Option Traders Unite Group Forum » My first Option trade: What just happened?

My first Option trade: What just happened?

The_raider_thumb Brokerage Account

Posted by prudentinvestor on July 16, 2008 (04:56PM)

Ok team, I've been trading stocks for awhile and have been looking to get into options trading. I've visted the learning center several times and listened to the MP3 over and over, thought I understood...basically. So I made my first options trade (buy) today, I brought a covered call.  The stock was not an anylitical pick, I just picked one...PARL trading at $5.08. I did  a "sell to buy"? ok.  strike price $5.00. The stock leg showed an increase, the option led is showing -80.00...what the heck does that mean?  BTW I figured the best way to really learn this is to jump in. Help!!

0.80
Last0.25  +45.5%
Change21
Volume0.65
Bid0.80
AskOpen$0.550 Expiration Date9/20/08 (66 days)Previous Close$0.550Open Interest66Day High$0.800Intrinsic Value$0.290Day Low$0.550Time Value$0.510

The_raider_thumb Brokerage Account

Posted by prudentinvestor on July 16, 2008 (05:00PM)

Oops, I did a sold to open...not a sell to buy....lol AWQ IA SLD to Open

Nophotosm Brokerage Account

Posted by ajedrez on July 16, 2008 (10:33PM)

First off I am by no means an expert in these things but here is what I think happened.

 

You purchased parl at 5.08 and then sold a call on it.  You didnt write the price of the call option originally.  You then said that the stock price showed an increase.  Your question was why the call leg showed a decrease. This is what you would expect.

 

A covered call you sold the option to someone else to buy the stock at $5 a share.  When the stock price hangs around $5 a share the option is less value than if the stock price goes to say $10 a share.  As the underlying goes up the value of the call option obviously goes up.  Since you SOLD the option as the value of the option you sold goes up you go negative.

 Since you own the underlying stock it doesnt really matter what price the stock goes to - it could hit $5,000.  Obviously the call option will be worth $4,995 or something at closing but since you already own the shares you just give them to the other guy and you are set.   What you want to have happen in your covered call trade for maximum profit is to have the stock price hit exactly $5.00 at expiration for maximum gains - then of course you can repeat the process next month. 

 

If I am wrong please correct me, but I am pretty sure on this one, hope I helped. 

The_raider_thumb Brokerage Account

Posted by prudentinvestor on July 18, 2008 (04:28AM)

Thanks for the insight ajedrez, are you saying that my option (to buy the stock) is locked in at $5?  I guess my confusion is the "sold to Open" term...I sold the stock at $5 to open my position?
Nophotosm Brokerage Account

Posted by stugots on July 31, 2008 (01:48PM)

to keep things straight in the future-- do 2 seperate transactions

buy the stock,   than sell the call.

Nophotosm Brokerage Account

Posted by roBear15roulette on April 15, 2009 (09:34PM)

The strategy for a covered call is basically this. You buy the stock, you think it will remain stagnant, go up a little, or possibly go down a little. 

The call you sell gives you a premium for selling. This premium is a slight buffer for loses you might incur from the stock dropping in price, but if it drops dramatically you're shit out of luck. If it rises a little, but doesn't go past the strike price, that is good because you got the premium, but don't have to get rid of your stock, and you keep the profit on the stock. What you hope for is the option to expire, so that you can keep the stock and premium, and profits incurred by the stock.

If you expect the stock to explode, you do not want to be owning the stock at the same time as selling a call.

Because if the stock explodes and rises, you can't collect the profit on it, and since you sold the call your profits are capped to the premium, plus the profit you got from the stock below the strike price, which would be nothing compared to the profit you could have made.

In that situation it would be good to own one or the other. If you bought the call option from someone else, he would be in your shoes, but the option would have increased in tremendous value, you could either sell the option to someone else or exercise it.

Or you could have just had the stock in the first place.

What I wonder is why more people don't exercise their options? Is it because all of their money is tied up in other options? Because if they had the money to exercise the option, wouldn't it be better to leverage their profit by doing so?




Monkey_thumb Brokerage Account

Posted by OldFart on April 16, 2009 (09:20AM)

prudent, it can be a little confusing I know, a position may consists of long and short items at the same time, so which one are you buying and which one are you selling. In general the rule is that if you have to pay money to open a position, you are buying it and vice versa - if money is coming into your account, you are selling it. I think you wanted to "buy to open" the covered call in your account - purchase the shares and sell a call against them. Please, verify this is what you have in your account, long shares, short call and not the other way around and we will try to help
Nophotosm Brokerage Account

Posted by stugots on May 07, 2009 (12:13AM)

next time say I wrote a covered call, because you are the seller { underwriter} of the option.  doing two seperate transactions will definately make it easier.  you must also pick a stock you want to own, not just one at random.

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