1. Most Discussed
  2. Gainers & Losers

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.....

DISCLAIMER:
Before making any financial decisions based on what you read, always consult an advisor or expert.

The HotCopper website is operated by Report Card Pty Ltd. Any information posted on the website has been prepared without taking into account your objectives, financial situation or needs and as such, you should before acting on the information or advice, consider the appropriateness of the information or advice in relation to your objectives, financial situation or needs. Please be aware that any information posted on this site should not be considered to be financial product advice.

From time to time comments aimed at manipulating other investors may appear on these forums. Posters may post overly optimistic or pessimistic comments on particular stocks, in an attempt to influence other investors. It is not possible for management to moderate all posts so some misleading and inaccurate posts may still appear on these forums. If you do have serious concerns with a post or posts you should report a Terms of Use Violation (TOU) on the link above. Unless specifically stated persons posting on this site are NOT investment advisors and do NOT hold the necessary licence, or have any formal training, to give investment advice.

Top

Thank you for visiting HotCopper

We have detected that you are running ad blocking software.


HotCopper relies on revenue generated from advertisers. Kindly disable your ad blocking software to return to the HotCopper website.

I understand, I have disabled my ad blocker. Let me in!

Need help? Click here for support.