Hey Dan and Gary, a comment, a question, and then a suggestion. COMMENT: This video went over a lot better than the first one. Good idea using the spreadsheet from the OIC rather than the one you used on the BAC trade, because there were a couple of math errors in the ROI calculations shown in the first video that made it a little hard to follow for those who may not have been familiar with these trades. QUESTION: Since your thesis seems to be trickle up through the end of the year and then a mild selloff in Jan, would you be talking about taking profits on these covered call trades the first week of Jan, or just sweat it out unitl options expiration? SUGGESTION: I just happened to be logged in when the GM trade was put up. I didn’t plan to check the OMM site every day, I sort of assumed that you would blast out an email to your members when a new trade was posted. Wouldn’t that make sense? That’s sort of what I have gotten used to with SMM; I get an email when new content is there, and I know if I log onto the site, there will be something interesting for me to watch. Works for me. Why not do this for OMM subscribers? THANKS
Hi Craig–I received an E-mail for this trade @ 10:26PM Tuesday. E-Mail also received for BAC trade. Gary posted some E-mail addresses to submit problems. I believe one was support@OMM.com You can search the forum under authors and put Gary’s name in and you will then find the address. Good luck to you. Rona.
As an OMM subscriber, do I have access to the charting service that you are showing or where do I go to get the charts with the technicals that you are displaying.
Paul
I’m not DAN, but I do know that DAN uses Worden Telecharts, which is a paid charting service. However, Worden also produces a free version that is excellent. You can access it at: freestockcharts.com
Hey Dan and Gary, are you reading my mind or what? About 10 minutes after my post, I got an email from you announcing the GM trade. Nice job, keep up the good work!
Dan: great video. I have been perplexed by your emphasis in the BAC video that we wanted to get called out. The calculator that you introduced in this one, combined with the accompanying verbiage, cleared the fog. I get it. Thank you.
The Covered Call Calculator is quite helpful….I know this is not “your calculator” but please note that it appears that it does not provide a means to deduct a commission for the scenario titled “if stock is called at expiration.”…i.e. there will be a commission on the stock if/when it gets called away but this calculator does not net the commission out of the stock proceeds….so it overstates the ROI for this scenario.
Gary, you do not have to pay a commission if your stock is called away. Like In home purchases, and in auctions, the buyer who calls your stock bears the (closing) cost of commissions. If you’re paying a commission when your stock is called away, I’d say it’s time to find another broker.
I have Schwab. If the stock is called away they treat it like a sale, $8.95 commision. If the option expires worthless there is no commission. They reason being called away is a sale for you. I think they see you get a profit so they want some too. There were posts in the forum some broker charges a 19.95 assignment fee.
Thank you to both yourself and Gary for making this site happen, options are new to me, but as I study the videos I am starting to feel more comfortable with the concepts. Was the calculator supposed to be with this video, or are you going to send it with the 45 minute video that you mentioned on the GM ‘buy write’ trade?
Dan,
Great video! Totally understandable and educational. I have a question about the GM Trade. What if you already own GM at a higher price? Do you adjust your strike price?
I’m slowly starting to understand this stuff. Do I have a clue? No… not really. Where does the $34.00 strike price come from? Why $34.00, and not something else?
Dan: when you set up the Multi-Leg Options order to (for example) buy to open 200 shares of GM and sell to open 2 options of GM 1/22/11 @ 34 with a net debit of 32.95: should you make this an All or None condition? BTW, Fidelity is set up to do these Multi-Leg Options.
COVERED CALL CALCULATOR – Here is the covered call calculator that Dan mentioned. I apologize that the video didn’t take you there. Beta testing at its best!!
I am having a hard time getting the option calculator page. I tried the above mentioned link that you provided. What I am getting is, that address does not exist. I need help.
Calculator – http://www.optionseducation.org/resources/covered_call_calculator.jsp Dashboard WidgetIdea for MAC users. In safari under file there is a feature called open in dashboard. If you go to the option calculator web page using safari, use the file drop down, open in dashboard, it will highlight an are of the page. Move the border until it is highlighting the area you put the stock symbol in and click add. Pull up you widget dashboard. Check it and if it is not quite right hit the i in the lower right corner. This will put you into edit mode to move it around and fine tune it if you have to. This will allow you to bring up the calculator on demand.I use this to display gold prices from kitco in the dashboard as will as the USD index quickly but it is useful to set up fast access to useful tools.Depending on peoples success with this I may or may not post a quick pdf instructional if I am allowed to link it here. Again remember you have to use Safari to set it up. It does not mean you have to keep using safari. For MAC/APPLE users. Sorry again PC.
Dan, this video was better for me. I already own GM at 34.30. I understood much better this time. This could be great fun if the market participates well. I already owned Bac also. Great job!
Very Good. Have not played with option in several years becasue it was clear I did not know what I was doing. This is good, not swinging for the fences and managing risk with options. Very good explaination Dan.
Gary Purkat, I just added the extra commision to the buy price to fake it out for the additional commision for being called out. It got me very close to the spreadsheet I generated for my own calculations. I think it dials it in very close.
Ok Dan, Gary, or anyone,
I understand making $0.85 /contract if GM goes sideways and paying less to own GM if I get called away. However, isn’t our downside risk unlimited? Should we set a stop somewhere below $32.95? What do you or anyone else think?
Thanks for the session (this session was great!). In the spirit of improvement, this session seemed to be much better than the first. This was not only because you had a better tool (vs. .xls format), but because you walked me (novice option trader) through how the strategy works (how we would make $ on it if we decided to execute on it). It would be helpful if you did the same for all future trading ideas (at least the ones where you introduce a new option strategy) and kept the video to 5-10 minutes :). In addition, it would be great (once you are finished with the beta and if it is possible) that you integrated SMM and OMM to a single ‘Members Area’ interface (at least with a single sign on). Lastly, please keep sending the emails (acts as notification for me that the smm premium strategy session and omm trading ideas are ready to view).
