Dan, you must have been looking over my shoulder! This RR popped up on my Smokin’ VS Breakout Scan (~ double volume). With transports moving higher, this looks like a winner, and I was looking at how to get involved when your e-mail arrived.
Dan,
Think it would be good to explain the downside of the out of the money calls compared to the in the money calls. Would they hit their stop quicker than the in the money call ? Would they move up slower initially since there is more premium ?
Better to explain the pros and cons–no ??
Out of the Money Calls will move up and down slower…As they move up their delta will increase and as they move down their delta will decrease. This is also effected by time so you have multiple moving parts with options.
Dan,
Well you explained it–thx. So only thing to consider considering the delta is that one would be stopped out faster on the out of the money call, correct ? Though the % loss is less. Guess the fly is one could get stopped out of the 100 call while the 95 call may still be in the trade–
Dan / OMM:
I am in the BAC trade (never sold covered call though but may sell $14 Jan), I am in the CRUS trade but took partial position at $2.55. (Don’t like the GM trade even though it was profitable. I live in Detroit and GM and the government screwed the bond-holders last time around… not for this venue I know).
My question is this… trades like SWN and UNP… is it OK to trade around these positions? Meaning, I would perhaps start small, review my entry and then probably get out right before earnings only to look to get back in? Or, do you think that is too much work for any risk mitigation? My experience is that you see a drop after earnings a high percentage of the time even if announcements are killer.
Mark Dz
Excellent discussion. The format is most helpful. I have learned to set my stop right away, after the buy. Then I don’t have to keep checking and worrying about it. Thanks again.
Given the pros and cons as explained on Option 1 vs 2 are “At the money” Calls always more conservative vs “Out of the money” but to a certain extent given your stop positioning. one can lose less if stopped at yr targets in option 2 vs Option 1 if they both go south.
This helped so much because I’d stumbled into AAPL calls, easy peasy NOT, and understanding what you need and risk/reward was missing. It was just umm, maybe it’ll go up!!!
CallaLilly — I don’t sleep. I’ll have plenty of time to sleep after I’m dead — which should be in about 60-70 years from now. (I’m looking to break the longevity record.) :o)
Dan,
Please get more sleep. I am someone who is big on health and nutrition. Try to get at least 5 straight hours of sleep per night so your body can rejuvenate itself. This kind of sleep pattern will help you to break the longevity record. It’s wonderful having you around. I’m learning a great deal from you about the market and trading. You are a treasure–MENTOR.
Dan — you’re providing a very lucid explanation of not only the option strategy itself, but the present technical momentum of the underlying stock and the stock industry. But why choose a UNP May call (and not August or a leap to Jan 12)? Is it just because of the cheaper option price (which increases for the same strike price the further out one goes) or do you have an underlying rational that under the present scenario the upwards momentum of the stock will (more probably) fade after May?
Dan, Something to think about. Three weeks ago I knew nothing about options. After looking at all the videos and reading about half of a book on options, I am seeing it. Not because I’m smart, but because I have been in SSM for over 1 year. As an example of this, I think LOW is a cash cow. The first thing I wanted to do is buy options on it. Because of what I have learned in SMM, I know that the volitility would eat me alive! The only way I have learned this is through experience. I got that through hours of listening to our mentor and studing the outcome. If a restriction was put on being in Options Market Mentor, such as being in SMM for some period of time. Then you would not have to listen to the carping of people who are here just for the trades. I know the stress that I felt in this. It must be tremendous for you. I pray for you and hope you do well. The goal for us is to learn, not for you to pick trades for us. Again, thank you so much for caring! Tim D
Dan,
I agree with Morpheous1.
I’ve always wanted to learn about options, but they always seemed so daunting to me.
Now, all the spreads and straddles still seem difficult, but I’m looking forward to learning about them.
vote for TDAmeritrade….i would have gone with Option Monster….but their commission is higher than what i’m currently paying…i submitted copy of trade and they were not willing to adjust.
btw,,,,good explanation of delta and how it is affected as it goes up and down
DAN – after UNP call option video i feel as if we are harvesting money…you make it sound so easy to harvest money. What I’m missing is the downside of options.
How can I lose money in options? What can turn against our trade here beside the tanking of UNP stock price. Perhaps you already have said it all but I just still don’t get it. I see the stop loss you specified and understand that.
Bear with me ’cause I’m totally new and unsure of even how to place a trade!! but I’m learning a huge amount after this short time being a member of OMM.
