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Post by babaoriley on Jan 8, 2014 2:17:37 GMT -5
mnkdfan, you asked about this comment of mine: "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." Instead of using the term "expiry" which is shorthand, I should have said "an option with an expiry right after an earnings release date" and it would have been far clearer. For example, NFLX reports around Jan 24; if I sell an option that expires prior to that, I won't worry as much if the strike price is relatively close to the money. But if I am trading an option which expires soon after the earnings release date, I'll give myself a lot more cushion between the current price and the strike price I select, and a stock like that can move, literally, $75 in a day after earnings release. It move that much upward last year one day after earnings release, and the stock was only about $100 at the time, not it's around $335, so you can only imagine. The premiums are great, but so is the risk.
Let's say you wanted to play DE (Deere) - and these are made up numbers, but let's say the stock's at $90, and let's say we're not dealing with an earnings release date, so if I sell an option with an expiry date within a month or so, well, I'm likely to go within a two or three bucks of the current price. Any more than that, and I would likely not be getting sufficient premium (this is all personal preference), so I wouldn't go farther from current price that a couple, three bucks. On the other hand, I might go out 4-6 months and sell an $80 put (again, current price of stock is assumed to be $90), figuring the stock won't go down ten bucks in that period of time, or even might go a year, and go with a $65 or $70 strike on selling put options.
So, let's say I chose a $70 January 2015 put option - I can get around 1.90 for that. So I do 10 options and get about $1,900 in my account now. Now the question is how much did I have to put up to do that transaction, and let's assume we're using cash for security and we have a margin account. The broker will likely require you to put up about 15% to 20% of the full amount of the exercise, so let's say 20% of $70,000, so $14,000. Well, you just picked up $1,900, so you'll have to come up with another $12,100 of your own cash (or the value of marginable securities you may own in that account). So that's over 15% for a year, but remember, you'll never make another dime off that transaction, other than the $1,900, but the good thing is you get it today. So Deere would have to go to about $68 to break even, and below that, the losses tally up. You have too many positions like that (leveraged with margin) in volatile stocks in a market crash and you will not only lose all your principal, Mr. Margin will be paying a very nasty call to you!
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Run up.
Jan 8, 2014 12:54:49 GMT -5
Post by Chris on Jan 8, 2014 12:54:49 GMT -5
I likely gave you the name back a year or two ago, Chris, glad you took it seriously! Yes, you did give me that book recommendation. Thank you! It was a very easy read and would give anyone seeking to learn about options a solid fundamental understanding. Sorry about your Kings! My LA Lakers got killed by the Dallas yesterday!
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Post by BD on Jan 8, 2014 15:57:49 GMT -5
What a finish today. Congrats, everyone!!
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Run up.
Jan 8, 2014 16:15:11 GMT -5
Post by babaoriley on Jan 8, 2014 16:15:11 GMT -5
Really was great! What is it that MNKD does again?
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Run up.
Jan 8, 2014 16:18:33 GMT -5
Post by rak5555 on Jan 8, 2014 16:18:33 GMT -5
baba, you are in rare form today. if this is how you are when we are up $.50, I can hardly wait to see what will happen when mnkd is up $5
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Post by babaoriley on Jan 8, 2014 19:21:49 GMT -5
"baba, you are in rare form today." Well, rak, so was MNKD stock! But perhaps not so rare going forward? Geez, I hope the late, big volume, upward action is the result of a positive and accurate leak about an impending partnership.
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Post by MnkdMainer (MM) on Jan 9, 2014 1:22:29 GMT -5
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 Milachka, Your entire post is extremely helpful and well articulated. I just need clarification of the language quoted above. Do you mean: 1. Sell some of my long position and purchase calls? I agree this is expensive. 2. Sell some of my long position and replace with call spreads, such as buying August $6 calls and selling August $11 calls. (Would you suggest selling covered calls?)
Thanks, MM
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Post by MnkdMainer (MM) on Jan 9, 2014 1:42:52 GMT -5
Baba, Ashiwi, Milachka, and Chris,
Thank you all for your excellent feedback and advice.
MM
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Post by milachka63 on Jan 9, 2014 7:02:36 GMT -5
Milachka, Your entire post is extremely helpful and well articulated. I just need clarification of the language quoted above. Do you mean: 1. Sell some of my long position and purchase calls? I agree this is expensive. 2. Sell some of my long position and replace with call spreads, such as buying August $6 calls and selling August $11 calls. (Would you suggest selling covered calls?)