BAC- Someone posted instead of writing a covered call why not sell a put, which made a lot of sense (to me) Could someone explain the advantage of writing the call instead of selling the put. I like the idea of taking in the premium without laying ut the money and if the stock is put to you then you buy it, instead of buying it up front. Am i not thinking straight ?
Michael
Some (if not all) of the on-line brokers consider selling a put to be an advanced strategy and will not make it available for less experienced traders or those that do not have a margin account. The covered call strategy is considered to be conservative and is available for all who have any level of option permission on their account. A margin account is not a requirement either which makes it available for those (like me) who trade in IRA accounts. Margin accounts are not available inside an IRA.
GatorD
Gator,
I’m approved for all options strategies. I’m talking pure #’s here and if i’m thinking correctly selling the put makes more sense, if not could someone explain why not.
If you have level 3 permission then selling a put is usually better, because the margin requirments are less, but if the underlying pays a dividend then you have to factor that in. If there’s a dividend you’ll miss out unless you own the stock. When you sell a put there is no commission fee to close it. Most people, especially here, can’t sell naked puts. If you can that would be better.
Michael,
There are many ways to use puts and calls for different strategies and different time periods. Dan is describing one. Some people might want to buy a stock if a dividend is approaching between the purchase date and the expiration date. In that scenario you can capture both the dividend and the option premium. Zen1
This is my first options trade and am looking for some guidance from the more experienced traders. The question is in regards to the actual mechanics of placing the order. I read through yesterdays BAC comments which I think was enough to get me through this. I have some specific questions on making the order. (I am using Fidelity if it makes any difference)
I placed a Multileg order, Buy-Write,
Buy – 100 shares GM
Sell to OPEN – 1 contract GM Jan 22 $34 CALL
Under order type it selected “Net Debit” where it automatically filled in $33.00. I was under the impression from Dan’s video that I would be able to specify the Net Debit. How does that work excactly?
I also selected “ALL or NONE” for the conditions and Time In Force = 1 DAY. Whas this the correct way?
It appears that trade executed at $33.71 with the option filled at 0.71 so I think the math will work out but how do I “limit” my order to get to the same trade specification that Dan issued? I hope my question makes sense. I am struggling a little here in explaining. I guess I liken this to making a limit order on a stock verses just “buying at Market”. I kinda felt like I was “buying at market” with this trade.
Please tell me if I screwed up and where I did. Thanks.
Fidelity (using the Active Trader Pro Platform) defaults net debit to market or close value (stocks trade extended hours, options close at 4PM). All you have to do to set a limit to your order is type it in and override the default. Since you are not trading market, you may not execute, but you set up your strategy on what you are willing to accept for your basis. Another advantage to automation is that you are paying a little less in commission as the security and option are executed together.
Congratulation. Wish you great success on your option site. You and me both. I am very excited. I have a question about covered call. I know you said to place the order as covered call. My thought is why not buy the stocks first when it goes down a little and sell the call when the stock is higher so I can take in more premium. I will make both trade on the same day. I want your thought on this.
Too many brokers and too many different fee structures. To add to the confusion, larger and more active accounts can negotiate better rates.
If you have a broker, (1) watch the commissions as they happen, and (2) go on other brokers’ sites — or call them — to walk through the charges for the same trade and compare.
Dan People are asking about chasing both trades after they have moved beyond the debit that you suggested. Is there a minimum rate of return that we can say “this trade is a go or a no go”?
Henry, I also subscribe to a different options educational group, and they suggest not to short an option for anything less than a $0.45 credit. Also they recommend a minimum of 20% annualized ROI or else don’t do the trade.
A dumb question from a beginner (me) On any covered call, the seller earns premium on initial sale of the call.
1. If the stock price goes up after purchase of the covered call, and I want to buy the call to close (for whatever reason), who gets the premium (differential between initial sell and repurchase of the call)?
2. Same question at exercise, if the call is in the money, who gets the premium when the call is purchased (I only get the value of the premium when I sold the call, but if the value of the call goes up, I’m trying to understand to whom the value of the of the differential accrues?
Answer 1…if the stock goes up and you want to buy the call (to close the option position) the seller of the call gets your $….you will be (most likely) buying this back at a loss (paying more than you received for it)…
Answer 2…nobody gets any premium from the call…..the owner of the call just gets the benefit of buying the stock at a discounted cost (the strike price) vs. the current market price, so essentially the “premium” is in that price differential…
I have a question – If I have a deep-in-the-money June 30 call – can I write a Jan 34 call against it? Not trying to mess with anybody’s mind, just curious.. If possible, what are the ramifications? I appreciate OMM..
If I understand you correctly: You own a June 30 call and have no obligations against it.
If so yes you can write a Jan 34 call against it. It will be a combination of a vertical and calendar spread.
Just make sure the premium you paid minus the premium for the Jan 34 call is reasonable to the $4 spread.
If you get called out in Jan for the 34 call you would be required to deliver the stock for $34, which you could provide by exercising your June option. So the profit loss would be: $34 -$30 -(commissions)- premium paid for june 30 call + premium received for the Jan 34 call.
Having deep in the money calls and selling calls against them is a fairly common practice.
Dan, last night I placed a multi-leg order with a net-debit of 32.95 but I haven’t been filled yet. Do you recommend chasing this position with a higher net-debit, or just wait and see what happens. The strategy seems sound when the price gets to be near support, as you are suggesting, but how far would you chase a cc trade. I apologize if you gave a range and I missed it.
Question from the risk manager part of my brain: I now own 200 shares of GM at 33.70 and sold 2 contracts for the Jan $34. I understand the strategy if GM hovers in near this range but what if it doesn’t (to the downside)?
For example, I would normally put in a stop order on most stocks I purchase (to manage downside risk). However, if I did it on these 200 GM and it triggered, I would be left naked with my call obligations. That may not be a bad thing if my stop triggered on a nasty drop but then I am thinking that I would then consider* also buying-to-close the calls to be prudent (since I would be naked and they should be cheap at the time).
