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Option writing stuff - for hell

  1. crashy

    1,741 Posts.

    Here's an old post of mine:

    Writing options is like owning a casino.....the odds are in your favour,and theres plenty of idiots willing to bet at your tables. In the gold rush,the smart money was made selling shovels,not panning for gold.
    Heres an example of a trade using options,showing how much easier it is to be profitable when you are the writer rather than the taker:

    Mr X owns 10,000 TLS shares at $5.50.After buying,he sees TLS is range trading between $5 and $5.50. One day Mr X realises he can sell call options every month,to make his TLS shares work harder. On Jan 1,Mr X writes 10 x TLS $5.75 Jan calls,for which he receives 12c. 10,000 x 12c = $1200 income for the month. He cant lose on this deal. If TLS goes up to $5.76 by expiry he will get exercised,and sell his TLS for a 25c profit.Also,he made 12c a share on the options so he actually made 37c profit per share.If TLS stays between $5.50 and $5.75,he keeps the 12c,and effectively his shares have given a 2.2% return in a month,or 26.2% a year.Add in the dividend and the deal gets better.The only drawback of this method is that it limits upside potensial.If TLS suddenly ran to $9,Mr X still sells at $5.76.
    So Mr X gives up the possibility of a large win,for a lot of certain wins.

    This is a very basic option strategy,and if Mr X is smart he will do more.If Mr X is prepared to buy more TLS should it fall to $5,he can do the same thing using puts.Every month he can write 10 x TLS $5 puts,for which he would receive around 6c.This means if TLS fell to $4.99 or lower by expiry,Mr X would get exercised,and be forced to buy 10,000 TLS at $5. Since TLS can not possibly be both $5.76 AND $4.99 at the end of the month,either the put or the call will be worthless,if not both.Of course,if the market crashes and TLS falls to $4,Mr X has still paid $5 for 10,000 TLS.
    Mr X collects a total of 18c per share per month,or 18/550 = 3.3% income per month,or 39% a year.

    Knowledge is the currency of the future.....

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