|
Post by MnkdMainer (MM) on Jan 7, 2014 1:53:08 GMT -5
... Once the phase 3 trial results were released and it became apparent that there was going To be a "sell on the news" scenario I wrote out of the money covered calls against all of my shares. I recently bought them back for pennies to be safe (keep my shares) should a partner emerge and we have a major pop. ... Again, I'm a neophyte with options, so bear with me please. You're saying you sold covered calls and you recently bought them back for pennies. For some reason, I'm not grasping the concept of buying back covered calls. Can you explain?
|
|
|
Post by MnkdMainer (MM) on Jan 7, 2014 2:01:05 GMT -5
Throughout this year I have sold "PUTS" . It's worked out very well as they have been expiring worthless every month. ... I still have some puts sold for jan and feb which I expect to expire worthless. ... The selling of puts and writing calls have lowered my avg cost and have provided some entertainment while we wait. Selling my shares is always the most difficult thing to do. ... Would you agree that selling puts makes sense, but not if they expire after the expected approval date? Are you not concerned about the stock tanking below $1 per share in the unlikely event of another CRL? At that point, I would want to own puts. But currently they are too expensive, it seems. Would you agree?
|
|
|
Post by MnkdMainer (MM) on Jan 7, 2014 2:07:38 GMT -5
Hi, milachka, not sure I follow. Do you propose buying the August $5's and selling the August 10's to help finance the purchase of the $5's? That's an okay strategy, however, if the stock gets past $10 by August, where does that leave you? You make a nice profit for your $1.00 to $1.20 or so net investment, as you'll get close to $5 when you close the spread (assuming the stock is over $10), so that's a bit over a triple, which is great, but that won't help you swing for the fences like many here like to do. Pretty much all appreciation over $10 is lost by that method, if I'm understanding you correctly. Yes, that is what I was proposing and your assessment of the consequences is also correct: [no] profit beyond MNKD at 10. I have 5/15 call spreads myself as I also harbour some hope that we may go over 10. I am not sure about the 'swinging for the fences' comment though. Assuming that the risk of a bad decision is USD 4 (drop from 5 to 1), I could buy 4 times as many spreads for the same amount of risk. So for 4 dollars of risk I might get 15 dollars of profit between now and August. For the same to happen with shares, MNKD would have to go to 20 by August. I don't think that is likely. So this strategy is also suited for swinging for the fences. Anyway, I proposed is as a risk mitigation strategy while still keeping significant upside. *** I think I understand, but I want to be sure. (See my previous posts.) If I do understand correctly, I agree that the 5/15 call spreads are attractive. What type of 5/15 spread are your referring to? Again, I have not seen August $15 calls in the Yahoo option chain. Thank you in advance for clarifying.
|
|
|
Post by MnkdMainer (MM) on Jan 7, 2014 2:19:51 GMT -5
*** But as an ancillary strategy, for someone who already has pretty much all the stock they want to have (and want to keep what they have), it's not a bad strategy at all. But that's not what I meant by my comment, I was talking about selling warrant or stock covered calls for a strike of $10. Your way, one risks more money, my way, you lower your downside if things don't work out. But I do like the return for the risk of your strategy if one is still in the "I want to make more when this thing hits, but I don't want to risk losing $4 per share on a $5 investment if it crashes, but would be willing to lose a buck to make three if it hits" mode. Here I don't understand you (and I think you should reconsider). By holding stock and selling covered calls at 10 you hang on to most of the downside risk and limit your profit potential in the same way as you would with a long call spread. Basically, being long stock and short covered calls is the same as being short puts which is a good strategy until before the binary event of the decision. I don't think it is a good position to be in on the day of the decision. Please bear with me once again, as I need clarification of the terminology, which is new to me, being a neophyte with options. I DO think I understand when you say, "By holding stock and selling covered calls at 10 you hang on to most of the downside risk and limit your profit potential in the same way as you would with a long call spread." By employing this strategy, one is subject to the full downside risk, minus the premium received when selling the $10 covered calls. Is this what you mean? I'm less certain about my understanding when you say, "Basically, being long stock and short covered calls is the same as being short puts which is a good strategy until before the binary event of the decision. I don't think it is a good position to be in on the day of the decision." Here is how I understand what you are saying: Being long stock and short covered calls means one owns the stock and has sold covered calls, which describes my position (95% long, 5% covered calls). Being short puts means one has sold puts which has been a very good strategy over the last several months. However, it is not a good strategy as the binary event approaches, because one could be forced to purchase the stock at a $4 strike price, for example, when the stock has tanked below $1 per share.
