I'm new to stock options and am trying to see if i have this strategy right. DNA is trading at 80.00 I think DNA will raise to 85.00 I buy a Aug 80 call for 2.65 I sell a Aug 85 call for 0.95 DNA's price raises to 85.00 I exercise both options (can i do this whenever i want ? ) I buy 100 shares for 80.00, I sell 100 shares for 85.00 for a profit of + 500.00. i subtract the 170.00 paid for the options from the 500.00 profit for a net profit of +330.00 (minus comm and fees) The max risk for this stratagy is -170.00 and the max profit from this stratagy is +330.00. Is this correct ? Thanks for any help
You're pretty far off on many accounts. 1) You cannot "exercise" a sold option. Only the person who bought it from you can, and he can do it whenever he feels like it. 2) The profit you describe occurs only if DNA rises to 85 or above and stays there *at* August expiration. If it happens sooner or later than that, you will make much less. 3) If DNA rises to 85 tomorrow, your short calls will be pretty substantial losers (overcome by your 80 calls, but not by much). 4) If DNA parks at 80, you will lose the premium you paid entirely. In short, if you think it will rise to 85 at August expiration (or BLOW through it before then), then your thinking is correct (aside from #1 above). If you think it will rise to 85 tomorrow, your computations are way off.
Yes, you are corrent in your analysis, but only on option expiration, and u can't ex. the sold option. option exercise is the exception rather than the rule. It occurs frequently when stocks trade ex-div but rarely elsewhere. Think about it this way, if there is time value remaining on the option, you just gave away free money to the mm's and contributed to their kids college fund. Another strategy u might ponder is the time or calendar spread, wherein you sell the 85 aug call, and then you buy the sept 85 call. If the stock drifts to 85 near option expiry, you will make much more $$ than the vertical debit spread. Some may disagree w/me on the merits of otm bullish calendar spreads, but i find them useful. The important thing to keep in mind with the time or calendar spread is volatility. The vega or sensitivity of the spreads value in relation to change in implied volatility is important. you must be bullish on implied volatility as well, because time spreads are vega +. As long as you buy your long option on the lower end of the range, IV will play a lesser role if the stock drifts upward, imo. Vols recently receded on DNA and a calendar spread is certainly a viable option for the near term. If you are unsure of what volatility is, refer to Ch. 4 and 14 of Sheldon Natenburg's Option Volatility and Pricing(Advanced trading strategies and Techniques) which should give you good primer. Good luck.
Try to avoid calls in calendar spread because most of time when market moves up VIX moves down. You have more chance to make money with put calendar spread with less effort.
I agree with volatilitypimp about the calander spread as a better option... Actually you can also you the LEAP option for this too. The advantage is , it acts like a covered call, but with out the large outlay for the shares of stocks. The time decay will be a lot smaller on the LEAP also, as compared to the same month or the next month. A good strategy would to first buy a LEAP in a stock that has had about 20% pull back and has started to rebound. Then wait for about 7-10 days before expiration to sell a OTM call around the last high that the stock just fell from. Watch your breakeven point and DO NOT hold the options past this point. With the LEAP you should be able to do this over and over for a couple months.
I'm not sure I understand this strategy. 1) You're selling diagonals, not calendars with the strategy you describe above. 2) If you're only collecting premium on the last 7-10 days before expiration, you will definitely lose on the leaps. (theta may be small, but on $100 options, it doesn't have to be big to lose money compared to the 10-20 centers you're selling 7-10 days before expiration) 3) It doesn't "act like a covered call" at all--it acts like a diagonal spread. The P&L curve is substantially different. 4) If the stock has a major rally (even if not through your strike), you will lose badly. (LEAPs are going to have a delta of what, .2-.3 at the money? The front month will have a delta of .5?) Perhaps I misunderstood your strategy, but selling calls "at the last minute" would seem to be a sure loser.
The strategy is describe by Lehman and McMillan. They call it "bull calendar spread", "diagonal spread", and "call-on-call covered write". Basically the call you want to write to collect the premium is "covered" by the long LEAPS call. The assumption is that the LEAPS won't lose much value, so you can sell it for a net profit (i.e. you made more on the short call). Or you can write more calls in the months before the LEAPS expiration. BTW, they don't say anything about waiting until the last 7-10 days.
A more common move is to sell and buy back the options to close the positions. I figure that 90% of option positions are closed without dealing with the stock.
The 7-10 days is what I have observed to work out for me. This will limit the amount of time I am exposed to the short call and will have the greatest amout of time decay applied each day until exp.....just my opinion...