Right on! Thanks, Dan. Great to see the inaugural trading idea video, and it’ll be interesting to see how many Jan 12.5 calls trade tomorrow morning lol. Which brings the point up again- no sharing of the trade outside OMM, my fellow Beta bunchers! We don’t need the extra competition for premium .
The spreadsheet is proprietary to me, for the purposes of the video. There are plenty of similar spreadsheets to be found on the web. Some are free and superior to mine. The only thing special about mine if the stuff you do not see on the screen. Thatnstays with me.
Dan,
This is my first time making a comment on SMM or OMM. I like your style of teaching so why change a winner. I understand what your trying to teach. Keep up the good job.
would you use the same strategy if you already hold some BAC at a different buy point, or is this trade meant to ride with a new buy at this price level specifically?
If I sell call (i.e. cover call) with 0.55 premium and if not called out at the expiry then return 3.52% is a maximum return and
it is not a minimum return, right? Because at the expiry if BAC is below $11.95 then return is 0.0% or it is a loss.
DAN, do you suggest to Buy/close the call and sell the stock if price goes down ???
The maximum return you get on the trade is what you sold the call for. The stock doesn’t figure in to the profit profile for one simple reason: you will still own the stock. The stock is not part of the trade when it is not taken from you.
Auto-trading – I saw a question about this in some other thread. Maybe I missed the answer. What in the Dickens is Auto-trading? Would someone more experienced than I know the answer?
Curious first choice with BAC…. with all the Wiki leaks stuff looming overhead, couldn’t this stock take a bit of a tumble? I own the stock with a tight stop just in case, but still do not get the covered call. I don’t know, maybe I am all backwards.
OK, I see the numbers and how they work, but for those of you that are more familiar with this, what is the thought process for picking this trade out from others? Does the option strike price need to be close to the selling price of the stock? Is there a certain premium for the option you are looking for? What other considerations might there be? Thanks in advance.
Feel free to sell out of the money calls. That isn’t this trade, but it IS a trade. It is just a different trade with different parameters and goals based on your own analysis of the stock.
Dan, you did not mention or compute brokerage fees in any of your videos, not having experience in option trading, am I right to presume that they are negligible?
How do I get around this problem? Commissions are killing this trade for me:
Buy 300 shares: $9
Sell 3 calls: $11.5
Sell stock (called away): $20
Total commissions: $41
I share your concerns. I was thinking my fees would eat up almost all of my profits unless I purchased hundreds of shares and several contracts at the same time.
1. Dan suggested selling the $12.50 calls.
2. You are correct about commissions– however, you need to buy more shares, so you can sell more contracts or find a broker with lower commissions.
That said, if you are new to options, I would keep my risk low, by starting small. This means lower or no significant profits, but also minimizing your losses. With a $12.50 stock, (ie a lower priced stock), the option premium will inherently be small (dollar wise) reflecting the price of the stock. Options premiums of higher priced stocks are larger, and thereby commissions become less significant. But –generally, the option premium percentage, relative to the price of the stock, remains relatively consistent.
Harkmeister, commissions are a cost of doing business. TD Ameritrade has one of the higher commission structures around.
To everyone, I cannot help you with your commission issues. I pay $1.00/contract at TradeStation. I don’t recommend TradeStation, though. But it pays to shop around. You are the customer. Demand better commission rates. Brokers will charge you as much as they can get away with. But competition makes the brokerage business a commoditized business–I.e., there is little profit in it. Use that to your advantage. Let your broker figure out how he is gonna make money. You don’t owe them a thing. Get the best deal you can…and again, shop around.
Dan – commissions
Why would you not recommend TradeStation? Is their system not user friendly? Are the people rude?
The price per contract sounds very reasonable.
Just thought I would ask.
Barb
Dan,
I think you are doing a great job. I love your spreadsheet and I am somewhat anal so I modified it a bit so as to show me what my maximum loss would be in total dollar terms if I let the stock go to $0, in this case on BAC Jan 12.5 covered call. My maximum $ loss is my maximum risk in this case and would occur only IF I was stupid enough to let the stock go to $0! Actually you identified a break-even $ value which everyone should use as a point to back out, cancel the trade, adjust or whatever – but the RED FLAG would be waving aggressively at that point. I got in a little late on BAC but was able to paper trade BAC Jan 12.5 CC for cost basis of $12.32. Not a great trade but it a learning experience at this point for me. Can you provide weekly updates on each of your trades, say on the weekend, so we can all see your thought process and how best to handle the trade for next week? Also which brokerage firm do you think is better for trading options and taking into consideration the tools that are available in their options trading program: Fidelity, Thinkorswim or TradeMonster?
I do not like this trade, as the risk/reward are not attractive. Max gain: 0.45-0.50; possible stock drop can happen to 11.00-11.50. Plus BAC has too much headline risks and housing may double dip once the forclosures are re-starting in new year.
BAC has weekly options on it. We can generate income 52 times a year with a covered call and make about 2 times as much in premium. One small problem is that BAC does not have a 12.50 call on it for the week of expiry Dec 23rd. Are weekly’s a real alternative and would one trade the 12 or 13 dollar premium? What do you think, Dan?
We will not be presenting option trades using weekly options. Feel free to use them yourselves, but we will be sticking to the big leagues, which is the third Friday of each month expiration.
Again, feel free to trade otherwise. But I must stick with certain parameters. If I do not maintain some consistency and predictability, I will ultimately be spending my days herding cats. I don’t like cats (I am a dog person). So I won’t be herding them. 🙂
Hello Dan:
With all do respect to your choice. I do not think this is a very good return on your investment. I would rader sell the BAC January
12.50 Put SHORT for .49 cent and only put in $100.00 percontract. by selling a BAC January 12.50 Put you will get a .48 cent permimum
back. And If the stock get above $12.50 you do not have to do any thing. Your option just simply expires worth less.
On the other hand if the stock falls below $12.50 then you will be put the stock to you at $12.01 and you only have to rick $100.00
to buy the stock at a later date for $12.01
Happy holiday to everyone.
Jim.
The underlying premise is that you want to own the stock. In light of the current environment with respect to volatility (it is quite low), the risk/reward here is fine. By their nature, covered calls have a limit in reward. That is a given. I wouldn’t mind owning the stock at $12. I can then use that same stock to sell February calls, and March calls, etc., to further reduce the cost basis on the stock.
Place limit orders to sell your calls with a GTC order. Many, many times I don’t get my price 1st thing in the morning – but am filled later on in the day or even the next day at an even better price. Be patient – Don’t chase.
I understanded your video. However, I am confused with Jim Khosh’s put short. What if we do both, is it a win win situation? I have not done any cover call before.
Eileen,
If you have not sold a covered call before, then start simple with one strategy. Do complicate or confuse yourself with selling puts. There are many ways to make money and tomorrow is another day. First, I would suggest to learn the covered call strategy so well, that to sell a call becomes extremely routine.
Feel free to get further explanation from Jim Khosh on this. I have not yet discussed selling puts, so I will not speak to his suggestion. It is too confusing for many members who are stretching just to understand covered calla. Feel free to sell puts, write calls at different months and strike prices, or on a ratio of stock you already own. I have presented a basic strategy designed to be simple and easy to understand. There are many variations and I encourage all of you to discuss them. This is you venue for discussing the trade among yourselves.
Dan, great video. I had a couple of questions, but they were answered by watching the educational videos within the website. Question for Dan or any OMM members…
Would this strategy work on something like FAS? Or is that a little too volatile for this type of trade?
First let me say I am a big supporter. What I think would and to the video is the ratioal for the trade which I would differentiate form the results. The technical reasons to take thisvrisk. This would allow us to identify similar trades on our own. Please don’t get me wrong I am a happy camper.
Was a bit fearful at attempting my first selling of a covered call – never traded options before. The way Dan laid it out in the video, particularly with the spread sheet (I used and copied the sheet to a blank page and printed it) made it quite easy. My on-line broker walked me through getting approved for level 1 option trading in a few minutes and bingo! Bought the shares and sold the covered call, all on-line. It’s starting to come together.
To those who are confused: I posted a separate video which addresses new option traders. Please view that video. You ignore it at your financial peril and I cannot help you if you get in trouble.
It is your money. This is not gambling. I don’t play Pai Gow poker because I don’t understand it. I’m sure it’s fun, but if I don’t understand the game, then I need to change my name from Dan to Victim in order to have a reason to trade.
DO THE WORK!!! This is not an event, it is a learning process. Making money is supposed to be hard. If you find some option service who says it is easy and without risk, that option service is not telling you the truth. This business is full of folks with poor character who view your money as potential revenue for their business. They don’t give a rip whether you win or lose. My focus is on whether you learn or not.
