Am i thinking about this right?

I am short an SPY nov 105 call at about $5.40 and it is currently tradsing at $5.30......since SPY is currently trading at 109 doesnt that mean that this is all premium anfd as long as the SPY doesnt go above $110 before expiration it will expire worthless and my profit will be $5.40?

my method sees this endless up run ending soon and i feel shorting with a tight stop is as safe as going long......

 

1) You may as well learn the correct terminology

The option price is the 'premium'

The option premium is your option is all 'time premium.' It has zero ''intrinsic value.'

2) Yes, if the option's settlement price is under 110 when the price is determined on SETTLEMENT Friday, the option expires worthless.

Be certain you learn about how European style options (SPX is one of those) settle. It's vital.

See: http://blog.mdwoptions.com/options_for_rookies/2008/07/european-vs-ame.html

http://blog.mdwoptions.com/options_for_rookies/2008/07/european-vs-a-1.html


3) The index does not have to remain below 110 at all times

4) Yes, your profit would be 540

5) Tight stop or not, a naked call option is not the best - and certainly not the safest way to play out your market expectations

Mark

 

thanks Mark....so how would you play this underr the assumption that the market may drift down over the next few weeks

i know this trade is risky....and shorting in this environment is not much fun, I shorted this at 130 yesterday and was $2 in the money....only to watch it drift back against me ytoday (I am trying to let winners run longer)

 

If an option is OTM, all of its premium is extrinsic or time premium. If its trading ITM, the premium is intrinsic (the amount the stock exceeds the strike) and any add'l balance is extrinsic.

With the SPY at $109 and a premium of $5.30 for a 105 call, you have $4.00 of intrinsic and $1.30 of extrinsic premium

 

dagnyt either misread your post or you mis-typed your original. If you sold a 105 call and the spy is at 109, and the call has a value of 5.30 and a basis of 5.4 then....

It's actually $4 in the money (intrinsic value)
And therefore has $1.30 of time value (extrinsic value)

If it expired with spy @109, you'd be exercised and be short shares @109 with a cost basis of 105. Implying a $4 loss. But you got $5.40 premium for this trade so if you sold your shares immediately @109, you'd have a net profit of $1.40.

 

Mark sorry you go that one wrong.

He is short the 105 calls, if the SPY is trading at 109 and the 105 calls are trading at 5.30 then those 105 calls have 4 dollars of intrinsic value and 1.30 of time value left in them. Now I didn’t check to see if his prices are correct but based on the facts he posted my answer is correct.

If the SPY closes at 110 he will be assigned on the call and theoretically will only make 40 cents less commissions since he sold the 105 call for 5.40.

Original Poster you should expect and will be assigned on those calls so long as the SPY is above 105 on expiration. In fact a price of 110 is meaningless in the realm of whether you’ll be assigned since you are 100% guaranteed to be assigned if SPY is over 105 at expiration. You’re break even would fall at 110.40 (without commissions) any price over that and you’ll lose money on assignment, any price over 105 on expiration and it will eat into your profit.

 

so I was wrong....I kinda thought so

basically any close above 105 will eat into my profits at expiration...

thanks guys

 

My mistake. Thank you.

 

I got is so wrong I even thought it was SPX, not SPY.

I apologize to the board.

Mark

 

Also we are not talking about SPX option. It is a plain equity option on SPY. Mark was surely in hurry or had some prejudice

My 2 cents to OP, please buy some decent book on options and read it before doing any more trade on options.

This was probably not the best bet if you are hoping for SPX to crash badly by NOV. You'll not make any extra money if SPY drops any further than 105. That is your ceiling... But hey! 5.40 is good money if you can get it all...