How to Invest Selling Put and Call Options
Call Option FOR EXAMPLE : YOU LIKE AMERICAN BARRICK YOU THINK IT IS GOING TO MOVE HIGHER IN THE NEXT 18 MONTHS AND YOU DON’T WANT TO PUT UP THE $39.07 A SHARE
Call Option THE BUYER HAS THE RIGHT TO BUY A SPECIFIC STOCK AT A SPECIFIC PRICE EVERY DAY UP UNTIL A SPECIFIC DATE YOU LIKE AMERICAN BARRICK
Call Option THE BUYER HAS THE RIGHT TO BUY A SPECIFIC STOCK AT A SPECIFIC PRICE EVERY DAY UP UNTIL A SPECIFIC DATE YOU LIKE AMERICAN BARRICK SPECIFIC STOCK – AMERICAN BARRICK SPECIFIC PRICE - $30 – (CALLED THE STRIKE PRICE) SPECIFIC TIME FRAME – ANY DAY UP UNTIL JANUARY 18, 2014
Call Option AMERICAN BARRICK – AT THE CLOSE TODAY IT TRADED AT $39.07 US (May 31) YOU THINK IT IS GOING TO MOVE HIGHER IN THE NEXT 18 MONTHS AND YOU DON’T WANT TO PUT UP THE $39.07 A SHARE 100 SHARES WOULD COST - $3,907.
Call Option AMERICAN BARRICK – AT THE CLOSE TODAY IT TRADED AT $39.07 US (May 31) YOU THINK IT IS GOING TO MOVE HIGHER IN THE NEXT 18 MONTHS AND YOU DON’T WANT TO PUT UP THE $39.07 A SHARE 100 SHARES WOULD COST - $3,907. YOUR COST OF PURCHASING THE OPTION – (TODAY’S CLOSE) - $12.05 PER SHARE - 100 SHARES - $1,205. YOU OWN AN AMERICAN BARRICK JAN 18 2014 $30 CALL
Call Option YOU OWN AN AMERICAN BARRICK JAN 18 2014 $30 CALL KEY – YOUR COST IF YOU DECIDE TO BY THE SHARE BY EXERCISING THE OPTION @$30 (THE AGREED UPON PURCHASE PRICE) + $12.05 (THE COST OF BUYING THE OPTION) = $42.05 TOTAL COST. ONLY THREE THINGS CAN HAPPEN – STOCK GOES UP – ABOVE $42.05 --- $30 STRIKE PRICE + $12.05 (YOU PAID) = $42.05 – YOU MAKE MONEY IF IT TRADES AT $50 THEN YOU MAKE $50 - $42.05 (YOUR COST) = $7.95 per share - 100 shares - $795 profit – 66%.
Call Option STOCK PRICE STAYS THE SAME – YOU BUY AT $30 AND SELL IN THE MARKET AT $39.07 . YOUR COST OF $42.05 MINUS $39.07 = $2.98 PER SHARE. 100 SHARES = $298 LOSS STOCK GOES DOWN BELOW $42.05 YOU WILL LOSE – IE TRADES AT $35 – YOUR COST OF $42.05 - $35 = $7.05 – 100 SHARES $705.
Selling Calls (WRITING CALLS) YOU OWN 100 SHARES OF AMERICAN BARRICK YOU’RE WORRIED IT MIGHT GO DOWN IN THE NEXT 18 MONTHS BUT LIKE THE STOCK LONGER TERM YOU SELL SOMEONE THE RIGHT TO PURCHASE IT FROM YOU AT A SPECIFIC PRICE ANY DAY UP TO A SPECIFIC TIME (SELLING A COVERED CALL) .
