not a very favorable RoE if you ask me.
Essentially, the key fact you're overlooking is that the contract won't be exercised until January 2014. That's the whole reason you're receiving so much premium for selling that put.
First, this option won't get exercised by the put-buyer until January 2014. The buyer has no motivation to exercise the contract before then.
Second, if the stock sits below $0.20 on the date the put-buyer decides to exercise, you will lose money.
Third, TradeKing charges extra commission on the buying and selling of stocks under $2.00 (which would hurt you when you try to sell the stock you've been assigned).
And fourth, if I'm not mistaken, TradeKing requires that you are holding, in cash, the amount needed to purchase the shares until they are exercised. Basically, for each put you sold, you would have to set aside $100.00 (and $104.75 for the first contract).
So basically, if you sold one put today, it would tie up $24.75 (capital needed to buy the stock - capital earned from selling the put) for approximately 18 months, with no guarantee of what the yield would be when the contract is finally exercised. Not a very favorable RoE if you ask me.
Essentially, the key fact you're overlooking is that the contract won't be exercised until January 2014. That's the whole reason you're receiving so much premium for selling that put.
No, you can sell cash-secured puts.sky02316 said: you need margin to sell calls and puts
He said he doesn't have much money in his acount.Datsik128 said:
No, you can sell cash-secured puts.sky02316 said: you need margin to sell calls and puts
If he can employ his originally-stated strategy with ten contracts, then it stands to reason that he can sell a smaller number of cash-secured puts. That's just logic.sky02316 said:
He said he doesn't have much money in his acount.Datsik128 said:
No, you can sell cash-secured puts.sky02316 said: you need margin to sell calls and puts
Thanks for the feedback, folks ... I could sell cash-secured puts (and
covered calls) with my account ... I have a couple hundred bucks in
there, so could do a small handful of the AONE contracts .. (this is
just an example, could use any underlying stock ... found this one
through some random searches in the ivolatility options scanner) ......
eventually, as with most strategies, I would scale such plays as my
available leverage allows.
Datsik,
Don't they have the option to exercise any time before then? And isn't the motivation for them to exercise that they can sell a .77 stock to me at 1.00? Whatever the potential reason, my bet is that someone out there would be willing to exercise early.
A contingency would be for me to buy back to close those puts ... hopefully sometime in the future, when the premium has declined ... and I still clear a profit. ... although the 2013s are only down to .60 .. so ... maybe just break even after commissions on that move.
Hmm ... wouldn't there likely be someone exercising early?
Datsik,
Datsik128 said: First, this option won't get exercised by the put-buyer until January 2014. The buyer has no motivation to exercise the contract before then. [ ....... ]
Essentially, the key fact you're overlooking is that the contract won't be exercised until January 2014.
Don't they have the option to exercise any time before then? And isn't the motivation for them to exercise that they can sell a .77 stock to me at 1.00? Whatever the potential reason, my bet is that someone out there would be willing to exercise early.
A contingency would be for me to buy back to close those puts ... hopefully sometime in the future, when the premium has declined ... and I still clear a profit. ... although the 2013s are only down to .60 .. so ... maybe just break even after commissions on that move.
Hmm ... wouldn't there likely be someone exercising early?
No, they have no motivation to exercise early. An option's price boils down to two factors, intrinsic value (difference between stock price and strike price) and time value (premium paid for the amount of time until expiration). If the intrinsic value is $0.23 in your original example, then the time value is $0.57. The buyer is over-paying by $0.57 in order to buy that time premium until expiration. The only real instance that an option gets exercised early is when an upcoming dividend is greater than the remaining time value on a call contracts, and the call-buyer wants to hold the underlying stock on the ex-dividend date.
Think of it this way: why would someone pay $80 (to buy the put), in order to make only $23 (his profit from exercising it)? He would just be throwing away money. The whole reason he paid that time premium is because he is gambling the price will go down over the next 18 months. If his view changes, and he fears the stock will go up instead of down, he will not exercise early, but rather sell the put to someone else who still thinks the stock will go down. This is because the time value is still a positive number, so he can make more money reselling the option than exercising it early. Make sense?