* Buying-to-close may not be necessary depending on the drop, conditions and time to expiration. However, I think it would be worth considering.
I do realize that we will get into hedging strategies with options eventually but I wanted to verify my simple approach outlined above.
I also am confused…the concept of a stop is so ingrained in normal stock management. Is there a stop concept here as well or do we just let the equity drop without a place to get out?
I’m waiting for prices closer to what Dan suggested. Right now the stock and option are providing a cost basis around 33.2, significantly higher than Dan’s recommended 32.85. Also the profit if exercised is down to like 70 cents which is less than 2%.
I’m not seeing this as a RHRN trade, I’ll wait for better prices all around….. Guess I’ll learn either way…
William: Link for Calculator is up the page below Dan’s picture. I don’t think a regular Scottrade account allows buy writes.
You have to download their Option Platform which requires a seperate account be set up. Strange but true.
Dan – Help. I bought the GM just as Dan Mentioned. I really have no idea what to do next. He told us how to buy it but now that I have it, what do I do. I am sure this sounds silly but this is my first option trade. I would really appreciate a little help here.
Forrest,
The general idea of writing a covered call is to let it expire worthless or have your stock called away. So, your answer is do nothing. Now, if GM goes up, the price of the call will naturally go up (but you have already collected your money) and GM will get called away from you at the strike price you chose. If GM goes down, and the price of your call decreases, you have the option of buying the call back (buy to close). And then writing another covered call on GM for the month of February (in this case).
Ok I am now 0 for 2 on these two ideas. BAC ran away from me on the first one – I didn’t chase it -and it looks like my GM order will go unfilled. I am following your parameters but not getting any trades due to mkt. Is this what I can expect or am I missing something?
Paper trade them just to get use to pushing the buttons. Use limit orders and pick any prices, try multiple orders at different prices. Be sure to take notes (keep a journal) of each trade and document what you did right & wrong.
Thanks Gene, started a journal of these trades yesterday.
Ralph LaBrack says:
Great video and I was able to execute this one. I had the same question answered above about what happens next, given that the stock is above the strike price. If I understand corectly even though it is above the strike price, it is unlikely to be called until 1/22,. Am I interpeting correctly?
I would be better if you can announce the trade idea in the email so we can catch the quick action. Waiting through 20 min video has caused many of us missed the timing.
Agreed, there was absolutely nothing wrong for me in terms of when the information was available. It was on the site, I got an email, and I didn’t do the trade until 10:20 on Wednesday morning and was still able to do it for the net debit that Dan suggested.
A little earlier in the day would be nice! I don’t know about most people but I am in bed at that hour due to work the next morning and that hardly gives us enough time to ponder over a trade. My suggestion is to give us at least a day advance notice so we can all discuss it over this chat session the day before and thoroughly understand the upside and downside of the trade. IMHO
Well I missed the action this morning because my option trading was not enabled until late today. I am looking at the same idea but with a 35 strike price and with the calculator I would get a 3.0% profit if the stock is called. Almost the same return and much better than the present 34 strike numbers at the end of today. So I plan to put that into play in the morning. I am a novice too and would appreciate a neg or pos comment on this idea.
I am worried that many people in this forum don’t understand the risks. Anyone who trades options without understanding what they’re doing is going to lose money. Please read and get educated. I’ve seen a buy-write post here where they bought the stock and bought the call instead of selling the call. If you don’t know the difference between buy to open and sell to close or sell to open and buy to close, don’t do this. There is no win-win. Someone wins and someone loses…always. There is always a downside. If you don’t know what it is don’t start the trade. Also please pay attention to commisions, if you are paying a lot in commissions, don’t do one buy-write. Commisions will kill you. The BAC trade with only one contract will eat you alive if you pay more than 1$ per contract.
I missed this trade as well as some other people. I normally if I trade covered calls it is on a position that I already have and I nearly always intend to either risk getting assigned a portion of the position at a price that is at what I think will be a top or intend to hold in which case I’ll buy a call that is out of the money. On new stock positions I will most frequently use tight stops if they are purchased after a support level is defined. On new positions, therefore, I have not been using buy writes and I leg in and wait until the stock confirms the direction I believe it will go. When and if that happens the call is worth more. The buy write strategy is new to me and is testing my patience.
On this GM trade, I decided to use the buy write as an exercise and because I didn’t want to stray too far from the suggested debit amount because it was a new position and I liked that the trade worked around a defined support level. Additionally, I have not done any Chrismas shopping so I didn’t want to hang around the computer all day to trade. My order went in last night but Fidelity disappointed me by not filling it and I wasn’t around to make the necessary adjustments to get it filled. I’m not sure I care anyway, but as a critique, the recommendation seems incomplete without some range of limits or suggested ways to execute the trade. I do like that the recommendation was made the evening before which gave me the leeway to use the pre-market and strategize the trade a bit. I was able to execute the BAC trade successfully without much work because I legged in. On this one, that would have been a better strategy for execution.
I would also add my critique that I feel that I am left hanging when the trade does not get executed. It would be ok to suggest that it’s ok to hold to a parameter of debit and to wait for the next one if the trade didn’t execute, but that has not been expressed. Also, I was expecting some coaching on the management of a trade to make it more successful. That includes selling or rolling it over before expiration or being assigned.
An additional observation is that because the experience levels of fellow posters vary widely, I find it difficult to cut to the information that will be most useful to me. More importantly, it is not readily apparent which posts are more credible based on experience and good judgement. I personally have had wide ranges of success and failures (big ones) with options and was hoping to contain the loss side of it through this service. Based on the two trades to date, I can see that the loss side will be greatly contained but so will the profit side unless I do other types of option trades which carry a greater risk. It remains to be seen whether a system that entails infusing slow drops of glucose is better than a system that drips occasional jolts of adrenalin into the body. That said, I’m not on board because I have the answer.