Thanks, MM
Of course it depends on your expectations about MNKD, your timeframe and if you want to swing for the fences or minimise risk - If you are very confident in the decision and if you definitely expect MNKD to explode to 20 or more this year, I'd buy naked calls. I'd take the Jan 2014 5 calls (@ 2.70) as they are hardly more expensive than the August calls. I would completly replace my shares with calls and I'd buy 1 contract for roughly every 90 shares. The profit potential for every 1000 shares is then: 1000*(20 - 5 - 2.7)/0.9 = 13667 Your potential loss for every 1000 shares: (1000*2.7)/0.9 = 3000 Profit potential for long shares: 1000*(20-6) = 14000 Potential loss: probably 5 * 1000 = 5000 So for a nice reduction in risk, you get the same profits. If MNKD does better than 20, the numbers only get better - If you think MNKD will have a hard time getting above 15, I'd consider replacing all my shares with a 5/15 spread (again JAN 2015) at 1.70. Maybe buy 15 contracts for every 1000 shares. MNKD 15: The profit potential for every 1000 shares is then: 1.5*1000*(10-1.7) = 12450 Your potential loss for every 1000 shares: 1.5*1000*1.7 = 2550 Profit potential for long shares: 1000*(15-6) = 9000 Potential loss: probably 5 * 1000 = 5000 MNKD 10: The profit potential for every 1000 shares is then: 1.5*1000*(5-1.7) = 4950 Your potential loss for every 1000 shares: 1.5*1000*1.7 = 2550 Profit potential for long shares: 1000*(10-6) = 4000 Potential loss: probably 5 * 1000 = 5000 So for a nice range of prices, you are better off with the spread. If you think MNKD will have difficulty going over 10, you might use the 6/10 or 6/11 August spread. So there are plenty of options and you could consider a mix of them. But I'd replace ALL my shares with options.
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Post by milachka63 on Jan 9, 2014 7:03:13 GMT -5
Milachka, Your entire post is extremely helpful and well articulated. I just need clarification of the language quoted above. Do you mean: 1. Sell some of my long position and purchase calls? I agree this is expensive. 2. Sell some of my long position and replace with call spreads, such as buying August $6 calls and selling August $11 calls. (Would you suggest selling covered calls?)
Thanks, MM
Of course it depends on your expectations about MNKD, your timeframe and if you want to swing for the fences or minimise risk - If you are very confident in the decision and if you definitely expect MNKD to explode to 20 or more this year, I'd buy naked calls. I'd take the Jan 2014 5 calls (@ 2.70) as they are hardly more expensive than the August calls. I would completly replace my shares with calls and I'd buy 1 contract for roughly every 90 shares. The profit potential for every 1000 shares is then: 1000*(20 - 5 - 2.7)/0.9 = 13667 Your potential loss for every 1000 shares: (1000*2.7)/0.9 = 3000 Profit potential for long shares: 1000*(20-6) = 14000 Potential loss: probably 5 * 1000 = 5000 So for a nice reduction in risk, you get the same profits. If MNKD does better than 20, the numbers only get better - If you think MNKD will have a hard time getting above 15, I'd consider replacing all my shares with a 5/15 spread (again JAN 2015) at 1.70. Maybe buy 15 contracts for every 1000 shares. MNKD 15: The profit potential for every 1000 shares is then: 1.5*1000*(10-1.7) = 12450 Your potential loss for every 1000 shares: 1.5*1000*1.7 = 2550 Profit potential for long shares: 1000*(15-6) = 9000 Potential loss: probably 5 * 1000 = 5000 MNKD 10: The profit potential for every 1000 shares is then: 1.5*1000*(5-1.7) = 4950 Your potential loss for every 1000 shares: 1.5*1000*1.7 = 2550 Profit potential for long shares: 1000*(10-6) = 4000 Potential loss: probably 5 * 1000 = 5000 So for a nice range of prices, you are better off with the spread. If you think MNKD will have difficulty going over 10, you might use the 6/10 or 6/11 August spread. So there are plenty of options and you could consider a mix of them. But I'd replace ALL my shares with options.
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Post by babaoriley on Jan 9, 2014 8:02:48 GMT -5
Nice job, milachka!
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Post by MnkdMainer (MM) on Jan 9, 2014 9:04:52 GMT -5
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Run up.
Jan 9, 2014 13:10:35 GMT -5
Post by nemzter on Jan 9, 2014 13:10:35 GMT -5
12M+ shares traded today, shorts covering?
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Post by babaoriley on Jan 9, 2014 13:44:08 GMT -5
12M+ shares traded today, shorts covering? One would think that has something to do with it, nemzter. But the questions are, why and why now? Shorts are shrewd and I believe the big time shorters have some sort of way to more closely monitor followings at companies than the retail folks like us. That's really sugar-coating what they do. So, what we're seeing could be a part of the short squeeze that we all discuss and wish for, etc. I'm more a believer in shorts figuring more graceful exits than covering at a loss - how embarrassing is that? Or, this could be a somewhat surprisingly strong, early run similar to what happened early last year? I don't believe there will be any blockbuster info related at the JP Morgan conference, those things do not happen at conferences in my experience (even when the conference time is after market hours), but perhaps before the conference something will happen and they can talk and talk and talk about it at JPM - that would be a pleasant change of pace - talking about a partnership that has actually happened! Whatever all this is about, let's hope it continues!
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Run up.
Jan 9, 2014 14:21:55 GMT -5
Post by nemzter on Jan 9, 2014 14:21:55 GMT -5
Let's hope it stays this way, I have my doubts we will go higher (been long enough here to live with the big up/down swings), but would love to see it keep going!
We're either going to be celebrating at the shareholders meeting this coming May or looking for a bridge to sleep under.
GLTA!
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