It is a different business than the hucksters.
Look at the “free money” ads. You know instinctively that they are crooks, but you just hope that you are wrong about them. Trust me…you are not wrong.
DO THE WORK. If you do not understand the trade, then do.not make the trade. WATCH!!
Dan.
OK. Gotta go. Discuss this stuff among yourselves. That’s what this forum is for.
No offense, but I think you may have understated the risk with the trade above. You noted in the spreadsheet that the % profit if called out @ 3.7% and a profit if NOT called out @ 4.28%….making it sound as if there is only profit potential, no risk with this trade.
The “issue” I’m pointing out is (assuming we’re NOT called out) while you keep the premium and your cost basis is $12.02 (using your numbers) for the stock, the stock COULD fall significantly lower – say to $11.00/share, giving you a net “loss” of $.98 cents/share…..
I read your chart above as almost “guaranteeing” a profitable return when this is not the case…..
Would you recommend putting in a stop to close both transactions @ the 12.02 range or something to protect a potentially (large) downward move?
While I agree this is a pretty safe trade, and a good one to get everyone going, I hope you new guys realized this is NOT a risk-less trade!!!
The stock could fall to zero. If I did not realize there was risk in this, I shouldn’t be writing a word on the internet.
Legobusier — I have spent countless hours producing videos for OMM, explaining covered calls.
If the stock falls to $5, then the net loss on the share is around $7. Am I supposed to do the calculations on that too?
If you read my chart as a guarantee, then you have misread. I am doing the math. There is nothing wrong with the math.
I specifically said that you’ve got to want to own the stock. I said that your new cost basis on the stock would be around $12.00ish. Was I wrong? Nope.
Again, you have to want to own the stock. You know that your cost basis will be around $12. If you don’t want to own the stock at $12, then you should not be doing the trade.
I’m not sure how I could be more clear about this.
Dan, my point was really that I think the new options guys here may not grasp the entire picture based on what you laid out – there IS a loss potential (as there is with every trade) – I get that, but I don’t think it would be very clear to the newcomer.
As we move forward and improve this product, I would just suggest that you at least identify the point @ which the trade is a bust for those that are still learning this strategy….then they will be in a better position to decide whether to take on the trade or not.
Thanks again – not trying to be critical, just trying to make things better and more clear for all!!
Need some help figuring, in the grid Dan presents in the video, how the “% earned if called” was arrived at. Discounting commissions I reason that the stock cost me $12.57 when I bought it and I made $0.55 when I sold the covered call. If the stock is called away from me, then I have made 55 cents on a $12.57 investment which to me is a 4.37% return in one month. What am I missing?
Paul, I got the same % as you. .55/12.57 X 100 = 4.37% I played with all the numbers given and could not get Dan’s %. Someone give us the “ahhh-haaa.” Gene
Thanks for reminding me about the additional 7 cent loss. Notwithstanding same, I still don’t get 3.70% – I get 3.818 percent. (0.55-0.07)/12.57. Did Dan crank in the commission in his spread sheet? Or am I still missing something?
Paul & geewhiz,
This is driving me nuts!
Dan’s #s are 3.52% if NOT called away, and 3.70% if called away.
I used a trading calculator at InvesTools and got:
3.74 % if not called away, and 3.82% if called away.
geewiz you subtract the .07 from what? why???
12.57 – .07 =12.50 .55 / 12.50 = .0440 X 100 = 4.40% or
.55 – .07 = .48 .48 / 12.57 = .0381 X 100 = 3.81% or
.55 – .07 = .48 .48 / 12.50 = .0384 X 100 = 3.84%
Please someone, what am I missing?
RV Pilot says:
Thanks Paul, I had the same question. I can’t get the calculations to work either. Dan, I’m not questioning your calculations, I’m just trying to set up my own calculator for my own trades. I’ve been trading options for the past six months, and never thought of this kind of trade. I’m a sponge Dan, I want to learn!! Can you give us the formula used to calculate % earned, called out and not called? Thanks!
I think people are focusing (obsessing?) on the wrong thing here. 3.57 vs 3.72 vs 3.64 vs 3.142515768%. It’s really not THAT important. You get a general idea what the possible profits are. When the trade is over you can calculate what you actually got. You know you should make a bit over 3% if you participate in this trade at the suggested prices and the stock gets called away (closes above 12.50 on 1/21/2011)….
Order completed at net debit of 12.06. Used Schwab’s platform. They have advanced option tab making it easy to form the trade and match parameters with DAN’s rationale. After trade posts I will update commission percent of this leg of transaction. Perhaps we can posts our percents in a way of comparison shopping the cheapest (not necessarily best filling, etc.) provider.
Also, think a good idea to respond to some of the questions/comments that challenge risk assumptions, etc. Just commenting assuming that feedback is welcomed. Thank you again.
this is my take away (please correct me if i’m misunderstanding)… the profitable expectation (hope) is that BAC will trade below 12.50 so stock will not be called and we keep premium, but that it will also trade above the break even point (about 11.95) so we are still “profitable ” owing the stock, and we repeat the trade. if the stock explodes and trades well beyond 12.50 we curse a little for the missed profit but are still profitable by premium. if it implodes, we still own stock at lower basis (about 11.95), but at loss.
question: if i just bought the stock , i would set a stop loss somewhere to protect against the unexpected. what is the prudent method of protecting for this trade?
question: this trade “says” we dont expect BAC to break out significantly. we expect it to trade in narrow range is this contrary to the expectation that financial are starting to move and that BAC might be reversing downtrend?
In the video Dan said we want (hope) the stock called away because #1 We keep the premium and #2 we make a little profit on the stock. If the stock stays flat we keep the premium and we keep the stock, maybe do another call. If the stock sinks we keep the premium, maybe do another call or maybe sell the stock for a loss.
Dan said to do a covered call only if you like the stock but expect the stock to stay flat in the near term or go up a little.
As far as the stop loss, you have to buy back the call (close the contract: buy to close) before selling the stock. If you sell the stock without buying back the call you would be “naked” and still have the obligation to supply the stock at a lowed price than you sold it. I’m new to this stuff too. On the few calls I have done (paper trades) I never tried to get out before experation day.
Thanks for the 1st video. Just like SMM you want to empower us to make trades and learn, so going on the same line of thought, learning options following things may help.
1. What is the premise for this strategy? Why does Dan thinks you should take this strategy? Is it bullish/bearish strategy?
2. What is the maximum/minimum upside for this strategy?
3. What is the maximum/minimul downside for this strategy?
4. Is there an exit strategy?
You did cover that dont buy this if it falls under X price, which was good as it defines risk.
Did I mention I am newbie? I think you can guess it the way my post reads,,,,,,,
I agree with your questions and have the same ones…. and I think they are fair questions to ask and probably should be addressed in each video. Along with his recommendation, it would also be nice to for him to say “well, here are some variations and things others might do, but keep in mind this is not my trade” just to help us learn.
Dan, I know you are getting lots thrown at you, but I hope you appreciate the healthy debate, etc, as it will help us learn and ultimately help us all become better traders 🙂
Sorry Dan but I cannot find how you calculate the earned percentages, profits and cost in your various tables. I must be missing something. Please let us have the formulas. Thanks
Regarding the BAC covered call strategy….
I am on Think or Swim platform.
The premium collected for selling a Jan 12.50 call is $.03…that is 3 cents not .45 to .50.
Also, Dan mentions if the stock decreases in price, then we can sell the Feb. $12 call.
The differences between strikes on BAC at the present price are $2.50. There are no $12 calls to sell.
Something is wrong someplace. Can anyone verify that they are getting about $.50 for selling a Jan $12.50 call
and
there is a Feb. $12 call to be sold.
I am with Optionsxpress. There you must pick the tab “covered call” chain. then it will offer you 12.50 strike. You won’t fine it under “option” chain.
Great comments on this first trade idea. Someone earlier mentioned concern that the stock could fall hard. Here is my srategy regarding that possibility. If the stock were to take a sudden hit I would buy back the calls I sold at say .10 and then look to sell the Jan $12.00 thus reducing my cost basis on the stock even further. The first sale reduced my cost basis to around $12.05 the second sale would reduce my basis even further.
woops..no $12.00 strike. So if the stock really got hammered I would buy to close the contracts I sold at the $12.50 strike and then sell to open contracts at the $11.00 strike. Maybe not an attractive stragey now that I write it out.
Thanks Dan. I hope everyone realizes you have a method to your trade picks .. I see us going in steps in your teachings and not meandering (like cats), I for one want to fully understand your first step before going on to the next one. Keep us in line Dan.