Don’t know how to edit the above post but I meant to say that if I intend to hold a stock I will sell a covered call, not buy, a call, that is out of the money and beyond a resistance point I can define.
You hit the crux of the matter and perhaps the issue with this format. I fear us clonies might be victimized by a “crowded trade”. I”ve experience this with other gurus and am sure other retailers have with the “CNBC Effect”. It would be up to our fearless leader to manage us around this with parameters and guidance in determining when the trade ceases to be opportunistic or morphs into another variation of the theme.
Dan,
Is it possible to start or end with an execution plan? For example, our trade is:
GM:
DAY 0 Execute: BUY Covered Call for GM
GM(100): 33.80
GM@Jan-22(1): 0.85
Plan #1: Let it expire worthless …. profit: $XXX
Plan #2: Let the option Call and sold the stock @ $34…. profit: $YYY
Just thought it may help some of the users here to be very clear the game plan.
Dan/Gary:
Do not know if you read all these comments. I have been a member of SMM for several years and have been looking forward to OMM since you announced the program several months back. I was able to make the BAC trade but the GM one got away from me on price. As time goes on I guess I will learn how flexible I can be in chasing. I know some of the comments I have read seemed pretty intense considering this is just getting off the ground. I understand the concept of beta testing what we are doing and I hope most of the subscribers will be patient as we go through this process. I agree with you it is better to be safe than sorry (especially with my money) Have a good vacation.
This trade got away from most of us right off the bat. However, if you don’t mind owning the stock over time, there are still ways to execute this trade for similar profits. What you can’t replicate well is the cost basis if the option is not exercised. The low cost basis Dan set up with the initial trade is out of reach.
Here’s what I did, however, as a way to get into the trade and potentially make some extra premium. This is a strategy that Dan is not sanctioning because I am starting with a Dec Q4 (weekly) call.
I finally bought the stock at the end of Thursday at $34.78 (100 shares). I sold one Dec Q4 2010 $35 call for $0.45 as well. This option expires next Friday 12/31. Here’s how the math works out:
If above $35 on 12/31, the stock gets called away from me at $35. My profit is $35.00 – ($34.78 – $0.45) = $0.67. About 1.9% in one week. (Annualize that!) Got my dough back for OMM already!
If below $35 on 12/31, I keep my stock with a cost basis of $34.33. I will then write a Jan 2011 call against my position like everyone else has.
If GM drops a lot by 12/31, I’m well behind anyone who was able to get into the trade near Dan’s initial parameters. I missed that boat, so this is what I came up with to get involved.
I replied to a post down a bit, but will post the same here: I did the trade at about 10:20am on Wednesday for the net debit that Dan suggested. And you could have done the trade for that same net debit,. or very close to it, until shortly before 11am. The only reason the trade got away from anyone is because their broker let them down.
I did the trade on my own, on the web, rather than putting it in as a buy-write. Yes, I paid commission on both parts of the trade rather than a buy-write commission, but if your broker is like mine and you have to phone in a buy-write to get that one commission, the extra time it takes to call it in is totally not worth the commission discount. You miss the trade, as many are reporting here.
Something to think about next time. If you have real time quotes, line the equity quote up above the option quote and when it’s offering up the net debit you want, just buy the stock then write the calls.
Of course, if you are doing one contract as a way to familiarize yourself with options, the commission may be prohibitive. If it is, you should really think about paper trading instead of trading one contract as a way to get accustomed to what is going on.
Unfortunately my real job prevented me from being able to trade right off the open (damn financial security!).
Once the price ran away I decided to wait to see if there would be a pull back. There wasn’t. I was just going to throw in the towel on the GM trade but I came up with the strategy I wrote about above to justify getting in now. Wanted to share with details in case someone else was in the same situation and still wanted to try to trade it…..
Feedback for Dan: you only get better with aqe. While both videos were clear and informative, this second one was superior, particularly due to the calculator that you used. I also really appreciate that you are giving us conservative trades by suggesting that we stick with stocks we are generally bullish about, and that covered calls reduce our risk from that which we are already willing to assume. I still have much homework to do before I can participate with my $$$, and I only just finished all the educational videos today, as I took your advice to enjoy the holiday season. I will also be paper trading for a bit, but I am really glad to be participating in a structured program that should ultimately lead to greater success as a trader. My skills improved immensely as a member of SMM throughout 2010, and I am ready for this. Thank you.
Hey Dan,
you are doing a great job . If we are called away, is it your intention to buy back and doing it again, or wait and see what the market does?
Dan: my first post for either stockmarketmentor or optionmarketmentor. This format is most helpful, thank you for all the insights you have given me.
Please post the address for the option calculator you used. The end of video didn’t route me to it. Thanks
Option calculator link –
http://www.optionseducation.org/resources/covered_call_calculator.jsp
jct98
Hey Dan and Gary, a comment, a question, and then a suggestion. COMMENT: This video went over a lot better than the first one. Good idea using the spreadsheet from the OIC rather than the one you used on the BAC trade, because there were a couple of math errors in the ROI calculations shown in the first video that made it a little hard to follow for those who may not have been familiar with these trades. QUESTION: Since your thesis seems to be trickle up through the end of the year and then a mild selloff in Jan, would you be talking about taking profits on these covered call trades the first week of Jan, or just sweat it out unitl options expiration? SUGGESTION: I just happened to be logged in when the GM trade was put up. I didn’t plan to check the OMM site every day, I sort of assumed that you would blast out an email to your members when a new trade was posted. Wouldn’t that make sense? That’s sort of what I have gotten used to with SMM; I get an email when new content is there, and I know if I log onto the site, there will be something interesting for me to watch. Works for me. Why not do this for OMM subscribers? THANKS
Hi Craig–I received an E-mail for this trade @ 10:26PM Tuesday. E-Mail also received for BAC trade. Gary posted some E-mail addresses to submit problems. I believe one was support@OMM.com You can search the forum under authors and put Gary’s name in and you will then find the address. Good luck to you. Rona.
