The idiots way to options riches

Hopeful said:

165/6855 is a 2.4% return in about 7 weeks. Annualised is about 50% return.


No, 18% return - not so hot eh. (well, I did say "idiots guide" didn't I).

Anyho, continuing with this...

(Oct 30 at the close) I think with the market going so well there's a good chance RIG will start to follow along soon. Targetting $83 in about 2 months I propose to sell JAN 80 Calls for 2.20 covered by the stock at 71. See you again in January!

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At January expiry (19th) RIG closed at 75.80 , would have kept the premium of 2.20 and would have kept the stock too. Would have written another one (say an $80 Feb call for say $2.00) at Jan expiry , which would also have expired worthless.

So simply selling covered calls has worked really well so far. Let's do another one:

Sell May $85 calls for $1.80. See you in May.

Hopeful said:

At January expiry (19th) RIG closed at 75.80 , would have kept the premium of 2.20 and would have kept the stock too. Would have written another one (say an $80 Feb call for say $2.00) at Jan expiry , which would also have expired worthless.

So simply selling covered calls has worked really well so far. Let's do another one:

Sell May $85 calls for $1.80. See you in May.

Click to expand...

Why are you writing them so far out in time?

wayneL said:

Why are you writing them so far out in time?

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The shorter term ones are cheap as chips, very unappealing.

BTW, this is just imaginary trading to see what I might do if I were inclined to do CCs in the future. But it's worked well so far, in theory!

Hopeful said:

The shorter term ones are cheap as chips, very unappealing.

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Howdy Hopeful,

"Cheap" can often be a subjective term when it comes to options; remember the acceleration of time decay is greatest (as a rule of thumb) in the final 3 weeks until expiry. If your spread is net credit, this is a bonus. Of course, the inverse is true as well.

Cheers

Hopeful said:

The shorter term ones are cheap as chips, very unappealing.

BTW, this is just imaginary trading to see what I might do if I were inclined to do CCs in the future. But it's worked well so far, in theory!

Click to expand...

OK lets extrapolate this thinking to it's logical conclusion.

If 90 day premium is better than 30 day premium, then 180 day premium must be better than 90 day premium. So why not write the August calls?

Why not write the 2008 LEAP? Why not the 2009 LEAP and get > $10?

Well part of the reason is that you are writing quite a long way out of the money.

It is often stated that theta accelerates as we get closer to expiry so options with 30 days or less till expiry should be written. This is not quite accurate.

It is of course accurate for AT THE MONEY options. However as we go further IN or OUT of the money, theta actually DEcelerates as we get very close to expiry.

For the strike Hopeful is writing, it is actually better to write further out.. 2 - 3 months. It is only when writing AT (or close to) the money that is is better to write with 30 days or less.

Happy brainstorms

At January expiry (19th) RIG closed at 75.80 , would have kept the premium of 2.20 and would have kept the stock too. Would have written another one (say an $80 Feb call for say $2.00) at Jan expiry , which would also have expired worthless.

So simply selling covered calls has worked really well so far. Let's do another one:

Sell May $85 calls for $1.80. See you in May.

Click to expand...

Finally, would have gotten called out. Would have sold RIG at $85 for a nice gain, and would have got the premium out of it too, $1.80. ei 9.20 + 1.80 $11 gain on this trade. I'm starting to wish I had actually done this now...

Now for the summary of this:

Bought stock in Oct at 70.45
Sold Oct 75 call for 1.90 (not called out)
Sold Jan 80 call for 2.20 (not called out)
Sold Feb 80 call for about 1.00 (not called out)
Sold May 85 call for 1.80 (premiums were not good so went for a longer term call, but got called out)

Buy stock 70.45 sold stock 85 = +14.55
Sold options for total premium of +7.00
Profit for 8 months is 21.55 ie $2155 for an investment of $7045, this is 30% for 8 mths or 45% for a year annualised.

Had you bought and held the stock only, 7045 , 9552 (at May exp) that would be 36% or 53% annualised.

Conclusion, just buy the stock, worked out better not to mention commissions. Even better when the mkt is flying options are cheap so just buy calls or do a bull call spread. It was the low premiums which tripped me up forcing me to go out further in time, but then sacraficing the potential upside.

Conclusion, when options are good value (low volitility, market moving up smoothly) just buy them. When options are volitile and expensive sell them! Valid conclusions (all other things being equal)?