Dan, thanks for all the efforts. I’ve been trading options for a while and your explanations are all very thorough.
I’ve been familiar with finviz for a while as well, although I’ve never had the ability to look at it through the eyes of a veteren. I’d love maybe a side video or short paragraph about what’s in your head as you’re scrolling through the fin vizworld, besides “man these bubbles are cool”, because that’s what’s in my head 🙂
I have been a member of SMM for two years and I am looking forward to OMM. I placed my trade on BAC this morning. However, I do have one question. How should I approach your recommendation if I already have a position in BAC. I had bought BAC in late October for $11.34. Today I bought additional shares to cover the covered call that I wrote. What is the right strategy. Do I use the previously purchased shares to cover the call I wrote, or do what I did and buy more? Maybe this is something you can address in your video or your Q&A.
Dean & Michael,
Not Dan, but yes, you can sell covered calls on the stock you already own, if you choose. However, if you sell the $12.50 call, your upside is set at $12.50 plus the premium you took in. So, lets say the stock goes to $13.25 at expiration, then it would get called away from you at $12.50 and you ‘miss-out’ on that $ 0.75. Or you can choose to sell a call on part of your position.
SamG: Thanks for your very valuable insights, please keep ’em coming! I wasn’t aware of being able to sell a call on part of a position. How then would you frame the partial position trade (period, premium, etc.)?
Graham,
Let’s say you have 1000 shares of BAC. You could sell 1,2,3,4,5,6,7,8,9 or 10 contracts (covered calls). The time period depends on your goal. If you are looking to generate cash, then sell the closest month calls– which would be January 2011. While months further out will give you a larger initial premium, there may be an unforeseen event. Look at selling calls like inventory in a store. When you have inventory on your shelves, you want to sell them as quickly as possible and repeat as often as possible. So—sell calls in the closest month & repeat next month.
JO HENRY says:
Yes, keep them coming. The stock on the shelves is very good analogy. And so, Do we “sell to close” the option anytime (like when we see profit) or wait for it to expire (with profit?)?
Thank you, Dan for your explanation of the yield calculation for the BAC covered call.
For those members who still need to know more about the covered call calculation, I have used this public site (Options Industry Council-Trading Tools-Covered Call Calculator) to help with this. It will get you started. And it is a Public Site.
I liked everything about this trade except that earnings are on 1-21-11 which is when the options expire. This is a conservative trade and holding a stock over earnings is not. I am afraid to do this trade because of earnings. Am I missing something or do I have a good point
It’s a good point. However, Dan said that part of the reason for getting into a trade like this one is that you like the stock and don’t mind holding onto it long term.
As Dan says, if you are a long-term investor in a company, that means you have to hold over earnings or you’ll never hold a stock longer than 90 days.
If you do not want to hold over earnings, then close your positions before earnings or paper trade this one to see how it goes….
I am trying to setup a spreadsheet to track my options trade based on the sheet you showed in your video. I am having a tough time reconciling to your earnings numbers. Would it be possible for you to post the spreadsheet so I can download it to make sure my formulas are correct. Thanks.
Today, I looked at the calls and saw two of them in the january 12.50 contracts.
It closed at .53 down .03 cents.
Do I buy to open or buy to close?
Much appreciated
If you can enter the order as one covered call transaction you can save a few $ on commissions. If not, then you buy 100 shares of the common and sell to open 1 Jan12.5C, or whatever multiple thereof.
Yes, they basically take it from your account at the strike price you which sold the call. By selling a call, you are giving your broker an ‘order’ to sell the stock at the strike price you chose. Similar to just selling the stock outright.
My understanding is that when an option is exercised/assigned, the Options Clearing Corporation (OCC) randomly chooses a broker (that has clients with appropriate positions). OCC tells the broker that they have to choose a client with an appropriate position to do what’s called for (buy the shares or sell them).
Really appreciate that you started our options education with a balanced approach from which, I believe, future option strategies can be built upon (baby steps, right?)
My first takeaway from this covered call strategy is to start with what we are comfortable with, which is choosing and owning stocks that can work for us. Second, if we get called away then we can recoup our initial capital with a bit of profit and if I do not get called away, we’re still comfortable owning BAC; win-win. Finally, your teaching strategy is to “teach” not “spoon feed” so that we can actually learn and apply these methods without your constant “hand-holding”.
I get it – I like and prefer this approach because at the end of the day my critical thinking skills and trading methods benfit. Thanks!
SMM veteran, but VERY new to options. I’ve seen all the intro videos, thank you DAN!!!! very helpful. One thing that I do not quite understand- in this BAC scenario. Let’s say the stock is at 14 and we are called out; the party “calling us out” has the right (as we have the obligation) to sell it at 12.5. Plus the .55 contract essentially gives us 13.05 per share, correct? So we would lose out on the potential .95 we would have otherwise gained per share? Or would the option price increase as well, to a parallel amount?
On the flip side, say the stock falls to 11. So we are not called out. We still “sold” the option, so we make $55 per contract but still are at a loss of >1.5 per share, correct?
DAN or OMM- please clarify.
Is anyone considering the threat of WikiLeaks releasing material that may hurt BAC? They are saying they will
release this material in 2011 and BAC is believed by some to be the bank they have in mind.
Richrun – I totally agree with you. I heard Jim Cramer say that many on Wall St. think that those wacky Wiki people will be releasing material about Bank of America. I can not take part in this trade for this reason. However, since I will not
participate in this trade, it will most likely be very successful. Barb
Your comment is funny Barbara… about, ‘not participating in the trade, so it will most likely be very successful.’ I’m reviewing some notes and saw this… wanted you to know, I’ve traded for about six years and nearly always feel that when I buy the dang stock falls… when I sell, it pops. Nice to know that I’m not the only one. Traders are seldom happy with no ‘buts’ about a trade. I know this is an old comment… two days! But, I had to mention that you make me chuckle. :>mickie
You’re right on both sides. When you sell the call, you are risking the possibility that BAC shoots up to 14 and your gain is capped.at 13.05. But if you really think BAC will be at 14 by Jan expiration then you should buy, not sell, the Jan 12.5 call. If you do buy the covered call and BAC heads to 14, your options include buying the call back at a loss if you really want to be long BAC, or you could roll the Jan 12.5 call up and/or out.
Thank you Nomad, this is a great table which I will use from now on. Although it does not make much difference I think there may be an error in the formula “cost of stock if not exercised. In the last portion it should be (0.75*G6) instead of (075/G6) 0.75 being the fee per contract and G6 the number of contracts.
thanks Dan. Enjoying the site so far. WOrking my way thru the tutorials, but it is taking time. I would not be trading options if I didn’t have a mentor to help guide me. Thanks for all you and the rest of the team do.
If you buy at 12.5 and sell the jan 12.5 strike at .55 your profit would be the .55 yea? what about the trade costs to buy the stock-10.00, sell the calls-10.00 then get called away-10.00? 30 bucks total costs and 55 bucks for the premium for a net 25 bucks. Am I calculating this correctly or is there a way to buy the stock and sell the calls in one transaction to eliminate a fee?
Actually if you use TD Ameritrade for instance, it’s 9.99 for the trade plus.75 cents per contract. So you do need to factor in the cost of the trade when trying to assess profits.
With my broker, if I do 2 separate transactions (buy 100 BAC and then sell 1 Jan 12.5 call) I am charged about $20 in commissions. However, if I put the order in as one covered call transaction the commission is only $7.64, roughly the commission of the stock purchase alone. Plus, with the covered call order, I can set a limit of $12.03 (or whatever) as Dan described in the video.
Hey Dan or Gary: Can you please post a downloadable Excel version of the spreadsheet you used for the BAC trade. If that is not possible, can you e-mail it to beta group members? It would be very helpful to see the calculations/formulas to better understand how the profit percentages are derived. Thanks a ton!
Help… Im with optionXpress I don’t know how to put in my trade. I am doing through virtual trading cuz I’m FOB (fresh of the Boat). But it said that the strike price is 12.62 the Jan 12.50 do I do it with market? I’m so confuse I did it in cover call I try to follow everything but still do not understand. could someone help me. Thanks:) Susie
I would use limits orders. I would imagine you can place the order as a single covered call transaction, you’ll likely save on commissions as described in my reply below. Otherwise, you’ll need 2 orders: buy 100 BAC, sell to open 1 Jan12.5 call. You can adjust the amounts, but sell 1 call for every 100 shares of common you buy. You’ll likely have to buy the common first and then sell the call. Good luck
Susie, I’m on optionXpresss as well. There are a lot of ways to initiate the trade. Probably the easiest is to start at Quotes/Options Chains in the menu bar. Once there, you can select the symbol (BAC), range (Near the money), type (Covered Calls), Expiration (Jan ’11) and click ‘view chain’. Then go down to the 12.50 strike price, across to ‘trade’ and click on trade. It will pull up an order ticket with both trades at once (one to buy the stock, the other to short the call). From there you can adjust the quantities, and click preview order. Then carefully review the trade on the confirmation page and click ‘place order’.