Dan,
As an OMM subscriber, do I have access to the charting service that you are showing or where do I go to get the charts with the technicals that you are displaying.
Paul
I’m not DAN, but I do know that DAN uses Worden Telecharts, which is a paid charting service. However, Worden also produces a free version that is excellent. You can access it at: freestockcharts.com
Hey Dan and Gary, are you reading my mind or what? About 10 minutes after my post, I got an email from you announcing the GM trade. Nice job, keep up the good work!
Dan: great video. I have been perplexed by your emphasis in the BAC video that we wanted to get called out. The calculator that you introduced in this one, combined with the accompanying verbiage, cleared the fog. I get it. Thank you.
Dan:
The Covered Call Calculator is quite helpful….I know this is not “your calculator” but please note that it appears that it does not provide a means to deduct a commission for the scenario titled “if stock is called at expiration.”…i.e. there will be a commission on the stock if/when it gets called away but this calculator does not net the commission out of the stock proceeds….so it overstates the ROI for this scenario.
Gary, you do not have to pay a commission if your stock is called away. Like In home purchases, and in auctions, the buyer who calls your stock bears the (closing) cost of commissions. If you’re paying a commission when your stock is called away, I’d say it’s time to find another broker.
I have Schwab. If the stock is called away they treat it like a sale, $8.95 commision. If the option expires worthless there is no commission. They reason being called away is a sale for you. I think they see you get a profit so they want some too. There were posts in the forum some broker charges a 19.95 assignment fee.
Interesting trade. A Cramer fav.
Dear Dan,
Thank you to both yourself and Gary for making this site happen, options are new to me, but as I study the videos I am starting to feel more comfortable with the concepts. Was the calculator supposed to be with this video, or are you going to send it with the 45 minute video that you mentioned on the GM ‘buy write’ trade?
Dan,
Great video! Totally understandable and educational. I have a question about the GM Trade. What if you already own GM at a higher price? Do you adjust your strike price?
Thanks from a newbie.
I’m slowly starting to understand this stuff. Do I have a clue? No… not really. Where does the $34.00 strike price come from? Why $34.00, and not something else?
ZFrog, there are January GM options with several strike prices. The 34.00 strike was the strategy Dan selected for the reasons layed out in the video.
Dan: when you set up the Multi-Leg Options order to (for example) buy to open 200 shares of GM and sell to open 2 options of GM 1/22/11 @ 34 with a net debit of 32.95: should you make this an All or None condition? BTW, Fidelity is set up to do these Multi-Leg Options.
Z
Anyone have the download link for dans options calculator? At the end of the video it did not go to link.
COVERED CALL CALCULATOR – Here is the covered call calculator that Dan mentioned. I apologize that the video didn’t take you there. Beta testing at its best!!
http://www.optionseducation.org/resources/covered_call_calculator.jsp
Thanks
Gary
I am having a hard time getting the option calculator page. I tried the above mentioned link that you provided. What I am getting is, that address does not exist. I need help.
I found the link to the option calculator page.
Calculator – http://www.optionseducation.org/resources/covered_call_calculator.jsp Dashboard WidgetIdea for MAC users. In safari under file there is a feature called open in dashboard. If you go to the option calculator web page using safari, use the file drop down, open in dashboard, it will highlight an are of the page. Move the border until it is highlighting the area you put the stock symbol in and click add. Pull up you widget dashboard. Check it and if it is not quite right hit the i in the lower right corner. This will put you into edit mode to move it around and fine tune it if you have to. This will allow you to bring up the calculator on demand.I use this to display gold prices from kitco in the dashboard as will as the USD index quickly but it is useful to set up fast access to useful tools.Depending on peoples success with this I may or may not post a quick pdf instructional if I am allowed to link it here. Again remember you have to use Safari to set it up. It does not mean you have to keep using safari. For MAC/APPLE users. Sorry again PC.
Dan, this video was better for me. I already own GM at 34.30. I understood much better this time. This could be great fun if the market participates well. I already owned Bac also. Great job!
Very Good. Have not played with option in several years becasue it was clear I did not know what I was doing. This is good, not swinging for the fences and managing risk with options. Very good explaination Dan.
Gary Purkat, I just added the extra commision to the buy price to fake it out for the additional commision for being called out. It got me very close to the spreadsheet I generated for my own calculations. I think it dials it in very close.
Ok Dan, Gary, or anyone,
I understand making $0.85 /contract if GM goes sideways and paying less to own GM if I get called away. However, isn’t our downside risk unlimited? Should we set a stop somewhere below $32.95? What do you or anyone else think?
Dan/Gary:
Thanks for the session (this session was great!). In the spirit of improvement, this session seemed to be much better than the first. This was not only because you had a better tool (vs. .xls format), but because you walked me (novice option trader) through how the strategy works (how we would make $ on it if we decided to execute on it). It would be helpful if you did the same for all future trading ideas (at least the ones where you introduce a new option strategy) and kept the video to 5-10 minutes :). In addition, it would be great (once you are finished with the beta and if it is possible) that you integrated SMM and OMM to a single ‘Members Area’ interface (at least with a single sign on). Lastly, please keep sending the emails (acts as notification for me that the smm premium strategy session and omm trading ideas are ready to view).
Thanks again,
Emilio
Could the stock be called away at anytime (above 34) or does the trade last till the 3rd fri. in Jan. Same with BAC–could it be called away today ?
Yes Micheal, the owner of the call can exercise it at any time….USUALLY it won’t be until expiration, but not always.
BAC- Someone posted instead of writing a covered call why not sell a put, which made a lot of sense (to me) Could someone explain the advantage of writing the call instead of selling the put. I like the idea of taking in the premium without laying ut the money and if the stock is put to you then you buy it, instead of buying it up front. Am i not thinking straight ?