You know we all appreciate your teaching and caring.
poppy — Not Dan, but you can definitely lose money in options. Options are a time dependent instrument. In other words, if the stock price goes nowhere or even down just a dollar, the option price will decline as time ticks away. AND, the closer to expiration we get, the faster the price of the option will decline. Additionally, if your UNP option is going nowhere, that’s money you have tied up that is not producing any return….opportunity cost. Also, before placing a trade, make sure you know what to do to get out (unwind) the trade. From personal experience, when there is money on the line and your emotions are involved and the stock price just tanked (see MEE last year) from an unforeseen event, you won’t know what to do, —-unless you have a clearly defined plan and know how to enter the trade.
poppy- Options are leveraged, so you can lose money in a big hurry if UNP goes south. You can lose even if UNP doesn’t tank. If you buy the May 95 call and UNP closes at 94.99 on May’s expiration Friday, your call is worthless. The entire $6.15 or whatever you paid is gone. Why would I pay you even $0.01 plus commissions for the right to buy UNP at 95 on expiration day if I can buy it for 94.99 on the open market? If you bought the common, you’d be down 0.19/sh in this scenario (excluding dividends), but the May 95 call would be a total loss. So you must be right in the chosen time frame.
Thank you so much for your reply…Now I’m more aware of danger. Yes I was excited after watching DAN’s UNP trade but knowing that I know nothing made me very cautious.
This morning trying to place the trade and found out I don’t know how…it was quite laughable! The rep that helped me kept saying ‘do you understand what you’re doing? (- not unkindly)” but he helped me. now I know how to make/lose money.
The grid………I love it. It’s not at all that I don’t want to listen to the yammering (sp?), it’s a time thing. UNP and SWN both look very good and I’ve put these on. These trades will be my first with the site… (oh, and I went back to listen to the yammering anyway ;), couldn’t help myself).
Mr. Fitzpatrick, what a wonderful way of explaining the hard to explain, really enjoy this, and hope to someday actually participate. My vote for auto trading is TDAmeritrade. Thank You, Karl.
I must have missed something ’cause i’m still confused about the mechanics of the trade. How do you finish the trade? Do you buy or sell the option and how do you do it? Do you end up owning 100 shares of UNP and having to pay $9500? What happens if you let the option expire, do you end up with 100 shares?
Frank-
You can end the trade either way. My plan is to sell the options if the target is hit, or at least to sell half if the position doubles. I’ve never exercised a long option position. To sell, you access your broker and sell to close your position preferably with a limit order. Or you could exercise the options and buy 100 sh UNP at $95/sh for every option contract you own. The Options Clearing Corproration (OCC) will automatically exercise an option that expires in the money, even by 1 penny, unless you put a do not exercise instruction on the position. So yes, if the option expires in the money (if UNP is at least $95.01 on May expiration) you will end up with 100sh for each option contract you own
Frank At this point, if you are not sure that if you pay for an option now, it means eventually you will sell it not buy it, it’s hard to know what to say. Perhaps life has kept you out of the forum and you haven’t watched Dan’s videos. That’s OK but you are playing catchup. There is a body on knowledge that needs to be mastered and it’s going to take work.
Lots of people had exactly the same questions about each of those trades; do I buy to open, sell to open, sell to close, what happens at expiration and these similar questions were discussed 100s of times. Dec 19th is a good place to start reading.
If you’ve been reading the forum and watched the videos, some more than once, you Are missing something and I’d say that Dan’s style isn’t working for you. You need to find another educational source.
You finish the trade by selling to close. You do not want to own the stock but if your option is in the money, most brokers will exercise your call automatically.
1. Sell the options for a profit to another buyer (who is more bullish about the trade and believes these options are still worth buying). This is also called ‘Sell to Close’ or ‘Close the trade’.
2. If you are really bullish on the underlying stock/company, you may decide owning 100 shares of stock/company is a better way instead of just selling the call options. That’s when you ‘Excercise the Option’. In this case, your broker will make sure that you get 100 shares.
If you do not take any actions, then I’m sure your broker will send you an email saying that your options are expiring soon.
Dan- The videos are great. Short, clean and with all necessary information. I can work out my contingency stops with a quick glance at the option chain.
Thanks
I have a few comments for Michael and some of the new members in the options game. At-The-Money (ATM) the time premium is maximum, and the time premium increases to near zero when the in-the-money (ITM) stock price aproximately doubles. The time premium will be at or near zero when the stock price is about one half of its price at the ATM. This explanation is for a Point-In-Time (current option chain). Interestingly the Delta is zero when the OTM time premium is zero , at about .5 when it is at the ATM and 1.0 when the ITM time premium is zero.
I’ll also add that you can also think of delta as the probability of that option expiring in the money. If you buy a May 95 call tomorrow, as UNP moves toward $120 and time moves toward May expiration, delta will rise because the probability of the May 95 call finishing in the money increases.
Dan, Gary,
Great Stuff! One thought; when you go away from the chart there is no way to stop and go back. Some of us (me) need to go over things again and again.