Susie. If your trading real money or trading on the paper account you can always call options Xpress and explain the trade you want and they will try to fill it for you. There has never been an extra charge for that. It’s one of the perks. If you are new to options I can’t say enough how important it is to trade on paper until you are profitable.You already pay Dan enough to learn.
Awesome trade. It’s clear that you put a lot of thought into this (something where the Break Even was well below current support, low price so not a lot of capital required, a pretty strong gain for such a short timeframe and pretty easy to recoup the OMM monthly this month). I’ve never really done a lot with covered calls because it was hard to find one that was worthwhile. You have really done a nice job with this one.
Has anyone looked at doing a covered call play with CRM in the past month? I have been tracking it a bit and it appears that early in the expiration month, you can get a 4-5%. For example right now looking at 140 JAN 11 strike you can sell that for a premium of 5.80 and it which gets you down to a cost basis of around 133.70.
That should be around a 4.7% return if called out, and 4.2% return if not. From looking at the chart i think there is support around the 133.40 level.
If you take the large initial amount you would have to have to make this trade, even for 1 contract, has anyone look to make a covered call play for CRM recently.
I am still a bit new at this, so i would love to hear opinions about the risk/return of this trade considering it its currently outside-the-money.
Hi to all here. I would appreciate a thought on what trade I ended up with.
I bought at .53 and the stock at 12.62. My account shows I am negative 74.00 on the call after todays close. Does that sound right? Much appreciated. David M
Long time, (almost from start) SMM subscriber. I have been waiting for this what seems like forever. So, thank you. I know there is an incredible amount of work that goes into a site like this. It will be interesting though as OMM is different than SMM for one reason… OMM makes trading recommendations. SMM does not. (Not directly anyway)
I have made a lot of money trading options… wait for it… and lost almost as much. I am anxiously awaiting “volatility” discussions, etc. My experience in options sounds similar to Dan’s early years. It will be very comforting to finally have some friends to trade and learn from. So, thank you Dan, Gary and Staff!!!
Now, I did buy BAC and was filled at 12.67. I have not yet sold the covered call and am on the fence wether I want to do the Feb $13 or the recommended Jan $12.50. Nice pop in BAC today so tomorrow could be the day. I did not get BAC at the better $12.50 price so that is why I have held off on selling the call. One thing I have learned… fills can be critical and $0.10 per share makes a world of difference when trading options.
Here is a link to a spreadsheet that I created which can show 20 different scenarios for an option trade with BAC using today’s end-of-day prices: http://www.box.net/shared/2shpf43p67 . This spreadsheet assumes that the underlying stock is NOT owned. This spreadsheet can be adapted for any other basic Call/Put Buy/Sell scenario. Instructions are at the top of the page. I am working on updating this spreadsheet to accommodate other variables like owning the underlying stock. Any suggestions are appreciated.
I noticed that there is also another “Dave” in the Forum.
Dan, why you wanted to sell covered calls at the same time you bought stock when Market expected to move up for at lest another week?
Now when stock is almost over $13 the price of that covered call moved up as well and now it’s a better point to sell this covered call.
Thanks,
Alla
alla — what would your question have been if the stock had moved down? Wouldn’t you have instead been saying, “Whi did you wait to sell the covered call? Why didn’t you sell it right away so that when the market went down, the trade would have worked better?”
I need to get this right the first time. To start this process in options, my first move is to have the $1257.00 to buy the 100 shares of stock…correct? Then during this process if the stock moves the right way and all the planets line up within this sell date, I will make that money back…and then some? So initially I need to have the have the money to cover the buy. Than say after the 3rd weeks end, stock sells and hopefully a good option has been made and the money frops back into the account and awaits another trade.
For some reason, I thought I watched or heard Dan say it would be a fraction of what the actual price of the stock was priced at. maybe a little clarity so I can gather my ducks for many rows.
thank you.
Dan,
I think the strategy and concept is good, but the execution plan need to give some ‘parameters’. You touch on this already, what price on the stock we will execute the trade? what price the call we will pull the trigger?
The price can change 10 cents one way or the other and make the trade non-profitable and pricing move quick, especially if someone want to get the trade done at the beginning part of the day.
Andy, I was extremely specific in all of this. While the format will change, there was absolutely no ambiguity in the parameters of the idea.
I got my fill. Why didn’t you get yours? If it’s not profitable for you, then you didn’t understand the parameters. Doing the trade for the sake of doing the trade isn’t good trading. Doing the trade with specific parameters and a specific profit (here, a “net debit”) in mind is good trading.
The spreadsheet that I used to explain the trade wasn’t squishy — it was specific.
Dan,
I think you are doing a great job. I love your spreadsheet and I am somewhat anal so I modified it a bit so as to show me what my maximum loss would be in total dollar terms if I let the stock go to $0, in this case on BAC Jan 12.5 covered call. My maximum $ loss is my maximum risk in this case and would occur only IF I was stupid enough to let the stock go to $0! Actually you identified a break-even $ value which everyone should use as a point to back out, cancel the trade, adjust or whatever – but the RED FLAG would be waving aggressively at that point. I got in a little late on BAC but was able to paper trade BAC Jan 12.5 CC for cost basis of $12.32. Not a great trade but it a learning experience at this point for me. Can you provide weekly updates on each of your trades, say on the weekend, so we can all see your thought process and how best to handle the trade for next week?
Easy, safe and a no brainer.
Right on! Thanks, Dan. Great to see the inaugural trading idea video, and it’ll be interesting to see how many Jan 12.5 calls trade tomorrow morning lol. Which brings the point up again- no sharing of the trade outside OMM, my fellow Beta bunchers! We don’t need the extra competition for premium .
Dan, have you look at the numers or possibility of doing the weeklies on BAC? and can you email me your CC formula?
Thx,
Admiral
Admiral,
What is a CC formula?
The spreadsheet is proprietary to me, for the purposes of the video. There are plenty of similar spreadsheets to be found on the web. Some are free and superior to mine. The only thing special about mine if the stuff you do not see on the screen. Thatnstays with me.
Dan,
This is my first time making a comment on SMM or OMM. I like your style of teaching so why change a winner. I understand what your trying to teach. Keep up the good job.
would you use the same strategy if you already hold some BAC at a different buy point, or is this trade meant to ride with a new buy at this price level specifically?
If I sell call (i.e. cover call) with 0.55 premium and if not called out at the expiry then return 3.52% is a maximum return and
it is not a minimum return, right? Because at the expiry if BAC is below $11.95 then return is 0.0% or it is a loss.
DAN, do you suggest to Buy/close the call and sell the stock if price goes down ???
The maximum return you get on the trade is what you sold the call for. The stock doesn’t figure in to the profit profile for one simple reason: you will still own the stock. The stock is not part of the trade when it is not taken from you.
Great start! Thanks, Dan
Auto-trading – I saw a question about this in some other thread. Maybe I missed the answer. What in the Dickens is Auto-trading? Would someone more experienced than I know the answer?
Thanks!
Craig
Craig – Watch the video!
Got it! Thanks Dr. Science.
Curious first choice with BAC…. with all the Wiki leaks stuff looming overhead, couldn’t this stock take a bit of a tumble? I own the stock with a tight stop just in case, but still do not get the covered call. I don’t know, maybe I am all backwards.
That is what I was thinking
OK, I see the numbers and how they work, but for those of you that are more familiar with this, what is the thought process for picking this trade out from others? Does the option strike price need to be close to the selling price of the stock? Is there a certain premium for the option you are looking for? What other considerations might there be? Thanks in advance.
I’ve always sold OTM covered calls. Wrong?
Feel free to sell out of the money calls. That isn’t this trade, but it IS a trade. It is just a different trade with different parameters and goals based on your own analysis of the stock.
Dan, you did not mention or compute brokerage fees in any of your videos, not having experience in option trading, am I right to presume that they are negligible?
Dan,
I am new member, its a good to start with covered call. and I am looking forwards to your option videos.
Thanks
How do I get around this problem? Commissions are killing this trade for me:
Buy 300 shares: $9
Sell 3 calls: $11.5
Sell stock (called away): $20
Total commissions: $41
I am with TD Ameritrade.