Selling Calls (WRITING CALLS) FOR EXAMPLE AMERICAN BARRICK - $39.07 YOU GIVE SOMEONE THE RIGHT TO BUY BARRICK FROM YOU AT $40 ANY DAY UP TO JAN, 18, 2014 – THEY PAY YOU $6.90 FOR THAT OPTION TO BUY IT FROM YOU (OR NOT) FOR $40 YOU KEEP THE MONEY THEY PAID YOU (THE PREMIUM) WHETHER THEY CHOSE TO BUY THE STOCK FROM YOU OR NOT IF STOCK GOES UP ABOVE $40 THEY WILL BUY IT FROM YOU – YOUR NET SELLING PRICE IS $40 (AGREED UPON PRICE) + $6.90 RECEIVED FOR THE OPTION = $46.90
Selling Calls (WRITING CALLS) YOU HAVE LIMITED YOUR UPSIDE GAIN TO A MAXIMUM OF $46.90. IF STOCK GOES DOWN (OR STAYS THE SAME) YOU KEEP THE $6.90 FOR SELLING THE OPTION WHICH REDUCES YOUR DOWN SIDE RISK BY THAT AMOUNT. IF YOU HAD BOUGHT THE STOCK AT $39.07 YOU HAVE REDUCED YOUR DOWNSIDE RISK TO $39.07 (WHAT YOU PAID FOR THE STOCK) - $6.90 YOU RECEIVED FOR THE OPTION PREMIUM = $32.17
WHICH IS THE BETTER CALL TO SELL IT DEPENDS ON HOW FAR THE STOCK RISES OR FALLS 1. SELL AMERICAN BARRICK AT $30 TIL JAN, 2014 – PREMIUM RECEIVED $12.05 - IF EXERCISED TOTAL RECEIVED $30 + $12.05 = $42.05 2. SELL AMERICAN BARRICK AT $35 TIL JAN, 2014 – PREMIUM RECEIVED $9.20 – IF EXERCISED $35 + $9.20 = $44.20 3. SELL AMERICAN BARRICK AT $40 TIL JAN, 2014 – PREMIUM RECEIVED $6.90 – IF EXERCISED $40 + $6.90 = $46.90
WHICH IS THE BETTER CALL TO SELL IT DEPENDS ON HOW FAR THE STOCK RISES OR FALLS EXAMPLE #1 GIVES YOU THE MOST PROTECTION FROM A SIGNFICANT DROP BECAUSE YOU TOOK IN MORE MONEY FOR SELLING THE OPTION. #3 GIVES YOU THE MOST MONEY IF THE STOCK RISES ABOVE $40 BECAUSE ITS TIME VALUE IS HIGHER. GENERALLY YOU WANT TO GET THE MOST PREMIUM WITHOUT LOSING THE STOCK – SO THAT YOU CAN WRITE ANOTHER CALL WHEN THE TIME IS UP.
Time Values Intrinsic Value KEY CONCEPT HOW TO VALUE AN OPTION WHICH IS THE BETTER DEAL? STOCK TRADES AT $39.05 1. BUY AMERICAN BARRICK AT $30 TIL JAN, 2014 - OPTION COST $12.05 2. BUY AMERICAN BARRICK AT $35 TIL JAN, 2014 – OPTION COST $9.20 3. BUY AMERICAN BARRICK AT $40 TIL JAN, 2014 – OPTION COST $6.90
Time Values Intrinsic Value TIME VALUE TOTAL YOU PAID FOR THE OPTION MINUS THE INTRINSIC VALUE 1. PAID $12.05 – INTRINSIC VALUE OF $9.05 = $3 DOLLARS TO LOCK UP THE STOCK FOR 18 MONTHS. 2. PAID $9.20 - $4.05 (INTRINSIC VALUE) = $5 TIME VALUE 3. PAID $6.90 – 0 = $6.90 TIME VALUEBREAKDOWN