Think of it this way: why would someone pay $80 (to buy the put), in order to make only $23 (his profit from exercising it)? He would just be throwing away money. The whole reason he paid that time premium is because he is gambling the price will go down over the next 18 months. If his view changes, and he fears the stock will go up instead of down, he will not exercise early, but rather sell the put to someone else who still thinks the stock will go down. This is because the time value is still a positive number, so he can make more money reselling the option than exercising it early. Make sense?
Yes, makes sense, thank you ... I guess I need to meditate a little more on why someone would buy that put option ... I understand your explanation ... but I have this nagging vagueness that some other person would be in some other situation where it does benefit them to exercise early .. they bought the puts to protect against a threshold of say, .70 stock price ............. ....... stock dips below .70, they exercise ... cuz it's their situation they're working, not mine ...... they don't know that I need it to stay about .20 ........ they just know they're protecting themselves against their mental stop...
maybe it's just not possible .... maybe there is no way anybody is going to buy a put when in the money to exercise right now ...... I'll think it through some more ...
maybe there are better example scenarios where the time isn't so far into the future .. or the underlying is more solid .....
maybe it's just not possible .... maybe there is no way anybody is going to buy a put when in the money to exercise right now ...... I'll think it through some more ...
maybe there are better example scenarios where the time isn't so far into the future .. or the underlying is more solid .....
I understand the issue you're hung up on. What you gotta understand is that the hypothetical person who is holding the put, even though he would experience a profit by exercising, would experience MORE of a profit by selling the put to someone else.
Think of it the following way (we will forget the dividend example I listed above, because it is a VERY specific case that rarely transpires); below are two profit calculations for the hypothetical put holder.
Exercising Early: Profit = Intrinsic Value = Strike Price - Price of Underlying Stock
Reselling Put: Profit = Intrinsic Value + Time Value
Because time value is always > 0 (although it decays exponentially as the expiration date approaches), the hypothetical put-holder will ALWAYS choose the second option to maximize profit.
Think of it the following way (we will forget the dividend example I listed above, because it is a VERY specific case that rarely transpires); below are two profit calculations for the hypothetical put holder.
Exercising Early: Profit = Intrinsic Value = Strike Price - Price of Underlying Stock
Reselling Put: Profit = Intrinsic Value + Time Value
Because time value is always > 0 (although it decays exponentially as the expiration date approaches), the hypothetical put-holder will ALWAYS choose the second option to maximize profit.
Ahha, okay, I follow you .. so ... option's not exercised, I'm stuck either waiting it out with my cash tied up, or buying back to close out the position (and thus knocking out my profit on the premium). Probably better investments out there. Thanks Datsik for the explanation, and to the others who responded.
Datsik128 is right on with what he is saying about exercising. Just to add to it, think of it this way:
If there is no dividend involved then there is no reason to exercise a call early. By exercising a call early you will give away the value of the contract. For example, if you are long a call option that has moved into the money you can exercise it early. By doing so you have now bought the stock at the strike price. However if the stock immediately drops in price and falls below your average price you would be losing money. If you just owned the option it would have just went from in-the-money to out-of-the-money giving you a small loss. If you took the shares the loss would be greater and could be avoided by not early exercise. The same goes with puts. The only reason you would want to exercise a put early is if the stock price drops to 0 and they are looking to drop their shares. Early exercise happens but it is usually from someone who doesn't know better and is rare.
If there is no dividend involved then there is no reason to exercise a call early. By exercising a call early you will give away the value of the contract. For example, if you are long a call option that has moved into the money you can exercise it early. By doing so you have now bought the stock at the strike price. However if the stock immediately drops in price and falls below your average price you would be losing money. If you just owned the option it would have just went from in-the-money to out-of-the-money giving you a small loss. If you took the shares the loss would be greater and could be avoided by not early exercise. The same goes with puts. The only reason you would want to exercise a put early is if the stock price drops to 0 and they are looking to drop their shares. Early exercise happens but it is usually from someone who doesn't know better and is rare.
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