Michael
Some (if not all) of the on-line brokers consider selling a put to be an advanced strategy and will not make it available for less experienced traders or those that do not have a margin account. The covered call strategy is considered to be conservative and is available for all who have any level of option permission on their account. A margin account is not a requirement either which makes it available for those (like me) who trade in IRA accounts. Margin accounts are not available inside an IRA.
GatorD
Gator,
I’m approved for all options strategies. I’m talking pure #’s here and if i’m thinking correctly selling the put makes more sense, if not could someone explain why not.
If you have level 3 permission then selling a put is usually better, because the margin requirments are less, but if the underlying pays a dividend then you have to factor that in. If there’s a dividend you’ll miss out unless you own the stock. When you sell a put there is no commission fee to close it. Most people, especially here, can’t sell naked puts. If you can that would be better.
Michael,
There are many ways to use puts and calls for different strategies and different time periods. Dan is describing one. Some people might want to buy a stock if a dividend is approaching between the purchase date and the expiration date. In that scenario you can capture both the dividend and the option premium. Zen1
Dan,
Much better presentation and explanation of the trade than with BAC – very clearly explained……good job. Much improved.
This is my first options trade and am looking for some guidance from the more experienced traders. The question is in regards to the actual mechanics of placing the order. I read through yesterdays BAC comments which I think was enough to get me through this. I have some specific questions on making the order. (I am using Fidelity if it makes any difference)
I placed a Multileg order, Buy-Write,
Buy – 100 shares GM
Sell to OPEN – 1 contract GM Jan 22 $34 CALL
Under order type it selected “Net Debit” where it automatically filled in $33.00. I was under the impression from Dan’s video that I would be able to specify the Net Debit. How does that work excactly?
I also selected “ALL or NONE” for the conditions and Time In Force = 1 DAY. Whas this the correct way?
It appears that trade executed at $33.71 with the option filled at 0.71 so I think the math will work out but how do I “limit” my order to get to the same trade specification that Dan issued? I hope my question makes sense. I am struggling a little here in explaining. I guess I liken this to making a limit order on a stock verses just “buying at Market”. I kinda felt like I was “buying at market” with this trade.
Please tell me if I screwed up and where I did. Thanks.
choose “buy write” from the option page.it might work better if you want to give single commission to fidelty.
Thanks. Was “sell to open” the right way to sell this call?
How do you set the “net debit” to be the same as Dan’s $32.95?
Fidelity (using the Active Trader Pro Platform) defaults net debit to market or close value (stocks trade extended hours, options close at 4PM). All you have to do to set a limit to your order is type it in and override the default. Since you are not trading market, you may not execute, but you set up your strategy on what you are willing to accept for your basis. Another advantage to automation is that you are paying a little less in commission as the security and option are executed together.
JP
Hi Dan,
Congratulation. Wish you great success on your option site. You and me both. I am very excited. I have a question about covered call. I know you said to place the order as covered call. My thought is why not buy the stocks first when it goes down a little and sell the call when the stock is higher so I can take in more premium. I will make both trade on the same day. I want your thought on this.
Very well done and understandable Dan, just wish the videos came a little earlier in the evening.
Dan – Could I suggest that you include average brokers and transaction fees to get a more realistic calculation of profit/loss
Too many brokers and too many different fee structures. To add to the confusion, larger and more active accounts can negotiate better rates.
If you have a broker, (1) watch the commissions as they happen, and (2) go on other brokers’ sites — or call them — to walk through the charges for the same trade and compare.
Dan People are asking about chasing both trades after they have moved beyond the debit that you suggested. Is there a minimum rate of return that we can say “this trade is a go or a no go”?
Henry, I also subscribe to a different options educational group, and they suggest not to short an option for anything less than a $0.45 credit. Also they recommend a minimum of 20% annualized ROI or else don’t do the trade.
To OMMentorites or DAN:
A dumb question from a beginner (me) On any covered call, the seller earns premium on initial sale of the call.
1. If the stock price goes up after purchase of the covered call, and I want to buy the call to close (for whatever reason), who gets the premium (differential between initial sell and repurchase of the call)?
2. Same question at exercise, if the call is in the money, who gets the premium when the call is purchased (I only get the value of the premium when I sold the call, but if the value of the call goes up, I’m trying to understand to whom the value of the of the differential accrues?
I almost get it.
Thanks.
Chris….
Answer 1…if the stock goes up and you want to buy the call (to close the option position) the seller of the call gets your $….you will be (most likely) buying this back at a loss (paying more than you received for it)…
Answer 2…nobody gets any premium from the call…..the owner of the call just gets the benefit of buying the stock at a discounted cost (the strike price) vs. the current market price, so essentially the “premium” is in that price differential…
Hope this makes sense…. 🙂
I have a question – If I have a deep-in-the-money June 30 call – can I write a Jan 34 call against it? Not trying to mess with anybody’s mind, just curious.. If possible, what are the ramifications? I appreciate OMM..
If I understand you correctly: You own a June 30 call and have no obligations against it.
If so yes you can write a Jan 34 call against it. It will be a combination of a vertical and calendar spread.
Just make sure the premium you paid minus the premium for the Jan 34 call is reasonable to the $4 spread.
If you get called out in Jan for the 34 call you would be required to deliver the stock for $34, which you could provide by exercising your June option. So the profit loss would be: $34 -$30 -(commissions)- premium paid for june 30 call + premium received for the Jan 34 call.
Having deep in the money calls and selling calls against them is a fairly common practice.
Mauitrader
Thanks Mauitrader, I was hoping that was the case. It sounds like you are trading
from a beautiful place..
Dan, last night I placed a multi-leg order with a net-debit of 32.95 but I haven’t been filled yet. Do you recommend chasing this position with a higher net-debit, or just wait and see what happens. The strategy seems sound when the price gets to be near support, as you are suggesting, but how far would you chase a cc trade. I apologize if you gave a range and I missed it.
Oops, sorry I didn’t see the post from Henry about an hour ago with the same question.
