Questions About Option Trading
The other day I post a message on Yahoo stock message board to asked suggestions on what direction I should take going forward with regard to the 4000 thousand shares of Bank of America I bought. The average share price I get in is at $11.25. So it is under water and I didn’t know what will happen on next Tuesday. A few person on the board have suggested that I sell call options while I am waiting for the stock price to bounce back. Frankly I never traded options and I have always considered options were something I should never touch. But the suggestions really interested me. It is not the first time I hear that. As you can see Bob’s on comment on this post Wells Fargo Is Over Valued at $25.70
I’m a long term holder and will own it for the next 5 years or more. I see this as an opportunity to sell options against the stock. I recently sold June 28 calls @ 1.60 and I am willing to risk having some shares called away at 28.
So I have study the options trading procedure in my stock trading account. The minute I finished the study I felt it open up my eyes and I felt I have missed out some big big earning opportunities for the past 10 year when I was a long term holder of some of the stocks. But I really have doubt and I need some help to clearing them out.
Bank of America Jun Options Chain
I look at Bank of America’s June 20th call options. See the above picture.The bid pice of Jun 20th call option with stick price at $12 has a premium iof $0.61. My question is If I sell 40 this contracts (40 X 100 share per contact = 4000 shares) I can net 4000 X $0.61 = $2,440 doesn’t matter where BAC stock price is heading next Tuesday. Am I right?
My next question is if some time in the next few weeks before the option expiration day Jun 20th BAC’s price come above $12 then someone who purchased my calls will exercise the calls and pay me $12 per share for my 4,000 share. Am I right? When the buyer exercise the calls I can make 4,000 X ($12-$11.25)=$3,000. So if I decided to hold the $4,000 share potentially I can make $5,440 before Jun 20th but I can make $2,440 for sure. Am I right?
My third question is if I decide to hold past June 20th and I sold 40 contract of this calls. Do I need to do anything to close the option position. If the buyers do exercise the options to buy my shares do I need to do anything?
Thank you very much for help me out.
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Hi Andrew,
To get you started there are some free online online tutorials at: http://www.optionseducation.org/default.jsp
Just as a rule stay away from high priced option education. There is tons of great information available for free.
I think of covered calls as a planned sale. If you sell covered calls, the option strike price is the price where you are willing to sell. If you sell BAC June 12 calls for $.60. and the stock is at or above 12 on June 19th your stock will be “called away”. You keep the .60 and $12 per share. If BAC settles below $12 you keep the stock and the $.60. With American style options, stocks can be called away anytime, even below the strike, but this is extremely rare. Usually exercises are only done at expiration.
Covered calls are considered a simple strategy, but there are lots of ideas surrounding this type of trade. There are lots of books, blogs, newsletters etc just on covered call strategies. Try out the tutorials, and if you still want more info email me privately.
Good Luck,
Bob
Thanks Bob!!
I post the same question on a forum and I got pretty detail answer from from a person called Mark Wolfinger
The following is the link
http://www.stocktradingtogo.com/forum/stock-questions/9533-i-have-some-question-regarding-option-trading.html#post23185
Great post! Just wanted to let you know you have a new subscriber- me!