Thanks,
Hark
I share your concerns. I was thinking my fees would eat up almost all of my profits unless I purchased hundreds of shares and several contracts at the same time.
Hi Hark,
1. Dan suggested selling the $12.50 calls.
2. You are correct about commissions– however, you need to buy more shares, so you can sell more contracts or find a broker with lower commissions.
That said, if you are new to options, I would keep my risk low, by starting small. This means lower or no significant profits, but also minimizing your losses. With a $12.50 stock, (ie a lower priced stock), the option premium will inherently be small (dollar wise) reflecting the price of the stock. Options premiums of higher priced stocks are larger, and thereby commissions become less significant. But –generally, the option premium percentage, relative to the price of the stock, remains relatively consistent.
Harkmeister, commissions are a cost of doing business. TD Ameritrade has one of the higher commission structures around.
To everyone, I cannot help you with your commission issues. I pay $1.00/contract at TradeStation. I don’t recommend TradeStation, though. But it pays to shop around. You are the customer. Demand better commission rates. Brokers will charge you as much as they can get away with. But competition makes the brokerage business a commoditized business–I.e., there is little profit in it. Use that to your advantage. Let your broker figure out how he is gonna make money. You don’t owe them a thing. Get the best deal you can…and again, shop around.
Dan – commissions
Why would you not recommend TradeStation? Is their system not user friendly? Are the people rude?
The price per contract sounds very reasonable.
Just thought I would ask.
Barb
Dan,
I think you are doing a great job. I love your spreadsheet and I am somewhat anal so I modified it a bit so as to show me what my maximum loss would be in total dollar terms if I let the stock go to $0, in this case on BAC Jan 12.5 covered call. My maximum $ loss is my maximum risk in this case and would occur only IF I was stupid enough to let the stock go to $0! Actually you identified a break-even $ value which everyone should use as a point to back out, cancel the trade, adjust or whatever – but the RED FLAG would be waving aggressively at that point. I got in a little late on BAC but was able to paper trade BAC Jan 12.5 CC for cost basis of $12.32. Not a great trade but it a learning experience at this point for me. Can you provide weekly updates on each of your trades, say on the weekend, so we can all see your thought process and how best to handle the trade for next week? Also which brokerage firm do you think is better for trading options and taking into consideration the tools that are available in their options trading program: Fidelity, Thinkorswim or TradeMonster?
Fidelity charges $7.95 per trade and $0.75 per contract.
wait till you see the auto trade fees.
I do not like this trade, as the risk/reward are not attractive. Max gain: 0.45-0.50; possible stock drop can happen to 11.00-11.50. Plus BAC has too much headline risks and housing may double dip once the forclosures are re-starting in new year.
BAC has weekly options on it. We can generate income 52 times a year with a covered call and make about 2 times as much in premium. One small problem is that BAC does not have a 12.50 call on it for the week of expiry Dec 23rd. Are weekly’s a real alternative and would one trade the 12 or 13 dollar premium? What do you think, Dan?
We will not be presenting option trades using weekly options. Feel free to use them yourselves, but we will be sticking to the big leagues, which is the third Friday of each month expiration.
Again, feel free to trade otherwise. But I must stick with certain parameters. If I do not maintain some consistency and predictability, I will ultimately be spending my days herding cats. I don’t like cats (I am a dog person). So I won’t be herding them. 🙂
Thanks.
Hello Dan:
With all do respect to your choice. I do not think this is a very good return on your investment. I would rader sell the BAC January
12.50 Put SHORT for .49 cent and only put in $100.00 percontract. by selling a BAC January 12.50 Put you will get a .48 cent permimum
back. And If the stock get above $12.50 you do not have to do any thing. Your option just simply expires worth less.
On the other hand if the stock falls below $12.50 then you will be put the stock to you at $12.01 and you only have to rick $100.00
to buy the stock at a later date for $12.01
Happy holiday to everyone.
Jim.
The underlying premise is that you want to own the stock. In light of the current environment with respect to volatility (it is quite low), the risk/reward here is fine. By their nature, covered calls have a limit in reward. That is a given. I wouldn’t mind owning the stock at $12. I can then use that same stock to sell February calls, and March calls, etc., to further reduce the cost basis on the stock.
Thanks Dan. Nice basic trade to start. Well presented.
Another thought: If you take two of these positions and get exercised, you’ve covered your 1st month of OMM costs.
Scottto, that was the general idea. :-0
Place limit orders to sell your calls with a GTC order. Many, many times I don’t get my price 1st thing in the morning – but am filled later on in the day or even the next day at an even better price. Be patient – Don’t chase.
I understanded your video. However, I am confused with Jim Khosh’s put short. What if we do both, is it a win win situation? I have not done any cover call before.
Eileen,
If you have not sold a covered call before, then start simple with one strategy. Do complicate or confuse yourself with selling puts. There are many ways to make money and tomorrow is another day. First, I would suggest to learn the covered call strategy so well, that to sell a call becomes extremely routine.
Good Luck
Feel free to get further explanation from Jim Khosh on this. I have not yet discussed selling puts, so I will not speak to his suggestion. It is too confusing for many members who are stretching just to understand covered calla. Feel free to sell puts, write calls at different months and strike prices, or on a ratio of stock you already own. I have presented a basic strategy designed to be simple and easy to understand. There are many variations and I encourage all of you to discuss them. This is you venue for discussing the trade among yourselves.
Dan
Dan, great video. I had a couple of questions, but they were answered by watching the educational videos within the website. Question for Dan or any OMM members…
Would this strategy work on something like FAS? Or is that a little too volatile for this type of trade?
You can use a covered call strategy on any stock that has options. The devil is in the details.
Nice spreadsheet!
Would be interested in getting a download of the excel spreadsheet you used with the formula’s already set?
I am figuring the net profit, it called out as .48 (.55-.07). Dan reflects 46.50. Am I figuring it wrong?
First let me say I am a big supporter. What I think would and to the video is the ratioal for the trade which I would differentiate form the results. The technical reasons to take thisvrisk. This would allow us to identify similar trades on our own. Please don’t get me wrong I am a happy camper.
Thought I laid out the technical picture pretty well, but thanks for the feedback. I will keep that in mind in subsequent videos.
I guess I didn’t say that very well. What I was trying to say was the characteristics of this trade that you could look for in other similar trades.
Thanks Mark
Thanks Dan but I am very new at this and I will need to digest this information. (Still very green at this).
what is the difference between sell to open and sell to close. Which are we talking about here with Dan’s recommendation? Dan?
Selling to open means you are opening a position, such as selling a call to open. That is the strategy here.
Watch the video in the education section about opening and closing trades….. It’s clear.
Was a bit fearful at attempting my first selling of a covered call – never traded options before. The way Dan laid it out in the video, particularly with the spread sheet (I used and copied the sheet to a blank page and printed it) made it quite easy. My on-line broker walked me through getting approved for level 1 option trading in a few minutes and bingo! Bought the shares and sold the covered call, all on-line. It’s starting to come together.
Thanks very much, Dan.
To those who are confused: I posted a separate video which addresses new option traders. Please view that video. You ignore it at your financial peril and I cannot help you if you get in trouble.
It is your money. This is not gambling. I don’t play Pai Gow poker because I don’t understand it. I’m sure it’s fun, but if I don’t understand the game, then I need to change my name from Dan to Victim in order to have a reason to trade.
DO THE WORK!!! This is not an event, it is a learning process. Making money is supposed to be hard. If you find some option service who says it is easy and without risk, that option service is not telling you the truth. This business is full of folks with poor character who view your money as potential revenue for their business. They don’t give a rip whether you win or lose. My focus is on whether you learn or not.
It is a different business than the hucksters.
Look at the “free money” ads. You know instinctively that they are crooks, but you just hope that you are wrong about them. Trust me…you are not wrong.
DO THE WORK. If you do not understand the trade, then do.not make the trade. WATCH!!
Dan.
OK. Gotta go. Discuss this stuff among yourselves. That’s what this forum is for.
Dan,
No offense, but I think you may have understated the risk with the trade above. You noted in the spreadsheet that the % profit if called out @ 3.7% and a profit if NOT called out @ 4.28%….making it sound as if there is only profit potential, no risk with this trade.
The “issue” I’m pointing out is (assuming we’re NOT called out) while you keep the premium and your cost basis is $12.02 (using your numbers) for the stock, the stock COULD fall significantly lower – say to $11.00/share, giving you a net “loss” of $.98 cents/share…..