|
|
|
Post by MnkdMainer (MM) on Jan 7, 2014 2:30:51 GMT -5
*** Right now, I have a bunch of naked puts with $4 and $5 strikes for February, as I don't think we're going to get hit hard between now and then. I also have sold some covered calls at a very modest $6 strike for February, so I'll lose the few shares I have if the stock goes above $6 by then, and that would be okay with me. The premiums are pretty generous on the options, and that's something you don't find much of these days in stocks, and, of course, that reflects the level of uncertainty, volatility and risk of this investment. ... As you can tell by now, I'm looking to use options to hedge my risk while maximizing my gain. When you say naked puts, do you simply mean that you have sold puts? Regarding the $4 and $5 strike prices for February, you are not concerned because the stock is not likely to go below $4 or $5 in February. Is this what you mean? I agree with your assessment, if I understand you correctly. However, are you at all concerned about dilution between February and April if a partner is not announced by then? I certainly am, as the company will be running on fumes after February without a partner. Anyone care to chime in on this concern? Thanks again in advance for clarifying.
|
|
|
Post by MnkdMainer (MM) on Jan 7, 2014 2:48:07 GMT -5
... especially on volatile stocks, where you find the best premiums, obviously, I watch out for earnings release dates (on stocks on which earnings matter, not developmental biotech, obviously, there are other dates you need to know for that). I'm willing to sell an expiry right after an earnings release date, but I give myself extra cushion, and still can get a decent premium. I tend to favor one or two months out, but have plenty that are January 2015, and even a couple of Jan 2016. I also have them in most all the months in between, but fewer. If you can only get a dime for a month, it doesn't make as much sense with the commission, so I'll go two months for .20 almost every time (if possible), especially on a single digit stock, as the return for amount set aside to secure the put is pretty darn good. I also try not to have too many puts expire in the same period, especially a short term put, just in case there is a dip in the market at the wrong time, as your shorter term options tend to be sold closer to the money. With MNKD doing well lately, I might consider selling Feb 7's, haven't really looked yet, but sounds like something I may like. I'll still be pleased if it zooms right by $7 by Feb 21! There's a lot here, so I want to be sure I understand. First, I need clarification or rephrasing where you say, "I'm willing to sell an expiry right after an earnings release date, but I give myself extra cushion, and still can get a decent premium." What do you mean by selling an expiry? I though "expiry" was just another word for the option expiration date. How do you give yourself "extra cushion"? I think I understand the rest, except where you say, "the return for amount set aside to secure the put is pretty darn good." Can you clarify, perhaps by giving an example? Can you also give a clarifying example where you refer to "a short term put, just in case there is a dip in the market at the wrong time, as your shorter term options tend to be sold closer to the money"? In your final comment, are you talking about selling Feb $7 calls? If so, are you worried about the upside that you would lose if there were a partnership announcement of the type that we longs have been waiting for? Or are you betting that there will be no partnership announcement prior to approval?
|
|
|
Post by babaoriley on Jan 7, 2014 2:52:03 GMT -5
MnkdMainer, it's not a superior strategy at all, it's just my strategy given that I don't want to sell any warrants right now (for one thing, they are tough to sell at a good price, other than perhaps into a major rally caused by news), but do want to mitigate the downside, while still enjoying much of the upside. If I don't sell anything, then I have to go into my pocket for the $1.30, and I don't want to invest any more. So, I just sell some calls, and if it hits big, I will have many uncovered positions and a few covered.
I think selling the $10's and buying the $5's is very good, especially for someone who has either more to invest, or is willing to change his investment from all stock, for example, into part stock and part this spread strategy. If you want to look for a bit more upside, you might consider going to Jan 2015, selling the $12's and buying the $5's, for example. Or even selling the $15's. By the way, I think your percentage return is 285%, not 385%, but check it out.
I think the spread that Milachka advocated is a wonderful strategy (and if I had just stock, I might well sell some and do just that). But, in any event, I think you need to keep a significant part out of the strategy just in case Spiro and his gang are correct. Remember the $20 to $40 buyout talk; it's far from impossible.
