Vol# 4: Exit strategies: When do you bail on a covered call

Plan on the Exit for the transaction before you get into it!!!


This is probably the most important part of the calculation. If you didn't do throughly homework on the stock you purchasing, you must at least plan on exiting the transaction and calculating ALL of the possibilities for this investment. You should never enter a transaction without planning on the exit.

The ideal case for most covered calls is that the stock price remains the same and you collect the premium. But you have to be prepared for ALL the other possibilities as well. What happens if the stock suddenly take a plunge downward on you? Do you keep the current option open and let it expire, or do you roll down the option to the next lower strike price? What happens if the reverse scenario occurs and the stock suddenly shoots up on you? Are you going to leave the option and get assigned at expiration or are you going to roll up with the stock price?


If you do not plan at all on an exit strategy you may end up wondering how in the world you lost on this transaction when the expiration date comes. By planning on an exit strategy early and writing it down in your worksheet you are also able to check your position at any time during the expiration time frame and deciding if it is still make sense to remain in the position.

To me, that’s the best way to decide if you should exit a stock. If you can say to yourself that this is a good buying point, then you should stay invested. If you aren’t sure if you would buy the stock at the current price, get out. I always wonder those analysts analysts who rate a stock a “hold”. Who would hold the stock with prediction that it won't go up at all. All stocks should be only either a buy or a sell. If you aren’t sure, then it is a “do not hold” because another stock is probably a better place to invest your cash.

For example, if I got assigned a stock from a naked put, I immediately sell a covered call on it the following trading day. A predefined strategy and then the only decision I have to make is at what strike to sell the covered calls base on the stock's situation.


Have fun and Always begin with an end in mind!!

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Vol #3 Strategy with Calculation on returns....

Today let's do some simple calculation on our expected returns
If you establish a buy/write on Microsoft (MSFT) trading at $54.05

February 55 call (3 weeks): $1.35-$1.45
February 60 call (3 weeks): $0.15-$0.25
February 65 call (3 weeks): $0.00-$0.10
March 55 call (7 weeks): $2.45-$2.55
March 60 call (7 weeks): $0.75-$0.80
March 65 call (7 weeks): $0.20-$0.25

Let say investor choose March 65 calls:
With the purchase of 400 shares MSFT and writes 4 March 55 calls @ $2.45.
We need to calculate for every possibilities:

1. Static Return
What if the underlying stock remains unchanged for the 7 weeks.
The return will be $2.45 / ($54.05-$2.45) = 4.75%
You'll need to annualized this for comparing buy /writes using options with varying terms to expirations. (Some 3 weeks, some 7 weeks) (4.75% x 52 weeks) / 7 weeks = 35.3%

2. If-Called Return
Best case scenario: If the option is called. This require the underlying stock to raise the above targeted price.
Maximum return the strategy can generate: ($2.45 + $0.95) / ($54.05 - $2.45) = 6.59%
Annualized it: (6.59% x 52 weeks) / 7 weeks = 49%

Now we have our two scenarios:
If the stock stay relatively unchanged (below the strike price) vs bull market (over the strike price)

Returns 4.75% vs 6.59%
Annualized 35.3% vs 49%

Of course, the annualized rate of returns only applicable if and only if you can get the same returns 6.59% over every 7 weeks in that whole year. :)

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Vol #2: Four basic strategies for Stock Option

How we come out with four basic strategies?


Well.. there's two, Call and Puts option. And when you buy something, you must have someone selling it. There's how option is created anyway. With four combination this create the base four strategies.

For every buy of Option, there must be someone else selling the Option.
For every investor who obtains a right, the other side someone must assume an obligation.

Seller = Writer : Writing a Call option is the same as issuing a call option for someone to purchase, to reduce confusion, from here onward, writing a call option means assuming obligation or issuing the call option to the market.