I was happy to see the UPN trade as I went long with this name 2 weeks ago. But at 10k per 100 it would be very tough to make a pile, even though it would be profitable. The explanation on the 2 trades was very easy to understand. It will be interesting tomorrow to see the effect on the pricing. The CRUS option was impossible to get into if you throw your emotion out. If there is one thing I have learned at SMM is to park my emotions at the door. I missed the CRUS trade, but there are other tomorrows. I agree with Michael that you may want to discuss the downside a little more, so if this does not work out the newbies will have a better understanding of the downside.
Re the 10K per 100, I don’t take away from the video that the plan is to exercise the options. The plan is to buy the calls at $6.15 (for the 95’s) and sell them at $12. So, you only need $615 to control $9500 worth of stock.
Dan,
The format and presentation with the discussion of the underlying stock is excellent. It is very easy to understand the risk/reward. I was unable to get the right price on the first two trades so I passed them up. Hopefully, two different alternatives will let us get in at a good price.
Break Even – I must be doing something wrong on my break even calculation.
The stock is trading at 95.00 and goes up 5.85 to 100.85.
If the delta is .54 and the stock is trading at 95.00, lets say, for the sake of argument, that the delta is static. A 5.85 increase in the price of the common would result in a premium of 3.16, whereby you have paid 5.85.
Would the price of the stock not have to increase (5.85/.54 = 10.83) to 105.83 for you to break even on the premium paid of 5.85 per share for the option contract?
I know the delta is not static and that may be where this breaks down.
Or, does the delta become 1.0 at expiration? (That doesn’t make sense to me)
I am new to this so if this is off the mark, I apologize in advance.
David Lylis – You are correct that Delta does not remain static. An Option’s Gamma measures the change in Delta for every one dollar change in the underlying price of the stock. For example, if the Delta of an option goes from .5 to .6 and the stock increases by $1.00, the gamma is .1. For the UNP trade, the Gamma is .027. Therefore, if UNP’s price rises by $1 then the Delta will increase by .01458 (.54x.027).
Break even-Is it not correct that if the price goes to 100.85, you can exercise the option to buy the stock at 95, sell for 100.85 and break even? (Ignoring commissions)
As options move closer to expiration the time value portion of the price continues to erode and the delta increases and will eventually become 1.0 or very close to for any “In the money” options….At expiration the option has to be worth its intrinsic value because no time value is remaining and as DavidM states you could simply excercise the option and sell the stock….thankfully you do not have to go through that process…you simply sell back the option.
So if I understand you correctly, at expiration the delta does approach (or reach) 1.0 so the break even correlates to the price movement of the common and you do, in fact, break even on the option trade.
I bought a copy of McMillan on Options and now I can read it without having to look up every other word!
David Lylis says:
Yes, that arithmetic seems to work, but I understood that the break even was on the option trade.
David L…I think you are getting closer…let me state another way…First Delta is basically derived off of two things…time and volitity. The more time until expiration and the more volitile a stock, the lower the delta…for example look at MCO and FIS at close of business today. Both closed at exact same price 28.68. the Feb 28 calls have the exact same intrinsic value of .68…however the asking price for the 28 calls is 1.68 for MCO and 1.24 for FIS….MCO also has a lower delta (.59 vs .65) meaning that the option price of MCO is less correlated to the stock price than FIS. The pricing difference makes sense in that MCO is much more volitile. Just look a the charts of the two and you can see that. Volitility and time equate to risk and that is why options that have expirations further out have a higher time value premium. Throw in high volitility and those options can get pretty expensive…so as the option moves closer to expiration the risk…time and volitility decrease which means that delta increases which means that options begin to move more in tandem with the price of the stock. On expiraton Friday near the end of trading hours you will find that all in the money option will have a delta of 1 or very near 1. All out of the money options on expiration friday will we worthless or very near since they have no intrinsic value.
BigLad says:
continued from below…Keep in mind what an option is…that is it is a right…so with the MCO and FIS options I mention below…if you buy the call…then you buy the right to call away or buy the stock at 28. Since the stock is trading at 28.68 when you buy the call you have to pay a minimum of the intrinsic value because that is exactly what the right your are buying is worth relative to the stock price….on top of paying the .68 cents of intrinsic value, you are also going to pay a risk premium related to the time and volitility of the stock…if you buy feb calls today you have a right that extends for over a month so you are going to pay for that privledge…and likewise the seller of the call is going to be compensated for giving up his right to dispose of the stock before feb expiration. As you get near expiration time plays less of a roll and what you are willing to pay for time premium would obviously decline. Hope this helps.
George Fox says:
David Lylis
Not sure if anyone directly answered your question. IF the stock is 95, the option is 5.85, and the Delta is .54…THEN if the stock rises 1, the call option rises .54. Therefore, if UNP rises from 95 to 96, your option rises from 5.85 to 6.39 (5.85 + .54). Here’s a link to better understand Delta: http://www.investopedia.com/terms/d/delta.asp
I loved having you talk through the dis/advantages of the two options. It helped me understand the trade-offs and what factors you consider much better. It’s a good learning tool.