I read your chart above as almost “guaranteeing” a profitable return when this is not the case…..
Would you recommend putting in a stop to close both transactions @ the 12.02 range or something to protect a potentially (large) downward move?
While I agree this is a pretty safe trade, and a good one to get everyone going, I hope you new guys realized this is NOT a risk-less trade!!!
The stock could fall to zero. If I did not realize there was risk in this, I shouldn’t be writing a word on the internet.
Legobusier — I have spent countless hours producing videos for OMM, explaining covered calls.
If the stock falls to $5, then the net loss on the share is around $7. Am I supposed to do the calculations on that too?
If you read my chart as a guarantee, then you have misread. I am doing the math. There is nothing wrong with the math.
I specifically said that you’ve got to want to own the stock. I said that your new cost basis on the stock would be around $12.00ish. Was I wrong? Nope.
Again, you have to want to own the stock. You know that your cost basis will be around $12. If you don’t want to own the stock at $12, then you should not be doing the trade.
I’m not sure how I could be more clear about this.
Dan, my point was really that I think the new options guys here may not grasp the entire picture based on what you laid out – there IS a loss potential (as there is with every trade) – I get that, but I don’t think it would be very clear to the newcomer.
As we move forward and improve this product, I would just suggest that you at least identify the point @ which the trade is a bust for those that are still learning this strategy….then they will be in a better position to decide whether to take on the trade or not.
Thanks again – not trying to be critical, just trying to make things better and more clear for all!!
Need some help figuring, in the grid Dan presents in the video, how the “% earned if called” was arrived at. Discounting commissions I reason that the stock cost me $12.57 when I bought it and I made $0.55 when I sold the covered call. If the stock is called away from me, then I have made 55 cents on a $12.57 investment which to me is a 4.37% return in one month. What am I missing?
Paul, I got the same % as you. .55/12.57 X 100 = 4.37% I played with all the numbers given and could not get Dan’s %. Someone give us the “ahhh-haaa.” Gene
You also “lose” 7 cents on the 12.50 call price on a stock you bought for 12.57. Volia! percent is exactement.
Thanks for reminding me about the additional 7 cent loss. Notwithstanding same, I still don’t get 3.70% – I get 3.818 percent. (0.55-0.07)/12.57. Did Dan crank in the commission in his spread sheet? Or am I still missing something?
Paul & geewhiz,
This is driving me nuts!
Dan’s #s are 3.52% if NOT called away, and 3.70% if called away.
I used a trading calculator at InvesTools and got:
3.74 % if not called away, and 3.82% if called away.
geewiz you subtract the .07 from what? why???
12.57 – .07 =12.50 .55 / 12.50 = .0440 X 100 = 4.40% or
.55 – .07 = .48 .48 / 12.57 = .0381 X 100 = 3.81% or
.55 – .07 = .48 .48 / 12.50 = .0384 X 100 = 3.84%
Please someone, what am I missing?
Thanks Paul, I had the same question. I can’t get the calculations to work either. Dan, I’m not questioning your calculations, I’m just trying to set up my own calculator for my own trades. I’ve been trading options for the past six months, and never thought of this kind of trade. I’m a sponge Dan, I want to learn!! Can you give us the formula used to calculate % earned, called out and not called? Thanks!
I’m not having any luck either. Don’t want to take on the trade if I can’t work the basic arithmetic.
I think people are focusing (obsessing?) on the wrong thing here. 3.57 vs 3.72 vs 3.64 vs 3.142515768%. It’s really not THAT important. You get a general idea what the possible profits are. When the trade is over you can calculate what you actually got. You know you should make a bit over 3% if you participate in this trade at the suggested prices and the stock gets called away (closes above 12.50 on 1/21/2011)….
Order completed at net debit of 12.06. Used Schwab’s platform. They have advanced option tab making it easy to form the trade and match parameters with DAN’s rationale. After trade posts I will update commission percent of this leg of transaction. Perhaps we can posts our percents in a way of comparison shopping the cheapest (not necessarily best filling, etc.) provider.
Like the format and content of the BAC video – not too long – appreciate the substance ! ….. and it’s concise enough ! Thank you.
Also, think a good idea to respond to some of the questions/comments that challenge risk assumptions, etc. Just commenting assuming that feedback is welcomed. Thank you again.
I’m in
this is my take away (please correct me if i’m misunderstanding)… the profitable expectation (hope) is that BAC will trade below 12.50 so stock will not be called and we keep premium, but that it will also trade above the break even point (about 11.95) so we are still “profitable ” owing the stock, and we repeat the trade. if the stock explodes and trades well beyond 12.50 we curse a little for the missed profit but are still profitable by premium. if it implodes, we still own stock at lower basis (about 11.95), but at loss.
question: if i just bought the stock , i would set a stop loss somewhere to protect against the unexpected. what is the prudent method of protecting for this trade?
question: this trade “says” we dont expect BAC to break out significantly. we expect it to trade in narrow range is this contrary to the expectation that financial are starting to move and that BAC might be reversing downtrend?
In the video Dan said we want (hope) the stock called away because #1 We keep the premium and #2 we make a little profit on the stock. If the stock stays flat we keep the premium and we keep the stock, maybe do another call. If the stock sinks we keep the premium, maybe do another call or maybe sell the stock for a loss.
Dan said to do a covered call only if you like the stock but expect the stock to stay flat in the near term or go up a little.
As far as the stop loss, you have to buy back the call (close the contract: buy to close) before selling the stock. If you sell the stock without buying back the call you would be “naked” and still have the obligation to supply the stock at a lowed price than you sold it. I’m new to this stuff too. On the few calls I have done (paper trades) I never tried to get out before experation day.
Dan,
Thanks for the 1st video. Just like SMM you want to empower us to make trades and learn, so going on the same line of thought, learning options following things may help.
1. What is the premise for this strategy? Why does Dan thinks you should take this strategy? Is it bullish/bearish strategy?
2. What is the maximum/minimum upside for this strategy?
3. What is the maximum/minimul downside for this strategy?
4. Is there an exit strategy?
You did cover that dont buy this if it falls under X price, which was good as it defines risk.
Did I mention I am newbie? I think you can guess it the way my post reads,,,,,,,
I agree with your questions and have the same ones…. and I think they are fair questions to ask and probably should be addressed in each video. Along with his recommendation, it would also be nice to for him to say “well, here are some variations and things others might do, but keep in mind this is not my trade” just to help us learn.
Dan, I know you are getting lots thrown at you, but I hope you appreciate the healthy debate, etc, as it will help us learn and ultimately help us all become better traders 🙂
We all very much appreciate your efforts.
Sorry Dan but I cannot find how you calculate the earned percentages, profits and cost in your various tables. I must be missing something. Please let us have the formulas. Thanks
There are a few of us who have voiced equal puzzlement. Sure hope Dan or Gary jumps in and explains.
I’m a newbie.
In Dan’s BAC chart he shows the premium.
I trade thru TD.
I can get an option chain, I can put in specifics under trading options.
I do not see, in either of those, the premium. Can anyone tell me where I’d find that please? Or is that something I must find thru a spreadsheet?
Thanks
Call TD and ask them
Bid and Ask in the option chain are the premium prices of an option.
Regarding the BAC covered call strategy….
I am on Think or Swim platform.
The premium collected for selling a Jan 12.50 call is $.03…that is 3 cents not .45 to .50.
Also, Dan mentions if the stock decreases in price, then we can sell the Feb. $12 call.
The differences between strikes on BAC at the present price are $2.50. There are no $12 calls to sell.
Something is wrong someplace. Can anyone verify that they are getting about $.50 for selling a Jan $12.50 call
and
there is a Feb. $12 call to be sold.
With the stock trading 7 cents above the strike price as the low of the day, it is impossible for the premium to be what you say it is. Impossible.
Just one reason why I don’t use, or recommend, Think or Swim.
Again, I got my fill with a net debit of around $12.05…. So yea, I can verify the quotes.
Thanks.
Dan
I am on TOS right now and the bid for the Jan. $12.50’s is .56.
Win – You are quoting the weekly series (I think)…instead you want the option series expiring Jan 22 2011
with BAC at 12.63 bid the Jan 12.50 call is .55 bid for size
Win, there are most assuredly $12 FEBRUARY calls.
I am with Optionsxpress. There you must pick the tab “covered call” chain. then it will offer you 12.50 strike. You won’t fine it under “option” chain.
Great comments on this first trade idea. Someone earlier mentioned concern that the stock could fall hard. Here is my srategy regarding that possibility. If the stock were to take a sudden hit I would buy back the calls I sold at say .10 and then look to sell the Jan $12.00 thus reducing my cost basis on the stock even further. The first sale reduced my cost basis to around $12.05 the second sale would reduce my basis even further.