An Example, the buyer of an call option obtains the right to purchase 100 shares of Intel stocks @ $22 until the third Friday in May and the writer of that option assumes the obligation to sell 100 shares of Intel (NASDAQ:INTC) at that price if the buyer decides to invoke his right. This is called contingent obligation because the writer doesn't know if he needs to meet the obligation in the future. It is up to the option buyer's decision.

Summary, four options strategies:
Write Call, Buy Call options
Write Put, Buy Put options

1. Buying Call option
Bought $18.20 May GOOER.X (stock NASDAQ:GOOG @ $590)
Current Price = $593

Objective:
Bullish market (Anticipate Market is going up)
Risks:
Option purchase cost: $18.20 x 100 shares = $1820
Risk is lower than stock ( $1820 option vs $59,300 stock)
Stock must increase in price some time over the life of the option or it'll expire worthless or sold for less than the purchase price.
Not Entitled for Dividends
Gain:
Unlimited upside, if the option expires, buyer can upgrade to purchase stock and fully utilize the upside of the stock.
Break even @ Stock + option purchase price = $593 +$18.20 = $611.20

2. Buying Put option
Selling shares short means to sell the shares at $60 and when it drops to $50 buy it back to cover the shares. Never ever do short selling, cause this is how you go bankrupt and jump off a building (not all, some just runaway).
!!!! An alternative to that is to purchase a put option.
With Yahoo shares trading at $28.88, the May $28 put was offered at $2.90.
Purchasing this option gives its holder the right to sell the shares at $28 until the option's expiration date.

Objective:
Bearish market (Anticipate Market will go down)
Risks:
Put buyer can't lose more than $2.90 the premium paid.
Gain:
Every dollar the stocks drop, the Intrinsic value increases. (option value increase)
Break even @ stock - premium = $28 - $2.90 = $25.10

3. Writing Covered Calls
What's different between covered and uncovered calls.
If the option writer is in a position to fully meet the obligation then is covered call writing.
If the option writer doesn't own the stock or have money to cover it then is uncovered or naked call writing.

With Yahoo shares trading at $28.88, the May $28 Call was offered at $2.90.
Purchasing this option gives its holder the right to buy the shares at $28 until the option's expiration date.

Comparing stock holder and covered call writer

Objective:
Bullish or Stable market (Anticipate Market will stay or goes up)
Risks:
Both also bear the full downside risk of stock. However, writer receive the premium $2.90 on the next business day when he write the call option, which mean his risk is less by that amount. (Normally option is 5% of stock price so his risk is 95%)
Gain:
Bullish market for Stock holder = Winner
Market unchanged good for Covered Call Writer as he earns premium for the time.
Both gets dividend of the stock

4. Writing Covered Puts
With Yahoo shares trading at $28.88, the May $28 Put was offered at $2.90.
The writer of this option gives its buyer of the option the right to sell the shares to him at $28 until the option's expiration date.

Writer looking to add shares to his portfolio but at a lower price than current market value.

Objective:
A little Bearish market (Anticipate Market will go down a bit)
Risks:
Ownership of the stock if the stock price drop to the the targeted price. Then will have to bear with the full downside of the stock if it continues to go down.
If changes mind and don't want to purchase, you can buy a put option to counter yours before the market assigns to you.
Gain:
Stock never goes down to Targeted price : Put writer gains premium, and no stock purchase
Stock goes down to Targeted price: Put writer gets the right to buy the stock at that price with the premium as a subsidy.

Key take away for this post covered the risk, gain and objective of the buy/write of calls and puts.

Stay tune for next Volume on Strategy with Calculation on returns....

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Merlion in Sentosa Island

The Merlion is one of the most well-known tourist icons of Singapore.

The merlion is a statue with the head of a lion and body of a fish. Its name comes from combination of mermaid and lion.
The merlion was designed by Fraser Brunner in 1964 and normally people makes it as a souvenir that represent Singapore.

Based on the Singapore Tourism Board's publicity campaign, the lion head and fish body of the creature recalls the story of the legendary Sang Nila Utama, who saw a lion while hunting on an island, en route to Malacca. The island eventually became the sea port of Temasek, a precursor to Singapore.