You can capture anything you see on the monitor using the Print Scr (Print Screen) key on the top right side of your keyboard and then paste into Word. It is a snapshot, not a movie. If your fussy (a.r.) and don’t want to see all the Intenet Explorer border, copy into Paint first. (Paint is a free program in Windows [Start-All Programs-Accessories-Paint] ) With the Select button, outline what you want, cut and paste into Word. In Dan’s video I copied the index chart and each chart as Dan was talking. It beats stopping the show and hand drawing the stuff.
dan someone just tell me…what is auto trading pray tell? thanx dan, you are a master explainer. throwing in bits about the
” greeks” here and there is a great idea. they’re hard to grasp as a group all at once.
Thanks Dan. I enjoyed both videos. I can’t buy both options so I am leaning towards one of the UPN recommendations. I particular enjoyed your discussion on Delta. I would be very interested in hearing more about Theta; time value.
Arthur… while the video is playing… I can right click on any part of the chart and ‘print picture.’ OR, you can select a portion by dragging down and printing only ‘selection.’ Hope that helps. I print the option block charts just to make sure I’m right on with the numbers… and use that paper for notes as Dan explains his trade.
Was wondering how many Mentorites were able to get into this trade and at what price. Is it likely the price will come back within the range as outlined unless the stock sells off? I’ll keep my limit order active but see little possibility of it getting hit.
I was able to get in the 100 strike at 3.90 but the 95 got away, I like to buy ITM calls – they both did well today – the 100 strike was up .75 and the 95 was up 1.00 from the max prices..
Dan et al, Tried to put on CRUS, & UNP trades but the price was so far off your recommended numbers even with the market down this morning, that I did not do so. Is it possible that these numbers will move back closer to your suggestions and can I put a limit order in at your numbers and hope?
Actually , what would be nice is a way to scale the initial recommendation with the market move.. If the stock price/call option moves up the morning after the recommendation, we should have a way to caliberate , what is a reasonable price to pay at the higher stock/option price ..even if it is outside the range as specified in the UNP/SWN examples..
DAN – this one ran away from me, was at $3.90 for about a minute and I was out hunting a coyote in the snow at 6:30am PST(really, I was)…should I take a few contracts here or wait? When is it too late?
Was able to buy at 6.20 at open as well. Not so good on SWN as I up-ticked that as well and should have waited. Just a little tip for other OMMs… I usually put up a 5-10 day / 5 minute chart and try to buy on dips on entries. I never, except for today ;-), but at the open. The UNP is tough though for reasons Dan gave and the Barron’s article over the weekend. (I think it was Barron’s)
Hey Lori… hope you shooed away the coyote! On the video for the UNP May/$100 call, Dan says to pay no more than $3.90. I went ahead and put in my order… with a limit price of $3.90. If the stock price falls… which it may because it spiked pretty good today (but the fall may only last a few minutes), then at least my order is in… otherwise, we’re chasing it. If you think of how he’s priced this model, you can kind of guess the #’s (if you’re a math flunkie like me) if you pay up above the $3.90 call option price. Just makes your Target/Return less and the risk is greater if the stock does somehow, flatten and not reach your target. If we pay $4.65, which is the call price at the close for today, for the May/$100, then… the stock price has to go up to $104.65 for us to be in the money. That’s break-even, I think… Okay… so, any further upside is good for us, but Dan’s called that target/return price at $10.00 (call price) once the stock price goes to $106-107. Now, you sell your call at that time… at the call target price of, $10.00. Your profit is $10 minus $4.65 equals, $5.35. (100 shares at 5.35=$535.00) Anyone else, who paid no more than $3.90 has a higher profit. Based on Dan’s block chart, your profit on that call will be $10 minus $3.90, which equals $6.10 (100 shares at $6.10=$610). Anyone who captured that call at less than $3.90 has a higher profit even still… if this trade goes as planned. Have I said it right… make sense? Shoot me down if I’m wrong. I can take it! Hope you had a good day today. :>
Hi Dan , for how long does the trading idea remain valid? As you can see, the current price for the options are far above what you had suggested. If it comes back to the suggested level during the next 5-10 days, is it still a buy?
Dan I looked at the video again to get a better understanding of the trade and it really helped, I didn’t get in the trade but eventually will. When you said you would be out of the trade long before expiration, do you put out the sell signal or do we ?
Hi Dan: I am thinking of getting in to the UNP option trade and would like your opinion after the stock has pulled back. Eventually I would love to see you give a little lesson on how to pick deep in the money calls for such stocks like Google and Apple.