And I certainly am not ruling out doing that spread strategy myself, I may reconsider and put up a few more dollars! Biotechs often yield such opportunities because of anticipation and volatility, and limiting the downside is a very, very valuable thing!
|
|
|
Post by ashiwi on Jan 7, 2014 7:15:35 GMT -5
Mnkdmainer, Back in August soon after the phase 3 trial results came out and the stock started to sell off, I sold covered calls for Jan and Feb with strike prices of 9, 11, 15, &16. I took in very nice premiums since I was going out 5 & 6 months, I figured PDUFA would not be before April and if a partner emerged, my strike prices were far enough out of the money that it wouldn't be the end of the world if there was a huge pop and my stock was called away. Because of the time factor evaporating as well as the continued spiraling down stock price from 8 to sub 5, the premiums dropped to pennies. So I decided to buy back my covered calls for the 9 & 11 strikes to close out the positions. So for example. If I sold 10 contracts for .51 and bought them back for .01 I make $500 for every 10 contracts.
|
|
|
Post by ashiwi on Jan 7, 2014 7:32:12 GMT -5
Mnkdmainer, Once the stock price went below 6, I started to sell "Puts" with strike prices of 4 and 5. I took in nice premiums while confident the stock price would stabilize. If the stock were to take a big hit and go below my strike and the stock was "put" to me, I was getting it at a discount because of the premium that I took in. As long as the stock remained above my strike price, I just get to keep the premium and the put expires worthless. I still have puts sold for February with 4 & 5 strikes which I hope to have expire worthless. I expect a run up before PDUFA. I I'll not sell puts or write covered calls for May because the risk and volatility become too great because of PDUFA.
so to recap: I sell out if the money covered calls when the stock is peaking. I sell out of the money puts when the stock goes down (as long as it goes down without bad news)
|
|
|
Post by milachka63 on Jan 7, 2014 9:40:56 GMT -5
*** Here I don't understand you (and I think you should reconsider). By holding stock and selling covered calls at 10 you hang on to most of the downside risk and limit your profit potential in the same way as you would with a long call spread. Basically, being long stock and short covered calls is the same as being short puts which is a good strategy until before the binary event of the decision. I don't think it is a good position to be in on the day of the decision. Please bear with me once again, as I need clarification of the terminology, which is new to me, being a neophyte with options. I DO think I understand when you say, "By holding stock and selling covered calls at 10 you hang on to most of the downside risk and limit your profit potential in the same way as you would with a long call spread." By employing this strategy, one is subject to the full downside risk, minus the premium received when selling the $10 covered calls. Is this what you mean? I'm less certain about my understanding when you say, "Basically, being long stock and short covered calls is the same as being short puts which is a good strategy until before the binary event of the decision. I don't think it is a good position to be in on the day of the decision." Here is how I understand what you are saying: Being long stock and short covered calls means one owns the stock and has sold covered calls, which describes my position (95% long, 5% covered calls). Being short puts means one has sold puts which has been a very good strategy over the last several months. However, it is not a good strategy as the binary event approaches, because one could be forced to purchase the stock at a $4 strike price, for example, when the stock has tanked below $1 per share. - I am long JAN 15 5 calls and short JAN 15 15 calls (I guess August 15 calls are indeed not available) - "By employing this strategy, one is subject to the full downside risk, minus the premium received when selling the $10 covered calls. Is this what you mean?" That is indeed what I am saying - Now the difficult bit: are you aware of put call parity: Call - Put = Stock - Strike price (discounted)? I'll simplify it by not discounting the strike price (interest rates are very low these days, so the equation becomes: Call - Put = Stock - Strike price This can be reorganized as: Stock - Call = - Put + Strike price The left hand side of this equation is effectively a covered call: long stock, short call. What the equation says is that this is equivalent to being short a put together with the money in you account to cover the put if necessary. Now, why wouldn't I want to be short Puts right before the decision: - Negative decision: I'll have to cover the puts and buy near worthless shares at the exercise price - Positive decision: the puts expire and my gain is limited to the premium Since 'Short put' is equivalent to 'Long stock, short covered calls' I would not want to be in that position either. Since you're only short 5% covered calls, that may not be to relevant, but I wonder why you bother. 5% short calls not significant. You seem very long shares, which means that you are very vulnerable to a negative decision. You could decrease your risk by using the following strategies (but they all come at a cost in case of a positive decision): - Replace by shares with naked calls (but quite expensive) - Replace by call spreads (e.g. August long 6 / short 11 for 0.90), you could afford to buy a good deal more than your current long position and get even more profit than with long shares, but it all depends on the magnitude of the jump I hope this helps. PS Buying back covered calls for pennies means that you buy back the calls when they have lost most of their value before expiry. It is often best to do so as there is very little left to be gained and you stand to lose all your gains on some unexpected good news.