The original or the first ever was built from cement fondue by the late Singapore craftsman, Lim Nang Seng. And from then on it has been replicated 5 across Singapore.

These include the two at Merlion Park, one a smaller Merlion and the other the main Merlion (both by Lim Nang Seng in 1972).

• Merlion Park (2)
• Sentosa which is a taller replica
• Mount Faber
• Tourism Court in Tanglin

Check out the bottom one's I taken from the Sentosa Island which is the tallest replica.

All taken from different place in Sentosa Island. Enjoy!!!

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Weekend in Singapore and what to check out new Happening?

Check out what's happening in Singapore at this site!!!

It lists activities from Arts & craft, performance, fine dining, businesses, charities, shopping, nightlife and much much more....
With great details of what day, what time to what time, and exactly how to get there to join the fun.

For example, check out things for this weekend ....
Saturday, May 03rd, 2008

09:00 AM - 05:00 PM

HSBC TreeTop Walk @MacRitchie Reservoir

06:00 PM - 02:00 AM
Chill out @ Oosh

Screenshot:

Goto: Whats happening at Sg

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Vol #1: Important info for Starting the Option Game

Basic:
Option comes with two type. Call option and Put Option.

Call Option: Gives the buyer right to purchase the shares at a targeted price.
Put Option: Gives the buyer right to sell the shares at a targeted price.

Example of an option:

AMD Jan 6 call @ 1.30

• This call option gives the buyer right to purchase shares at $6 (strike price).

• This is January option, which mean the right to purchase the shares at $6 will expire on the 3rd Friday of January.

• $1.30 for buyers means that, by paying $1.30 now. You are granted the right to purchase a shares of the underlying stock and since US market is counting by 100 shares for one contract. This buy will cost the buyer $130 to reserve the right for 100 shares of the underlying stock @ $6 x100 = $600.

Note that, option of the month always expired on the 3rd Friday of that month.
i.e. Jan will be on the 3rd Friday on Jan, Feb call option will be on the 3rd Friday in Feb.


Expiration cycles:
Why do you think that sometimes you see this share with Option expiring on Jan, Feb, May, August? While some expire on Feb, March, June, and Sept.

This is because at anytime, there'll be four different expiration months listed for trading on any stock.

In total there's three cycles known as the January, the February, and the March cycles.

1. Jan cycle: Jan, April, July, October
2. Feb cycle: Feb, May, August, November
3. March cycle: March, June, Sept, December

One example:
AMD shares trades in Jan cycle. If now we are in April, the four different expiration will be, April, May (current and next month), and July, October (the next two months in the Jan cycle).



To find out what cycle is the stock trading at, just pull out the option trading for that day and check the expiration months.

Find out here in Yahoo's Finance website. finance.yahoo.com

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Option the way to make money!!!!

The Options Strategist: How to Invest and Trade Equity-related Options

By Marc Allaire

Recommended books:

Overview:
Investors of all types with whatever portfolios size should really consider and take advantages of the unrealized protection and profit in equity options. It was mostly seen as a volatile investment designed strictly for chancer, gamblers and high rollers, options in fact offer unique advantages to even the most conservative investors and are suitable for rounding out virtually any investment portfolio.

The book tells you everything you need to know to trade and invest with equity options. Whether you want to use options aggressively to increase profits through the power of leverage or conservatively by protecting your stocks in your portfolio against sudden market reversals, this hands-on, practical guide will introduce you to strategies from basic to advanced, including:

• Buying calls and puts
• Writing covered calls and puts
• Writing naked calls and puts
• Straddles
• Spreads
• Strangles
• Collars
• Combinations

The book doesn't just explain how to do it but also explains why to do it. It is definitely a great read.. Take your time and have a read, it surely worth your time.

If you aren't sure, you can have a preview of the book in Google = Google books

• Format: Kindle Edition
• File Size: 1991 KB
• Print Length: 256 pages
• Publisher: McGraw-Hill; 1 edition (March 3, 2003)
• Price: RM119.90

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