Fortunately I chose not to chase the UNP trade, It looks like both the 95 @100 calls got stopped out. For new byers ,at which point is it worthwhile if at all to enter this trade at the much lower prices?
Bummer, I did get stopped out. The stock bounced off the 50DMA but there was some very heavy selling which pushed it to the 50DMA. So I guess I might wonder if it would take some time for the stk to recover.
Dan, you must have been looking over my shoulder! This RR popped up on my Smokin’ VS Breakout Scan (~ double volume). With transports moving higher, this looks like a winner, and I was looking at how to get involved when your e-mail arrived.
Dan,
Think it would be good to explain the downside of the out of the money calls compared to the in the money calls. Would they hit their stop quicker than the in the money call ? Would they move up slower initially since there is more premium ?
Better to explain the pros and cons–no ??
Out of the Money Calls will move up and down slower…As they move up their delta will increase and as they move down their delta will decrease. This is also effected by time so you have multiple moving parts with options.
Dan,
Well you explained it–thx. So only thing to consider considering the delta is that one would be stopped out faster on the out of the money call, correct ? Though the % loss is less. Guess the fly is one could get stopped out of the 100 call while the 95 call may still be in the trade–
I like the format as it is very easy to understand and follow.
Nice job.
Dan / OMM:
I am in the BAC trade (never sold covered call though but may sell $14 Jan), I am in the CRUS trade but took partial position at $2.55. (Don’t like the GM trade even though it was profitable. I live in Detroit and GM and the government screwed the bond-holders last time around… not for this venue I know).
My question is this… trades like SWN and UNP… is it OK to trade around these positions? Meaning, I would perhaps start small, review my entry and then probably get out right before earnings only to look to get back in? Or, do you think that is too much work for any risk mitigation? My experience is that you see a drop after earnings a high percentage of the time even if announcements are killer.
Mark Dz
Excellent discussion. The format is most helpful. I have learned to set my stop right away, after the buy. Then I don’t have to keep checking and worrying about it. Thanks again.
SWE and UNP: excellent!
Given the pros and cons as explained on Option 1 vs 2 are “At the money” Calls always more conservative vs “Out of the money” but to a certain extent given your stop positioning. one can lose less if stopped at yr targets in option 2 vs Option 1 if they both go south.
Good – looking trades. Thanks for posting a graphic so we can cut and paste them somewhere else …. Any thoughts about F ?
Ah, when do you sleep????
This helped so much because I’d stumbled into AAPL calls, easy peasy NOT, and understanding what you need and risk/reward was missing. It was just umm, maybe it’ll go up!!!
Thank you for the learnin’ …
CallaLilly — I don’t sleep. I’ll have plenty of time to sleep after I’m dead — which should be in about 60-70 years from now. (I’m looking to break the longevity record.) :o)
Dan,
Please get more sleep. I am someone who is big on health and nutrition. Try to get at least 5 straight hours of sleep per night so your body can rejuvenate itself. This kind of sleep pattern will help you to break the longevity record. It’s wonderful having you around. I’m learning a great deal from you about the market and trading. You are a treasure–MENTOR.
Dan — you’re providing a very lucid explanation of not only the option strategy itself, but the present technical momentum of the underlying stock and the stock industry. But why choose a UNP May call (and not August or a leap to Jan 12)? Is it just because of the cheaper option price (which increases for the same strike price the further out one goes) or do you have an underlying rational that under the present scenario the upwards momentum of the stock will (more probably) fade after May?
Z
Dan, Something to think about. Three weeks ago I knew nothing about options. After looking at all the videos and reading about half of a book on options, I am seeing it. Not because I’m smart, but because I have been in SSM for over 1 year. As an example of this, I think LOW is a cash cow. The first thing I wanted to do is buy options on it. Because of what I have learned in SMM, I know that the volitility would eat me alive! The only way I have learned this is through experience. I got that through hours of listening to our mentor and studing the outcome. If a restriction was put on being in Options Market Mentor, such as being in SMM for some period of time. Then you would not have to listen to the carping of people who are here just for the trades. I know the stress that I felt in this. It must be tremendous for you. I pray for you and hope you do well. The goal for us is to learn, not for you to pick trades for us. Again, thank you so much for caring! Tim D
Dan,
I agree with Morpheous1.
I’ve always wanted to learn about options, but they always seemed so daunting to me.
Now, all the spreads and straddles still seem difficult, but I’m looking forward to learning about them.
Thanks for the effort you put forth.
Rick
Dan,
vote for TDAmeritrade….i would have gone with Option Monster….but their commission is higher than what i’m currently paying…i submitted copy of trade and they were not willing to adjust.
btw,,,,good explanation of delta and how it is affected as it goes up and down
btw….thanks for being a master teacher.
