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Short Term Expiration Activity. BCSI Example. Thursday 11/18/10- Sold 4 Nov $26 Puts for $.65 Sold 5 Nov $25 Puts for $.35 Total Collected: $26 Puts - $154.29 $25 Puts - $171.43 Total Collected - $428.58.
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Thursday 11/18/10- Sold 4 Nov $26 Puts for $.65 Sold 5 Nov $25 Puts for $.35 Total Collected: $26 Puts - $154.29 $25 Puts - $171.43 Total Collected - $428.58
Thursday Price on BCSI:Open $26.92High $27.43Low $26.72Close $27.10
Thursday Close: $27.10% Drop to $26 = 4.1%% Drop to $25 = 7.7%
Net Return: Sale of $26 Puts - $257.15 Sale of $25 Puts - 171.43Purchase of $26 Puts – (102.86) Total Gain on Deal - $325.72
4 x 100 x $26 = $10,4005 x 100 x $25 = 12,500Total Margin = $22,900Cash Required x 20% = $4,580
Sell Nov $26 Put for $.65Buy Nov $25 Put for .35Net Credit to Account-$.30
Margin Required $26 - $25 = $1.00Less: Credit Received of $.30 $.70Net Margin = $.70 x 100 = $70
Let’s Assume you sold 10 Spreads$70 x 10 = $700Margin Needed $70 x 10 = $700If held to close on Friday:Return = $300 / $700 = 42%
Sell 10 Nov $25 puts @ $.35Buy 10 Nov $24 Puts for $.10Net Credit Received $.25$.25 x 100 = $25 x 10 = $250$250/ $750 = 33% Return
Time of the MonthWhere PremiumErosion is theFastest!1. The Weekend Before Expiration2. The last day ofExpiration
Strategies to Capture Short Term Premium … 1. Sell a Naked Put 2. Sell a Bull Put Spread 3. Sell a Bear Call Spread 4. Short Term covered call5. Vertical Spreads
1. Selling a Naked Put Pros: a. You collect option premium b. You can earn profits without owning the stock Cons: a. You need to be approved by your Broker to sell Naked Puts as it is considered a “risky” transaction b. Margin required in some cases, is the full value of the stock represented by the puts you sell
2. Sell a Bull Put Spread-Bullish Strategy Pros: a. Considered less risky than selling naked puts b. The spread offers downside protection c. Typically, approval by the Broker is less stringent than selling puts d. Margin is less than selling puts Cons: a. Less profitable than selling a naked put because you are buying a put at a lower strike price
How to Place anorder for a Bull Put Spread?Sell a Put at a Higher Strike PriceBuy a Put at a Lower Strike Price
Margin Required fora Bull Put SpreadDifference in Strike PriceLess the Credit Received.Eg, Sell a put at $20 Strike for $.80Buy a put at $17.50 for $.25Net Credit Received is $.55 or$55 per Spread.
Difference in Strike Prices$20 - $17.50 = $2.50$2.50 x 100 = $250Less Credit of $55Net margin Required = $195If you collect the full $55,yourreturn is55/195 = 28%
3. Sell a Bear Call Spread- Bearish Strategy Pros: a. The spread offers upsideprotection b. Broker approval is less stringent than selling naked puts c. Margin is the same as Bull Put Spread (Less than selling naked puts) Cons: a. Like the Bull Put Spread, less profitable than selling naked puts, but also less risky
How to Place anorder for a Bear Call Spread?Sell a Call at a Lower Strike PriceBuy a Call at a Higher Strike Price
Margin Required is theSame as the Bull Put SpreadDifference in Strike PriceLess the Credit Received
Bear Call Spread ExampleSay you think DV will close under $45 with 1 ½ weeks to expiration.Stock trading at $44.01.Sell 1 Dec $45 call for $.70Buy 1 Dec $50 call for .05 Net Credit to Account = $.65or $65 per Spread
Bear Call SpreadMargin RequirementDifference in Strike Prices-$50-$45 = $5Net Credit Received = .65$5 - .65 = $4.35$4.35 x 100 = $435 per SpreadProfit Potential is DV closesunder $45 in 1 ½ weeks.65 / 435 = 14.9%
Short TermCovered CallsBuy Stock and SellCalls Againstthe Stock inthe Front Month
This is a StrategyI Love!Returns can be upto 5% for 2 Weeks.And if you don’t getassigned, you cansell calls again!
Vertical Call SpreadDefinition: Purchasea Call Option at onestrike price andSell a Call Optionat the nexthigherStrike Price.
Vertical Put SpreadBuy a Put at a higher Strike priceSell a Put at a lower Strike Price
You can use thisStrategy to takeadvantage ofthe limited timevalue in an option
Vertical Call ExampleTIE is trading at $18.58on 12/7 and optionexpiration is on 12/17.Buy (1) Dec $19 call for $.40Sell (1) Dec $20 call for $.15Net Debit of $.25 per Spread
TIE Vertical Call ExampleThe cost is $25 per spreadto buy the $19 call andsell the $20 call that expirein 10 days.If TIE moves up to $20, the$19 calls will be worth $1 or$100 per spread allowingyou to make 4 times your money
All these Strategies arebased on taking advantage of when Time Value willerode the fastest.
Fastest Time Decay …1. The weekend before expiration2. Thursday of expirationuntil Friday afternoon ofexpiration