Showing posts with label out of money. Show all posts
Showing posts with label out of money. Show all posts

Thursday, 3 April 2014

NYSE&NASDAQ: March options virtual trades

Mar 14 options virtual trades, expired 21 March 2014.

Mar14 virtual trade

1. BAC, return of 33% while the mother share rose 1.2% in that particular period. (magnified power of options, just like call warrants)

2. JPMorgan Chase Co. (NYSE: JPM), advanced US 3++ in 1 week, or 5.93%. I bought the option at $0.98 and it ended up with $3.60. A return of 267% in 1 week time, not bad right? This is the kind of return in US markets.

3. TSLA, a recently hot stock in NASDAQ, where the call option is out-of-money @ strike price of 250, i.e. options expired worthless. A loss of 100% of the capital. 

Not too bad when you are a buyer and you bought at the right trend - unlimited profit and a limited loss of 100%. In real trade I would chose those expire at least 2 months later, so that the price fluctuation will be lower. Still a lot to learn for this financial derivatives.

Friday, 14 February 2014

NYSE: Selling call options: some basic stuffs

This time is the seller of call options. Selling options will always earn you premium, as you get the chance to be the "insurance company", as if collecting premium from buyers who wish to protect their shares. 
Case 1: Out of money

Buy: AMD JanWk5 3.5
Strike price = $ 3.5
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.02*1000 = $ 20 + ($ 15.35 brokerage)
AMD cloased at 31 Jan 2014 = $ 3.43

AMD @ 30 Jan 2014 = $ 3.45. It has little chance to close above $ 3.50, hence the premium is very small. At the expired day, AMD closed below strike price, so premium was collected free by call seller.

Case 2: In the money

Buy: AMD JanWk5 3
Strike price = $ 3.5
Expired date = 31 Jan 2014
Cost: 0.13/options = 045*1000 = $ 450 + ($ 15.35 brokerage)

Call options is in the money at the expired date, i.e. call options will be exercised. I am required to sell the share @ $ 3 to the call options buyer. If I will to buy back immediately, this will cause me a loss of $ (3-3.43) = - $ 0.43 / share. But I collected premium from selling the call. So is a different story.

Based on yesterday closed price of $ 3.70, if I buy back to close my position, my net loss will be:

+ $ 450 - $ 3000 + $ 3700 = - $ 250.

There is something known as Sell Covered Call, which is pretty common in options. Covered here means that you own the mother share, and at the same time, selling call options to earn premium. If the shares go down, the premium collected will be yours. If the share rises, you still earn from having the upside of the mother share. This looks to be a good deal, although still need some time to have a deeper look on it.

Wednesday, 12 February 2014

NYSE: Buying call options: basic things to know

2 cases of call options are considered:

1. in the money: A call options is in the money when share price > strike price (opposite to put)
2. out of money: A call options is out of money when share price < strike price

Case 1: Out of money

Buy: BAC JanWk5 17
 (NYSE: BAC, Bank of America Corp)
Strike price = $ 17
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.06*1000 = $ 60 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 16.75

BAC price at 30 Jan 2014 = $ 16.93. As a call options buyer, I anticipate the share price to be higher than $ 17 on the expired date. This did not happen, so my premium is collected by the seller. The call options expires worthless.

Case 2: In the money

Buy: BAC JanWk5 16
Strike price = $ 16
Cost: 0.13/options = 0.87*1000 = $ 870 + ($ 15.35 brokerage)

This call options is most probably to be in the money, as BAC share price is higher than the strike price. Essentially, I paid a premium of  $ (16 + 0.87 - 16.81) / $ 16.81 = 0.4% as compared to buying the mother share directly. This is very much similar to buying call warrants, however, call warrants in Malaysia are all cash settlements, i.e. does not have the option to convert to mother share. 

Note: $ 16.81 is BAC opening price on 30 Jan 2014.

On 31 Jan 2014, this call options was exercised, so I can buy BAC mother share @ $ 16. 

BAC closed @ $ 16.72 on 10 Feb 2014. If I sell the mother share yesterday @ $ 16.71, I would make a profit of 0.71/share from the mother share = $ 710.

Then my net profit is
 = - $ 870 (call options) - 16000 (stock assignment @  $ 16/share) + 16710 + (brokerage)
= - $ 150

If I wouldn't want to incur any loss, I can hold BAC to wait the share price to go up until it breaks even my cost.

Friday, 7 February 2014

NASDAQ: Buying put options, what should you know?

I traded put options to see what happens to the contract when it expire either:

1. in the money: A put options is in the money when share price < strike price (opposite to call)
2. out of money: A put options is out of money when share price > strike price

Case 1: Out of money

Buy: MSFT JanWk5 36 Put
 (NASDAQ: MSFT, Microsoft Corp, everybody knows what this company does)
Strike price = $ 36
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.13*1000 = $ 130 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 37.84

At the expired date, MSFT stayed at $37.84, which is higher than the strike price, meaning that the options is out of money, i.e. worthless. It was brought to close automatically (zero cost).

As a put options buyer, I anticipate the share price to drop from $ 36.86 (30 Jan 2014) to $ 36, i.e. a fall of 2.3% in 1 day, which is rather a slim chance. The premium is collected free by the seller. Nobody will exercise his right in this case, as it would mean to selling the share @ $ 36 and then buy back @ current market price of $ 37.84, such a stupid action isn't it? 

MSFT options


Case 2: In the money

Buy: MSFT JanWk5 38 Put
Strike price = $ 38
Cost: 0.13/options = 1.59*1000 = $ 1590 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 37.84

On 31 Jan 2014, MSFT share price is $ 37.84 < strike price $ 38, i.e the options is in the money, it will be exercised automatically. Hence, I can sell MSFT @ $ 38 to put options seller. But I don't have any MSFT share in my portfolio, this means that I will have to "short sell" MSFT to the seller, causing me to "earn" $ 38*1000 = $ 38.000 by selling the shares.

I need to buy back the share to close my position. At this time, MSFT share is trading at $ 37.84, which means that I earn a difference of $ 160 immediately. But then in purchasing the put options already cost me $ 1590, which means that I actually incur a loss of $ -1590 +  160 + (brokerage) = -$ 1430. As a put options of strike price @ $ 38 is highly possible to be in the money during expiry, which is why the price is so high. Being a put options buyer, I expect the share to go down, but MSFT is going the opposite direction against my prediction. In short, as long as your put options is in the money, you will be required to sell the share at the strike price.

Yesterday, MSFT closed at $ 36.18, due to bad market sentiment few days ago. This means that I will make a profit of $ (38 - 36.18)*1000 = $ 1820 if I close my position yesterday.

Net profit = $ -1590 + 1820 + (brokerage) = $ 230.

This is not surprising, a put options buyer will always benefit from a loss in share price.  Not a bad return in such a short time if the direction anticipated is correct right?