Another vote for TDAmeritrade for the Autotrading. They are very easy to deal with, resonably cheap and have great tools…
DAN – after UNP call option video i feel as if we are harvesting money…you make it sound so easy to harvest money. What I’m missing is the downside of options.
How can I lose money in options? What can turn against our trade here beside the tanking of UNP stock price. Perhaps you already have said it all but I just still don’t get it. I see the stop loss you specified and understand that.
Bear with me ’cause I’m totally new and unsure of even how to place a trade!! but I’m learning a huge amount after this short time being a member of OMM.
You know we all appreciate your teaching and caring.
poppy — Not Dan, but you can definitely lose money in options. Options are a time dependent instrument. In other words, if the stock price goes nowhere or even down just a dollar, the option price will decline as time ticks away. AND, the closer to expiration we get, the faster the price of the option will decline. Additionally, if your UNP option is going nowhere, that’s money you have tied up that is not producing any return….opportunity cost. Also, before placing a trade, make sure you know what to do to get out (unwind) the trade. From personal experience, when there is money on the line and your emotions are involved and the stock price just tanked (see MEE last year) from an unforeseen event, you won’t know what to do, —-unless you have a clearly defined plan and know how to enter the trade.
poppy- Options are leveraged, so you can lose money in a big hurry if UNP goes south. You can lose even if UNP doesn’t tank. If you buy the May 95 call and UNP closes at 94.99 on May’s expiration Friday, your call is worthless. The entire $6.15 or whatever you paid is gone. Why would I pay you even $0.01 plus commissions for the right to buy UNP at 95 on expiration day if I can buy it for 94.99 on the open market? If you bought the common, you’d be down 0.19/sh in this scenario (excluding dividends), but the May 95 call would be a total loss. So you must be right in the chosen time frame.
SamG & david
Thank you so much for your reply…Now I’m more aware of danger. Yes I was excited after watching DAN’s UNP trade but knowing that I know nothing made me very cautious.
This morning trying to place the trade and found out I don’t know how…it was quite laughable! The rep that helped me kept saying ‘do you understand what you’re doing? (- not unkindly)” but he helped me. now I know how to make/lose money.
I’ll be patient…
poppy
DAN :
The grid………I love it. It’s not at all that I don’t want to listen to the yammering (sp?), it’s a time thing. UNP and SWN both look very good and I’ve put these on. These trades will be my first with the site… (oh, and I went back to listen to the yammering anyway ;), couldn’t help myself).
Nice THX Dan.
Mr. Fitzpatrick, what a wonderful way of explaining the hard to explain, really enjoy this, and hope to someday actually participate. My vote for auto trading is TDAmeritrade. Thank You, Karl.
I must have missed something ’cause i’m still confused about the mechanics of the trade. How do you finish the trade? Do you buy or sell the option and how do you do it? Do you end up owning 100 shares of UNP and having to pay $9500? What happens if you let the option expire, do you end up with 100 shares?
Frank-
You can end the trade either way. My plan is to sell the options if the target is hit, or at least to sell half if the position doubles. I’ve never exercised a long option position. To sell, you access your broker and sell to close your position preferably with a limit order. Or you could exercise the options and buy 100 sh UNP at $95/sh for every option contract you own. The Options Clearing Corproration (OCC) will automatically exercise an option that expires in the money, even by 1 penny, unless you put a do not exercise instruction on the position. So yes, if the option expires in the money (if UNP is at least $95.01 on May expiration) you will end up with 100sh for each option contract you own
Frank At this point, if you are not sure that if you pay for an option now, it means eventually you will sell it not buy it, it’s hard to know what to say. Perhaps life has kept you out of the forum and you haven’t watched Dan’s videos. That’s OK but you are playing catchup. There is a body on knowledge that needs to be mastered and it’s going to take work.
Lots of people had exactly the same questions about each of those trades; do I buy to open, sell to open, sell to close, what happens at expiration and these similar questions were discussed 100s of times. Dec 19th is a good place to start reading.
If you’ve been reading the forum and watched the videos, some more than once, you Are missing something and I’d say that Dan’s style isn’t working for you. You need to find another educational source.
You finish the trade by selling to close. You do not want to own the stock but if your option is in the money, most brokers will exercise your call automatically.
Frank Ura,
There are two possible outcomes for this trade :
1. Sell the options for a profit to another buyer (who is more bullish about the trade and believes these options are still worth buying). This is also called ‘Sell to Close’ or ‘Close the trade’.
2. If you are really bullish on the underlying stock/company, you may decide owning 100 shares of stock/company is a better way instead of just selling the call options. That’s when you ‘Excercise the Option’. In this case, your broker will make sure that you get 100 shares.
If you do not take any actions, then I’m sure your broker will send you an email saying that your options are expiring soon.
