I'm considering a credit spread on TOL for Sept. Buy the $12.50 put. Sell the $14 put. Credit of $0.30. If I did the trade, it would be a strictly technical trade, as its current fundamentals are poor. The reason I'm considering it, is stated below. However, I'd need the stock to trade in the $17.50 area to earn the credit I desire. A credit of $0.30 doesn't seem like much. However, in the "context" of there being a small $1.5 gap between the strikes, my strike being 20% OTM from that $17.50 price, a R/R of 4:1, and the strong downside tech support in the $14 area.... its a trade I'm considering. My question is, what other strategies might I consider, other than a credit spread? http://finance.yahoo.com/q/bc?s=TOL&t=1y&l=on&z=m&q=b&c= Putz Master
IV is measured in % and no 200% IV is not common. As mentioned by another poster there is a significant news event which will occure during the life of that option. You dont collect 3.20 if the stock stays right here since you'll be assigned on the 5 call which is 2 dollars in change in the money and therefore you'll lose that 2 and change on the stock. You only can hope to collect the time premium which works out to be about 85 cents give or take. You should include that loss on the stock as part of your % return.
You need to deduct the stock ITM amount of 2.10 [when assigned] from the option premium of 3.20. You net 1.10 [15.5%] if called. You only keep the extrinsic premium, in this case, 1.10.
PM, I personally wouldn't go that far out, but again, that is a personal thing. I see about 79% probability and I think you could do better and get more than 10% premium faster, and with the same risk. 3.3% per month is fine. Beats losing 3.3% per month, and compounded is something like 44% annually. I think you could do well in a different stock for July or even an index in July. Or, you could widen your spread. Again, my opinion only. The reason I say that is summer is coming and typically slow,....but who really knows. also, July 4th is coming and has adverse effects on options typically, because most folks are not trading, they are on vacation, etc. so decay is profound during this time of year and is great for this type of trading. I am right now, looking for rollouts to July for several of my position in the indexes, specifically, NDX and SPX right now,.....just looking for the proper entry. I prefer to have my money compounding consistently. This is your money, (I assume), and it is ultimately your call.......good luck
You can't handle basic maths, so I question the model which arrived at your 79% figure. Post less, read more.
The amount of "trading" people do has no effect on the decay of the option. decay is a function of time and other objective variables.
<<< I personally wouldn't go that far out, but again, that is a personal thing. I see about 79% probability and I think you could do better and get more than 10% premium faster, and with the same risk. 3.3% per month is fine. >>> I also prefer July. Unfortunately, the strikes I desire are not avaliable for July.
Xflat and Atticus, Sorry, maybe there is some confusion here. Maybe I need to mention I own the stock, not the options. Does that make more sense? For clarification: I bought, ( in 2 entries), xxx shares with a cost basis of $7.10. I have received, and will get to keep the option premiums, ($3.20 each) I collected for selling the $5 calls against the stock. it's not hard to see why I don't care about the options technicals because I don't own them. So now we are left with only 2 things happening come June 19th, either the stock will be below $5 or it won't. Again, this is a small position I have that I saw an opportunity. I am also armed with other management strategies, if, in fact the stock goes wacky on the news. To me, news is noise and I wouldn't hang my hat on news in this market. Look what happened a week or so ago,....whoda thought the market would rally on bad news?...