Question from the risk manager part of my brain: I now own 200 shares of GM at 33.70 and sold 2 contracts for the Jan $34. I understand the strategy if GM hovers in near this range but what if it doesn’t (to the downside)?
For example, I would normally put in a stop order on most stocks I purchase (to manage downside risk). However, if I did it on these 200 GM and it triggered, I would be left naked with my call obligations. That may not be a bad thing if my stop triggered on a nasty drop but then I am thinking that I would then consider* also buying-to-close the calls to be prudent (since I would be naked and they should be cheap at the time).
* Buying-to-close may not be necessary depending on the drop, conditions and time to expiration. However, I think it would be worth considering.
I do realize that we will get into hedging strategies with options eventually but I wanted to verify my simple approach outlined above.
I also am confused…the concept of a stop is so ingrained in normal stock management. Is there a stop concept here as well or do we just let the equity drop without a place to get out?
I’m waiting for prices closer to what Dan suggested. Right now the stock and option are providing a cost basis around 33.2, significantly higher than Dan’s recommended 32.85. Also the profit if exercised is down to like 70 cents which is less than 2%.
I’m not seeing this as a RHRN trade, I’ll wait for better prices all around….. Guess I’ll learn either way…
Did not see the address for the option calculator. Will the Scottrade option program allow buy/ writes?
William: Link for Calculator is up the page below Dan’s picture. I don’t think a regular Scottrade account allows buy writes.
You have to download their Option Platform which requires a seperate account be set up. Strange but true.
Dan – Help. I bought the GM just as Dan Mentioned. I really have no idea what to do next. He told us how to buy it but now that I have it, what do I do. I am sure this sounds silly but this is my first option trade. I would really appreciate a little help here.
Forrest,
The general idea of writing a covered call is to let it expire worthless or have your stock called away. So, your answer is do nothing. Now, if GM goes up, the price of the call will naturally go up (but you have already collected your money) and GM will get called away from you at the strike price you chose. If GM goes down, and the price of your call decreases, you have the option of buying the call back (buy to close). And then writing another covered call on GM for the month of February (in this case).
Thanks SamG, you made this so understandable.
JW
Hold it and watch the Options you sold decline thru time decay.
Ok I am now 0 for 2 on these two ideas. BAC ran away from me on the first one – I didn’t chase it -and it looks like my GM order will go unfilled. I am following your parameters but not getting any trades due to mkt. Is this what I can expect or am I missing something?
Bruce,
You are not missing anything. There will be many other trades. Don’t take a trade if you can’t make the $$ you need.
Gotcha…..Thanks!
Paper trade them just to get use to pushing the buttons. Use limit orders and pick any prices, try multiple orders at different prices. Be sure to take notes (keep a journal) of each trade and document what you did right & wrong.
Thanks Gene, started a journal of these trades yesterday.
Great video and I was able to execute this one. I had the same question answered above about what happens next, given that the stock is above the strike price. If I understand corectly even though it is above the strike price, it is unlikely to be called until 1/22,. Am I interpeting correctly?
I would be better if you can announce the trade idea in the email so we can catch the quick action. Waiting through 20 min video has caused many of us missed the timing.
Dan sent out the email last night (I got it at 10:27pm)….market opens @ 9:30am the next day…how much more time do you need?
Agreed, there was absolutely nothing wrong for me in terms of when the information was available. It was on the site, I got an email, and I didn’t do the trade until 10:20 on Wednesday morning and was still able to do it for the net debit that Dan suggested.
A little earlier in the day would be nice! I don’t know about most people but I am in bed at that hour due to work the next morning and that hardly gives us enough time to ponder over a trade. My suggestion is to give us at least a day advance notice so we can all discuss it over this chat session the day before and thoroughly understand the upside and downside of the trade. IMHO
Well I missed the action this morning because my option trading was not enabled until late today. I am looking at the same idea but with a 35 strike price and with the calculator I would get a 3.0% profit if the stock is called. Almost the same return and much better than the present 34 strike numbers at the end of today. So I plan to put that into play in the morning. I am a novice too and would appreciate a neg or pos comment on this idea.
I am worried that many people in this forum don’t understand the risks. Anyone who trades options without understanding what they’re doing is going to lose money. Please read and get educated. I’ve seen a buy-write post here where they bought the stock and bought the call instead of selling the call. If you don’t know the difference between buy to open and sell to close or sell to open and buy to close, don’t do this. There is no win-win. Someone wins and someone loses…always. There is always a downside. If you don’t know what it is don’t start the trade. Also please pay attention to commisions, if you are paying a lot in commissions, don’t do one buy-write. Commisions will kill you. The BAC trade with only one contract will eat you alive if you pay more than 1$ per contract.
Agreed, I made all these same mistakes without someone holding my hand. At least Dan is giving these people a chance not to make these same mistakes.
I missed this trade as well as some other people. I normally if I trade covered calls it is on a position that I already have and I nearly always intend to either risk getting assigned a portion of the position at a price that is at what I think will be a top or intend to hold in which case I’ll buy a call that is out of the money. On new stock positions I will most frequently use tight stops if they are purchased after a support level is defined. On new positions, therefore, I have not been using buy writes and I leg in and wait until the stock confirms the direction I believe it will go. When and if that happens the call is worth more. The buy write strategy is new to me and is testing my patience.
On this GM trade, I decided to use the buy write as an exercise and because I didn’t want to stray too far from the suggested debit amount because it was a new position and I liked that the trade worked around a defined support level. Additionally, I have not done any Chrismas shopping so I didn’t want to hang around the computer all day to trade. My order went in last night but Fidelity disappointed me by not filling it and I wasn’t around to make the necessary adjustments to get it filled. I’m not sure I care anyway, but as a critique, the recommendation seems incomplete without some range of limits or suggested ways to execute the trade. I do like that the recommendation was made the evening before which gave me the leeway to use the pre-market and strategize the trade a bit. I was able to execute the BAC trade successfully without much work because I legged in. On this one, that would have been a better strategy for execution.