PUT OPTIONS A PUT IS THE RIGHT (YOUR CHOICE) TO SELL A SPECIFIC STOCK AT A SPECIFIC PRICE ANY DAY UP UNTIL A SPRCIFIC DATE. EXAMPLE AMERICAN BARRICK $39.07 YOU THINK AMERICAN BARRICK IS GOING DOWN OVER THE NEXT 18 MONTHS SO YOU BUY A PUT TO PROTECT THE STOCK YOU OWN. YOU BUY THE RIGHT TO SELL BARRICK FOR $40 ANYDAY UP TO JAN 18, 2014. YOU PAY TO HAVE THAT INSURANCE AGAINST A SIGNIFICANT DROP IN THE SHARE PRICE. COST OF THE OPTION $8.50 PER SHARE – 100 SHARES -- $850 YOUR BREAK EVEN IS IF THE STOCK DROPS BELOW THE $40 YOU GET FOR THE SALE MINUS THE $8.50 YOU PAID FOR THE OPTION. $40- $8.50 -31.50
PUT OPTIONS IF THE STOCK STAYS ABOVE THAT YOU WILL LOSE MONEY – FOR EVERY DOLLAR ABOVE $31.50 YOU LOSE A MAXIMUM OF $8.50 YOU PAID FOR THE OPTION THE STOCK DROPS TO $35 – YOU WILL SELL IT AT THE AGREED UPON PRICE OF $40- YOU LOSE $8.50 - $5.00 DIFFERENCE IN THE PRICE, THE OPTION ALLOWS YOU TO SELL ($40) AND THE MARKET PRICE ($35)- $8.50-$5-3.50 PER SHARE-$350 FOR 100 SHARES IF THE STOCK DROPS TO $25-YOU SELL AT $40- $15 BETTER DROP OFF THAN SELLING IN THE MARKET- MINUS THE $8.50 YOU PAID FOR THE OPTIONS- $15 -$8.50 YOU PAID FOR THE OPTION- $15- $8.50- $6.50 PROFIT YOU THINK AMERICAN BARRICK IS GOING DOWN OVER THE NEXT 18 MONTHS SO YOU BUY A PUT TO PROTECT THE STOCK YOU OWN.
SELLING PUT OPTIONS SELLING SOMEONE THE RIGHT TO SELL YOU A SPECIIFC STOCK AT A SPECIFIC PRICE UP UNTIL A SPECIFIC DATE. EXAMPLE AMERICAN BARRICK $39.07 YOU SELL SOMEONE THE RIGHT TO SELL YOU BARRICK FOR $40 ANY DAY UP TO JAN, 18, 2014. THEY PAY YOU $8.50 PER SHARE – 100 SHARES = $850. YOU KEEP THIS MONEY (THE PREMIUM) NO MATTER IF THEY SELL YOU THE STOCK OR NOT.
SELLING PUT OPTIONS IF THEY SELL YOU BARRICK AT $40 (AGREED UPON PRICE) – YOUR NET COST IS $40 MINUS $8.50 (OPTION PREMIUM YOU RECEIVED) = $31.50 IF THE STOCK STAYS ABOVE $31.50 YOU MAKE MONEY – FOR EVERY DOLLAR ABOVE $31.50 YOU MAKE A DOLLAR TO A MAXIMUM OF THE $8.50 YOU RECEIVED FOR THE OPTION. YOUR MAXIMUM GAIN IS $8.50 – EVEN IF THE STOCK SKYROCKETS BECAUSE THE PUT BUYER WILL NOT SELL YOU THE STOCK AT $40 IF HE CAN GET MORE IN THE MARKET. IF THE STOCK DROPS TO $35 – YOU MUST BUY IT AT THE AGREED UPON PRICE OF $40 – YOUR COST IS $31.50. MARKET PRICE IS $35 – YOUR GAIN IS $35 - $31.50 = $3.50 PER SHARE. IF THE STOCK DROPS TO $25 – YOUR LOSS IS $31.50 MINUS $25 = $6.50.
SAMPLE OF EXCHANGE TRADED FUNDS GLD - gold EWI - mirrors Japanese index SLV - silver EZW - Latin American stocks USO - oil FXI - Chinese Xinhua 25 Index DBB - base metals UNG – natural gas MOO - agricultural stocks JJC – copper NLR - nuclear stocks GDX - gold stocks FXC - Canadian dollar IBB - Nasdaq biotechnology stocks FXY - Japanese yen RYF - US financial stocks FXE – Euro REMX – rare earths HXT – mirrors S&P/TSX 60 DIA - mirrors Dow Jones SPY - mirrors S&P QQQ - mirrors Nasdaq 100
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