|
|
|
Post by babaoriley on Jan 7, 2014 10:39:20 GMT -5
Great discussion, developmental biotech is a terrific area to employ options, as the premiums are rich. For example, when there is a date more or less certain, like the PDUFA date, you can feel somewhat safe selling puts with an expiry prior to that date, but, as Milachka cautions, you don't want to be caught in that position at the PDUFA date - you get the downside risk, with no upside reward. Unfortunately, taking the opposite position of buying long calls, is pretty expensive for MNKD.
Mnkdmainer, I will answer some of your questions of me later on.
|
|
|
Post by Chris on Jan 7, 2014 17:08:06 GMT -5
Great discussion, I'll add some formulas I've learned about Covered Calls and Naked Puts:
If sold: (strike price + premium earned - purchase price)/purchase price
If expired: premium/purchase price
Put factor= 6(100 PR) (CP - SP)/ (ME)(SP)(SP)
Where:
ME= Months to expiration
PR=Put options premium
CP=Current Stock Price
SP=Strike price
To decide what options to purchase, you can create a list with buy limits and buy ranks after compiling a list of prospect quality stocks using any method you prefer.
You can also use
Buy Limit= L+.15(H-L)
Buy Rank=10(BL-CP)/.25(H-L)
Where:
H=52-week High
L=52-week Low
BL=Buy limit
CP=Current Price of the stock
On top of that you can also use a "TAI" Take Action Indicator
TAI=BR(1+FDA/2(FDA)-CP)
TAI=Take Action Indicator
BR=Buy Rank
FDA=Fifty Day Moving Average
CP=Current Price of the stock
Feel free to ask me questions!
|
|
|
Post by babaoriley on Jan 7, 2014 17:33:53 GMT -5
Options may well work better with a formula like Chris describes. A simple book I used a few years back when I decided to get into selling options (I'd bought options for years, and was pretty much a consistent loser), is called Covered Calls and Naked Puts by a guy named Ronald Greinke (sp?). Sounded simple and it is pretty simple, and he espoused certain parameters. One was only sell calls or puts when the stock was near (within 20% of) its 52 week low (well, in 2008, when I started, there were a lot of candidates!). Another of his rules was to trade only in stocks showing profits over the most recent 5 quarters.
2008 and 2009 and even 2010, were golden years for option selling, you really hardly could miss and the premiums were unbelievable (literally, 4 or 5 times what they are now), because the fear level was so high. Unfortunately, that's not the case now for most stocks, especially those which Greinke would say are trade worthy. So, obviously, I've gone off the formula track and playing by feel, experience, etc. But if is much tougher to make a profit selling options now, than it was 3, 4 years ago.
|
|
|
Post by Chris on Jan 7, 2014 22:39:52 GMT -5
Options may well work better with a formula like Chris describes. A simple book I used a few years back when I decided to get into selling options (I'd bought options for years, and was pretty much a consistent loser), is called Covered Calls and Naked Puts by a guy named Ronald Greinke (sp?). Sounded simple and it is pretty simple, and he espoused certain parameters. One was only sell calls or puts when the stock was near (within 20% of) its 52 week low (well, in 2008, when I started, there were a lot of candidates!). Another of his rules was to trade only in stocks showing profits over the most recent 5 quarters. 2008 and 2009 and even 2010, were golden years for option selling, you really hardly could miss and the premiums were unbelievable (literally, 4 or 5 times what they are now), because the fear level was so high. Unfortunately, that's not the case now for most stocks, especially those which Greinke would say are trade worthy. So, obviously, I've gone off the formula track and playing by feel, experience, etc. But if is much tougher to make a profit selling options now, than it was 3, 4 years ago. Nice! The formulas I shared are from that very book!
|
|
|
Post by babaoriley on Jan 8, 2014 1:55:57 GMT -5
I likely gave you the name back a year or two ago, Chris, glad you took it seriously!
|
|