Thoughts?
woops..no $12.00 strike. So if the stock really got hammered I would buy to close the contracts I sold at the $12.50 strike and then sell to open contracts at the $11.00 strike. Maybe not an attractive stragey now that I write it out.
Hey… I think it’s all healthy discussion….. I have learned a ton the last few days… all I have ever done is buy calls and puts.
test…changed my screen neame
Forget my comment…I was looking at the wrong option chain. Whoops!
Someone with a calculator, please help us out.
What is 10% of $12.50?
My first grade teacher says: I’ll give you four quarters, two dimes, and a nickel. How much do you have?
My calculus instructor says: That would be exactly $1.25.
My economics professor grabbed me by the jacket, hustled me into his office, closed and locked the door, and whispered: What do you want it to be?
Thanks Dan. I hope everyone realizes you have a method to your trade picks .. I see us going in steps in your teachings and not meandering (like cats), I for one want to fully understand your first step before going on to the next one. Keep us in line Dan.
Dan, thanks for all the efforts. I’ve been trading options for a while and your explanations are all very thorough.
I’ve been familiar with finviz for a while as well, although I’ve never had the ability to look at it through the eyes of a veteren. I’d love maybe a side video or short paragraph about what’s in your head as you’re scrolling through the fin vizworld, besides “man these bubbles are cool”, because that’s what’s in my head 🙂
I have been a member of SMM for two years and I am looking forward to OMM. I placed my trade on BAC this morning. However, I do have one question. How should I approach your recommendation if I already have a position in BAC. I had bought BAC in late October for $11.34. Today I bought additional shares to cover the covered call that I wrote. What is the right strategy. Do I use the previously purchased shares to cover the call I wrote, or do what I did and buy more? Maybe this is something you can address in your video or your Q&A.
I have the same question… I already have BAC in my portfolio (I bought at an average of $11)… wondering how to handel this as well. Thanks.
Dean & Michael,
Not Dan, but yes, you can sell covered calls on the stock you already own, if you choose. However, if you sell the $12.50 call, your upside is set at $12.50 plus the premium you took in. So, lets say the stock goes to $13.25 at expiration, then it would get called away from you at $12.50 and you ‘miss-out’ on that $ 0.75. Or you can choose to sell a call on part of your position.
SamG: Thanks for your very valuable insights, please keep ’em coming! I wasn’t aware of being able to sell a call on part of a position. How then would you frame the partial position trade (period, premium, etc.)?
Graham,
Let’s say you have 1000 shares of BAC. You could sell 1,2,3,4,5,6,7,8,9 or 10 contracts (covered calls). The time period depends on your goal. If you are looking to generate cash, then sell the closest month calls– which would be January 2011. While months further out will give you a larger initial premium, there may be an unforeseen event. Look at selling calls like inventory in a store. When you have inventory on your shelves, you want to sell them as quickly as possible and repeat as often as possible. So—sell calls in the closest month & repeat next month.
Yes, keep them coming. The stock on the shelves is very good analogy. And so, Do we “sell to close” the option anytime (like when we see profit) or wait for it to expire (with profit?)?
Thank you, Dan for your explanation of the yield calculation for the BAC covered call.
For those members who still need to know more about the covered call calculation, I have used this public site (Options Industry Council-Trading Tools-Covered Call Calculator) to help with this. It will get you started. And it is a Public Site.
http://www.optionseducation.org/resources/covered_call_calculator.jsp
Hope it helps.
Thank you all.
I liked everything about this trade except that earnings are on 1-21-11 which is when the options expire. This is a conservative trade and holding a stock over earnings is not. I am afraid to do this trade because of earnings. Am I missing something or do I have a good point
It’s a good point. However, Dan said that part of the reason for getting into a trade like this one is that you like the stock and don’t mind holding onto it long term.
As Dan says, if you are a long-term investor in a company, that means you have to hold over earnings or you’ll never hold a stock longer than 90 days.
If you do not want to hold over earnings, then close your positions before earnings or paper trade this one to see how it goes….
Scott
I am trying to setup a spreadsheet to track my options trade based on the sheet you showed in your video. I am having a tough time reconciling to your earnings numbers. Would it be possible for you to post the spreadsheet so I can download it to make sure my formulas are correct. Thanks.
OMMer’s….is it me or is the forum down? Just checking.
must be you…forum working fine on my end
thanks!
Munir has posted a very valuable link:
http://www.optionseducation.org/resources/covered_call_calculator.jsp
That should take care of the “Dan, can I have your calculator?” issue.
Dan
Today, I looked at the calls and saw two of them in the january 12.50 contracts.
It closed at .53 down .03 cents.
Do I buy to open or buy to close?
Much appreciated
If you can enter the order as one covered call transaction you can save a few $ on commissions. If not, then you buy 100 shares of the common and sell to open 1 Jan12.5C, or whatever multiple thereof.
David did you get your answer? I to do not know whether to sell the call at “open” or “close”
Thanks
Stupid question team, I understand being called out. Who delivers the stock though, my clearing house automatically??
Yes, they basically take it from your account at the strike price you which sold the call. By selling a call, you are giving your broker an ‘order’ to sell the stock at the strike price you chose. Similar to just selling the stock outright.
My understanding is that when an option is exercised/assigned, the Options Clearing Corporation (OCC) randomly chooses a broker (that has clients with appropriate positions). OCC tells the broker that they have to choose a client with an appropriate position to do what’s called for (buy the shares or sell them).
Love it Dan. I traded like you said with BAC in my virtual account. To get a feel for it. IT WORKS. YEAH !!!!!
Waiting for January with you for real money trades, thanks so much. Happy Holidays
Dan,
Really appreciate that you started our options education with a balanced approach from which, I believe, future option strategies can be built upon (baby steps, right?)
My first takeaway from this covered call strategy is to start with what we are comfortable with, which is choosing and owning stocks that can work for us. Second, if we get called away then we can recoup our initial capital with a bit of profit and if I do not get called away, we’re still comfortable owning BAC; win-win. Finally, your teaching strategy is to “teach” not “spoon feed” so that we can actually learn and apply these methods without your constant “hand-holding”.
I get it – I like and prefer this approach because at the end of the day my critical thinking skills and trading methods benfit. Thanks!
SMM veteran, but VERY new to options. I’ve seen all the intro videos, thank you DAN!!!! very helpful. One thing that I do not quite understand- in this BAC scenario. Let’s say the stock is at 14 and we are called out; the party “calling us out” has the right (as we have the obligation) to sell it at 12.5. Plus the .55 contract essentially gives us 13.05 per share, correct? So we would lose out on the potential .95 we would have otherwise gained per share? Or would the option price increase as well, to a parallel amount?
On the flip side, say the stock falls to 11. So we are not called out. We still “sold” the option, so we make $55 per contract but still are at a loss of >1.5 per share, correct?
DAN or OMM- please clarify.
THANKS TEAM!
Is anyone considering the threat of WikiLeaks releasing material that may hurt BAC? They are saying they will
release this material in 2011 and BAC is believed by some to be the bank they have in mind.
Richrun – I totally agree with you. I heard Jim Cramer say that many on Wall St. think that those wacky Wiki people will be releasing material about Bank of America. I can not take part in this trade for this reason. However, since I will not
participate in this trade, it will most likely be very successful. Barb
Your comment is funny Barbara… about, ‘not participating in the trade, so it will most likely be very successful.’ I’m reviewing some notes and saw this… wanted you to know, I’ve traded for about six years and nearly always feel that when I buy the dang stock falls… when I sell, it pops. Nice to know that I’m not the only one. Traders are seldom happy with no ‘buts’ about a trade. I know this is an old comment… two days! But, I had to mention that you make me chuckle. :>mickie
You’re right on both sides. When you sell the call, you are risking the possibility that BAC shoots up to 14 and your gain is capped.at 13.05. But if you really think BAC will be at 14 by Jan expiration then you should buy, not sell, the Jan 12.5 call. If you do buy the covered call and BAC heads to 14, your options include buying the call back at a loss if you really want to be long BAC, or you could roll the Jan 12.5 call up and/or out.
There is an Excel spreadsheet on Covered Calls at
http://mytradersjournal.com/stock-options/excel-spreadsheets/
Go to RETURN ON INVESTMENT – COVERED CALLS and get
ROI-CoveredCalls.xls
It has some of the heading that Dan has on his spreadsheet.