Dan- The videos are great. Short, clean and with all necessary information. I can work out my contingency stops with a quick glance at the option chain.
Thanks
I have a few comments for Michael and some of the new members in the options game. At-The-Money (ATM) the time premium is maximum, and the time premium increases to near zero when the in-the-money (ITM) stock price aproximately doubles. The time premium will be at or near zero when the stock price is about one half of its price at the ATM. This explanation is for a Point-In-Time (current option chain). Interestingly the Delta is zero when the OTM time premium is zero , at about .5 when it is at the ATM and 1.0 when the ITM time premium is zero.
I’ll also add that you can also think of delta as the probability of that option expiring in the money. If you buy a May 95 call tomorrow, as UNP moves toward $120 and time moves toward May expiration, delta will rise because the probability of the May 95 call finishing in the money increases.
Dan, Gary,
Great Stuff! One thought; when you go away from the chart there is no way to stop and go back. Some of us (me) need to go over things again and again.
Nice Dan, Nice can not say thank you enough. TKS
Dan,
I was happy to see the UPN trade as I went long with this name 2 weeks ago. But at 10k per 100 it would be very tough to make a pile, even though it would be profitable. The explanation on the 2 trades was very easy to understand. It will be interesting tomorrow to see the effect on the pricing. The CRUS option was impossible to get into if you throw your emotion out. If there is one thing I have learned at SMM is to park my emotions at the door. I missed the CRUS trade, but there are other tomorrows. I agree with Michael that you may want to discuss the downside a little more, so if this does not work out the newbies will have a better understanding of the downside.
Re the 10K per 100, I don’t take away from the video that the plan is to exercise the options. The plan is to buy the calls at $6.15 (for the 95’s) and sell them at $12. So, you only need $615 to control $9500 worth of stock.
Dan,
The format and presentation with the discussion of the underlying stock is excellent. It is very easy to understand the risk/reward. I was unable to get the right price on the first two trades so I passed them up. Hopefully, two different alternatives will let us get in at a good price.
Dan,
Could you do a scenario where the stock does not behave as expected so we can understand the risk of loss better?
Great videos. I have this little guy on my shoulder whispering in my ear that this is easy money, and I know that is not the case.
Dan. Your ability to adapt to the needs of the members is admirable. I’m sure it’s that very talent that makes you such a successful trader.
Dan – thanks for a great explanation – especially UNP – something really clicked.
Break Even – I must be doing something wrong on my break even calculation.
The stock is trading at 95.00 and goes up 5.85 to 100.85.
If the delta is .54 and the stock is trading at 95.00, lets say, for the sake of argument, that the delta is static. A 5.85 increase in the price of the common would result in a premium of 3.16, whereby you have paid 5.85.
Would the price of the stock not have to increase (5.85/.54 = 10.83) to 105.83 for you to break even on the premium paid of 5.85 per share for the option contract?
I know the delta is not static and that may be where this breaks down.
Or, does the delta become 1.0 at expiration? (That doesn’t make sense to me)
I am new to this so if this is off the mark, I apologize in advance.
David Lylis – You are correct that Delta does not remain static. An Option’s Gamma measures the change in Delta for every one dollar change in the underlying price of the stock. For example, if the Delta of an option goes from .5 to .6 and the stock increases by $1.00, the gamma is .1. For the UNP trade, the Gamma is .027. Therefore, if UNP’s price rises by $1 then the Delta will increase by .01458 (.54x.027).
Break even-Is it not correct that if the price goes to 100.85, you can exercise the option to buy the stock at 95, sell for 100.85 and break even? (Ignoring commissions)
As options move closer to expiration the time value portion of the price continues to erode and the delta increases and will eventually become 1.0 or very close to for any “In the money” options….At expiration the option has to be worth its intrinsic value because no time value is remaining and as DavidM states you could simply excercise the option and sell the stock….thankfully you do not have to go through that process…you simply sell back the option.
So if I understand you correctly, at expiration the delta does approach (or reach) 1.0 so the break even correlates to the price movement of the common and you do, in fact, break even on the option trade.
I bought a copy of McMillan on Options and now I can read it without having to look up every other word!
Yes, that arithmetic seems to work, but I understood that the break even was on the option trade.