I would also add my critique that I feel that I am left hanging when the trade does not get executed. It would be ok to suggest that it’s ok to hold to a parameter of debit and to wait for the next one if the trade didn’t execute, but that has not been expressed. Also, I was expecting some coaching on the management of a trade to make it more successful. That includes selling or rolling it over before expiration or being assigned.
An additional observation is that because the experience levels of fellow posters vary widely, I find it difficult to cut to the information that will be most useful to me. More importantly, it is not readily apparent which posts are more credible based on experience and good judgement. I personally have had wide ranges of success and failures (big ones) with options and was hoping to contain the loss side of it through this service. Based on the two trades to date, I can see that the loss side will be greatly contained but so will the profit side unless I do other types of option trades which carry a greater risk. It remains to be seen whether a system that entails infusing slow drops of glucose is better than a system that drips occasional jolts of adrenalin into the body. That said, I’m not on board because I have the answer.
Don’t know how to edit the above post but I meant to say that if I intend to hold a stock I will sell a covered call, not buy, a call, that is out of the money and beyond a resistance point I can define.
You hit the crux of the matter and perhaps the issue with this format. I fear us clonies might be victimized by a “crowded trade”. I”ve experience this with other gurus and am sure other retailers have with the “CNBC Effect”. It would be up to our fearless leader to manage us around this with parameters and guidance in determining when the trade ceases to be opportunistic or morphs into another variation of the theme.
Dan,
Is it possible to start or end with an execution plan? For example, our trade is:
GM:
DAY 0 Execute: BUY Covered Call for GM
GM(100): 33.80
GM@Jan-22(1): 0.85
Plan #1: Let it expire worthless …. profit: $XXX
Plan #2: Let the option Call and sold the stock @ $34…. profit: $YYY
Just thought it may help some of the users here to be very clear the game plan.
Dan/Gary:
Do not know if you read all these comments. I have been a member of SMM for several years and have been looking forward to OMM since you announced the program several months back. I was able to make the BAC trade but the GM one got away from me on price. As time goes on I guess I will learn how flexible I can be in chasing. I know some of the comments I have read seemed pretty intense considering this is just getting off the ground. I understand the concept of beta testing what we are doing and I hope most of the subscribers will be patient as we go through this process. I agree with you it is better to be safe than sorry (especially with my money) Have a good vacation.
This trade got away from most of us right off the bat. However, if you don’t mind owning the stock over time, there are still ways to execute this trade for similar profits. What you can’t replicate well is the cost basis if the option is not exercised. The low cost basis Dan set up with the initial trade is out of reach.
Here’s what I did, however, as a way to get into the trade and potentially make some extra premium. This is a strategy that Dan is not sanctioning because I am starting with a Dec Q4 (weekly) call.
I finally bought the stock at the end of Thursday at $34.78 (100 shares). I sold one Dec Q4 2010 $35 call for $0.45 as well. This option expires next Friday 12/31. Here’s how the math works out:
If above $35 on 12/31, the stock gets called away from me at $35. My profit is $35.00 – ($34.78 – $0.45) = $0.67. About 1.9% in one week. (Annualize that!) Got my dough back for OMM already!
If below $35 on 12/31, I keep my stock with a cost basis of $34.33. I will then write a Jan 2011 call against my position like everyone else has.
If GM drops a lot by 12/31, I’m well behind anyone who was able to get into the trade near Dan’s initial parameters. I missed that boat, so this is what I came up with to get involved.
I replied to a post down a bit, but will post the same here: I did the trade at about 10:20am on Wednesday for the net debit that Dan suggested. And you could have done the trade for that same net debit,. or very close to it, until shortly before 11am. The only reason the trade got away from anyone is because their broker let them down.
I did the trade on my own, on the web, rather than putting it in as a buy-write. Yes, I paid commission on both parts of the trade rather than a buy-write commission, but if your broker is like mine and you have to phone in a buy-write to get that one commission, the extra time it takes to call it in is totally not worth the commission discount. You miss the trade, as many are reporting here.
Something to think about next time. If you have real time quotes, line the equity quote up above the option quote and when it’s offering up the net debit you want, just buy the stock then write the calls.
Of course, if you are doing one contract as a way to familiarize yourself with options, the commission may be prohibitive. If it is, you should really think about paper trading instead of trading one contract as a way to get accustomed to what is going on.
Thanks, Dunsek.
Unfortunately my real job prevented me from being able to trade right off the open (damn financial security!).
Once the price ran away I decided to wait to see if there would be a pull back. There wasn’t. I was just going to throw in the towel on the GM trade but I came up with the strategy I wrote about above to justify getting in now. Wanted to share with details in case someone else was in the same situation and still wanted to try to trade it…..
Since the stock moved up enough to take me out Friday, I decided to roll my short call up and out to January 36.
It cost me $1.10 to buy back my Q4 $35 call (cb $0.45) for a net loss of $65. Which keeps me from losing my GM at $35.
I then sold the Jan $36 call for $0.90.
Math: Stock $3478 – $45 + $110 – $90 = $3453 cost basis.
If option exercised, my profit is $147 ($3600-3453). My profit was going to be $62 ($3500-3478-40).
Dan showed us this strategy so we could try to employ it ourselves. I’m sharing my version here to help myself grasp the concept better.
Feedback for Dan: you only get better with aqe. While both videos were clear and informative, this second one was superior, particularly due to the calculator that you used. I also really appreciate that you are giving us conservative trades by suggesting that we stick with stocks we are generally bullish about, and that covered calls reduce our risk from that which we are already willing to assume. I still have much homework to do before I can participate with my $$$, and I only just finished all the educational videos today, as I took your advice to enjoy the holiday season. I will also be paper trading for a bit, but I am really glad to be participating in a structured program that should ultimately lead to greater success as a trader. My skills improved immensely as a member of SMM throughout 2010, and I am ready for this. Thank you.
Dan, Where do I find the seminar on using the option calculator software. Is that on OMM or on the software site?