Nomad,
Thanks for the link! I’m totally new at options, and this kind of tool will be really helpful
Thank you Nomad, this is a great table which I will use from now on. Although it does not make much difference I think there may be an error in the formula “cost of stock if not exercised. In the last portion it should be (0.75*G6) instead of (075/G6) 0.75 being the fee per contract and G6 the number of contracts.
thanks Dan. Enjoying the site so far. WOrking my way thru the tutorials, but it is taking time. I would not be trading options if I didn’t have a mentor to help guide me. Thanks for all you and the rest of the team do.
If you buy at 12.5 and sell the jan 12.5 strike at .55 your profit would be the .55 yea? what about the trade costs to buy the stock-10.00, sell the calls-10.00 then get called away-10.00? 30 bucks total costs and 55 bucks for the premium for a net 25 bucks. Am I calculating this correctly or is there a way to buy the stock and sell the calls in one transaction to eliminate a fee?
Actually if you use TD Ameritrade for instance, it’s 9.99 for the trade plus.75 cents per contract. So you do need to factor in the cost of the trade when trying to assess profits.
With my broker, if I do 2 separate transactions (buy 100 BAC and then sell 1 Jan 12.5 call) I am charged about $20 in commissions. However, if I put the order in as one covered call transaction the commission is only $7.64, roughly the commission of the stock purchase alone. Plus, with the covered call order, I can set a limit of $12.03 (or whatever) as Dan described in the video.
Hey Dan or Gary: Can you please post a downloadable Excel version of the spreadsheet you used for the BAC trade. If that is not possible, can you e-mail it to beta group members? It would be very helpful to see the calculations/formulas to better understand how the profit percentages are derived. Thanks a ton!
Help… Im with optionXpress I don’t know how to put in my trade. I am doing through virtual trading cuz I’m FOB (fresh of the Boat). But it said that the strike price is 12.62 the Jan 12.50 do I do it with market? I’m so confuse I did it in cover call I try to follow everything but still do not understand. could someone help me. Thanks:) Susie
I would use limits orders. I would imagine you can place the order as a single covered call transaction, you’ll likely save on commissions as described in my reply below. Otherwise, you’ll need 2 orders: buy 100 BAC, sell to open 1 Jan12.5 call. You can adjust the amounts, but sell 1 call for every 100 shares of common you buy. You’ll likely have to buy the common first and then sell the call. Good luck
Susie, I’m on optionXpresss as well. There are a lot of ways to initiate the trade. Probably the easiest is to start at Quotes/Options Chains in the menu bar. Once there, you can select the symbol (BAC), range (Near the money), type (Covered Calls), Expiration (Jan ’11) and click ‘view chain’. Then go down to the 12.50 strike price, across to ‘trade’ and click on trade. It will pull up an order ticket with both trades at once (one to buy the stock, the other to short the call). From there you can adjust the quantities, and click preview order. Then carefully review the trade on the confirmation page and click ‘place order’.
Susie. If your trading real money or trading on the paper account you can always call options Xpress and explain the trade you want and they will try to fill it for you. There has never been an extra charge for that. It’s one of the perks. If you are new to options I can’t say enough how important it is to trade on paper until you are profitable.You already pay Dan enough to learn.
Best wishes and good trading……
Dan,
Awesome trade. It’s clear that you put a lot of thought into this (something where the Break Even was well below current support, low price so not a lot of capital required, a pretty strong gain for such a short timeframe and pretty easy to recoup the OMM monthly this month). I’ve never really done a lot with covered calls because it was hard to find one that was worthwhile. You have really done a nice job with this one.
I thought I had posted a comment but now can’t find it so here’s a brief Thank you Dan.
Ed
Has anyone looked at doing a covered call play with CRM in the past month? I have been tracking it a bit and it appears that early in the expiration month, you can get a 4-5%. For example right now looking at 140 JAN 11 strike you can sell that for a premium of 5.80 and it which gets you down to a cost basis of around 133.70.
That should be around a 4.7% return if called out, and 4.2% return if not. From looking at the chart i think there is support around the 133.40 level.
If you take the large initial amount you would have to have to make this trade, even for 1 contract, has anyone look to make a covered call play for CRM recently.
I am still a bit new at this, so i would love to hear opinions about the risk/return of this trade considering it its currently outside-the-money.
Hi to all here. I would appreciate a thought on what trade I ended up with.
I bought at .53 and the stock at 12.62. My account shows I am negative 74.00 on the call after todays close. Does that sound right? Much appreciated. David M
Dan, I liked ur teaching… It is whole new world to me I am liking the methods and teaching process.
Thanks a lot…
Dan / Gary:
Long time, (almost from start) SMM subscriber. I have been waiting for this what seems like forever. So, thank you. I know there is an incredible amount of work that goes into a site like this. It will be interesting though as OMM is different than SMM for one reason… OMM makes trading recommendations. SMM does not. (Not directly anyway)
I have made a lot of money trading options… wait for it… and lost almost as much. I am anxiously awaiting “volatility” discussions, etc. My experience in options sounds similar to Dan’s early years. It will be very comforting to finally have some friends to trade and learn from. So, thank you Dan, Gary and Staff!!!
Now, I did buy BAC and was filled at 12.67. I have not yet sold the covered call and am on the fence wether I want to do the Feb $13 or the recommended Jan $12.50. Nice pop in BAC today so tomorrow could be the day. I did not get BAC at the better $12.50 price so that is why I have held off on selling the call. One thing I have learned… fills can be critical and $0.10 per share makes a world of difference when trading options.
Mark
Here is a link to a spreadsheet that I created which can show 20 different scenarios for an option trade with BAC using today’s end-of-day prices: http://www.box.net/shared/2shpf43p67 . This spreadsheet assumes that the underlying stock is NOT owned. This spreadsheet can be adapted for any other basic Call/Put Buy/Sell scenario. Instructions are at the top of the page. I am working on updating this spreadsheet to accommodate other variables like owning the underlying stock. Any suggestions are appreciated.
I noticed that there is also another “Dave” in the Forum.
Thank you Dave should be very helpfull. (spreadsheet)
Dan, why you wanted to sell covered calls at the same time you bought stock when Market expected to move up for at lest another week?
Now when stock is almost over $13 the price of that covered call moved up as well and now it’s a better point to sell this covered call.
Thanks,
Alla
alla — what would your question have been if the stock had moved down? Wouldn’t you have instead been saying, “Whi did you wait to sell the covered call? Why didn’t you sell it right away so that when the market went down, the trade would have worked better?”
The trade is the trade.
I need to get this right the first time. To start this process in options, my first move is to have the $1257.00 to buy the 100 shares of stock…correct? Then during this process if the stock moves the right way and all the planets line up within this sell date, I will make that money back…and then some? So initially I need to have the have the money to cover the buy. Than say after the 3rd weeks end, stock sells and hopefully a good option has been made and the money frops back into the account and awaits another trade.
For some reason, I thought I watched or heard Dan say it would be a fraction of what the actual price of the stock was priced at. maybe a little clarity so I can gather my ducks for many rows.
thank you.
That was a different strategy than this covered call.
Is there a way to make the comments post in order by date and time? Thanks!
Dan,
I think the strategy and concept is good, but the execution plan need to give some ‘parameters’. You touch on this already, what price on the stock we will execute the trade? what price the call we will pull the trigger?
The price can change 10 cents one way or the other and make the trade non-profitable and pricing move quick, especially if someone want to get the trade done at the beginning part of the day.
Andy, I was extremely specific in all of this. While the format will change, there was absolutely no ambiguity in the parameters of the idea.
I got my fill. Why didn’t you get yours? If it’s not profitable for you, then you didn’t understand the parameters. Doing the trade for the sake of doing the trade isn’t good trading. Doing the trade with specific parameters and a specific profit (here, a “net debit”) in mind is good trading.
The spreadsheet that I used to explain the trade wasn’t squishy — it was specific.
Hope that clarifies things for you.
Dan
Dan,
I think you are doing a great job. I love your spreadsheet and I am somewhat anal so I modified it a bit so as to show me what my maximum loss would be in total dollar terms if I let the stock go to $0, in this case on BAC Jan 12.5 covered call. My maximum $ loss is my maximum risk in this case and would occur only IF I was stupid enough to let the stock go to $0! Actually you identified a break-even $ value which everyone should use as a point to back out, cancel the trade, adjust or whatever – but the RED FLAG would be waving aggressively at that point. I got in a little late on BAC but was able to paper trade BAC Jan 12.5 CC for cost basis of $12.32. Not a great trade but it a learning experience at this point for me. Can you provide weekly updates on each of your trades, say on the weekend, so we can all see your thought process and how best to handle the trade for next week?