David L…I think you are getting closer…let me state another way…First Delta is basically derived off of two things…time and volitity. The more time until expiration and the more volitile a stock, the lower the delta…for example look at MCO and FIS at close of business today. Both closed at exact same price 28.68. the Feb 28 calls have the exact same intrinsic value of .68…however the asking price for the 28 calls is 1.68 for MCO and 1.24 for FIS….MCO also has a lower delta (.59 vs .65) meaning that the option price of MCO is less correlated to the stock price than FIS. The pricing difference makes sense in that MCO is much more volitile. Just look a the charts of the two and you can see that. Volitility and time equate to risk and that is why options that have expirations further out have a higher time value premium. Throw in high volitility and those options can get pretty expensive…so as the option moves closer to expiration the risk…time and volitility decrease which means that delta increases which means that options begin to move more in tandem with the price of the stock. On expiraton Friday near the end of trading hours you will find that all in the money option will have a delta of 1 or very near 1. All out of the money options on expiration friday will we worthless or very near since they have no intrinsic value.
continued from below…Keep in mind what an option is…that is it is a right…so with the MCO and FIS options I mention below…if you buy the call…then you buy the right to call away or buy the stock at 28. Since the stock is trading at 28.68 when you buy the call you have to pay a minimum of the intrinsic value because that is exactly what the right your are buying is worth relative to the stock price….on top of paying the .68 cents of intrinsic value, you are also going to pay a risk premium related to the time and volitility of the stock…if you buy feb calls today you have a right that extends for over a month so you are going to pay for that privledge…and likewise the seller of the call is going to be compensated for giving up his right to dispose of the stock before feb expiration. As you get near expiration time plays less of a roll and what you are willing to pay for time premium would obviously decline. Hope this helps.
David Lylis
Not sure if anyone directly answered your question. IF the stock is 95, the option is 5.85, and the Delta is .54…THEN if the stock rises 1, the call option rises .54. Therefore, if UNP rises from 95 to 96, your option rises from 5.85 to 6.39 (5.85 + .54). Here’s a link to better understand Delta: http://www.investopedia.com/terms/d/delta.asp
George
Dan,
I loved having you talk through the dis/advantages of the two options. It helped me understand the trade-offs and what factors you consider much better. It’s a good learning tool.
Gary or Dan;
On a PC is there a way to print the chart (boxes of calculations) without getting all the comments?
Thanks
Yes Mark. Highlight the grid, copy,then paste in a Word document and print…did it for both Grids this weekend.
Opps sorry, not Mark…Taoofmoney
You can capture anything you see on the monitor using the Print Scr (Print Screen) key on the top right side of your keyboard and then paste into Word. It is a snapshot, not a movie. If your fussy (a.r.) and don’t want to see all the Intenet Explorer border, copy into Paint first. (Paint is a free program in Windows [Start-All Programs-Accessories-Paint] ) With the Select button, outline what you want, cut and paste into Word. In Dan’s video I copied the index chart and each chart as Dan was talking. It beats stopping the show and hand drawing the stuff.
The one thing good about Vista is the free OneNote application. It comes with a screen clipping tool.
dan someone just tell me…what is auto trading pray tell? thanx dan, you are a master explainer. throwing in bits about the
” greeks” here and there is a great idea. they’re hard to grasp as a group all at once.
ooops i meant CAN someone tell me not dan someone tell me…..
Great Video, Dan! After UNP moves up a little, will you consider selling an out-of-money call against it in the front month (say Feb or Mar)? Thanks!
Thanks Dan. I enjoyed both videos. I can’t buy both options so I am leaning towards one of the UPN recommendations. I particular enjoyed your discussion on Delta. I would be very interested in hearing more about Theta; time value.
DAN, Should we also think about time line for stop or is only stop price enough? E.g. if certain price is not hit by certain time then exit the trade.
These look good. Nice open interest on the 95s.
I just noted that members cannot edit their posts here as they can on SMM. That would be a nice feature to add.
Like buying the UNP May 95’s. Been following UNP for a while trying to get conviction. Never thought about buying calls until the video. Thank Dan!
PS…not doing like the SWN play….not a fan of SWN…
Perfect format. One suggestion Dan, could you explain how you come up with the stop? Thanks.
nice if we could print the options recommendations …
The chart that Dan has is a picture. Just copy it and paste it into a word doc and then print. All you have to do is right click and Copy Image.
Arthur… while the video is playing… I can right click on any part of the chart and ‘print picture.’ OR, you can select a portion by dragging down and printing only ‘selection.’ Hope that helps. I print the option block charts just to make sure I’m right on with the numbers… and use that paper for notes as Dan explains his trade.
You can print it… but it will print all the comments – or just print and select the first 2 pages…
Just my opinion, but, anybody chasing this thing (and bidding it up over 6.60 at one point) is a little being a little over-exuberant…
Moving mkts. How Is auto trade status?
Was wondering how many Mentorites were able to get into this trade and at what price. Is it likely the price will come back within the range as outlined unless the stock sells off? I’ll keep my limit order active but see little possibility of it getting hit.
Got the May 95’s for 6.20 just after the open…
I was able to get in the 100 strike at 3.90 but the 95 got away, I like to buy ITM calls – they both did well today – the 100 strike was up .75 and the 95 was up 1.00 from the max prices..
Should be a good trade..
I managed to get the May calls – 4 contracts at $3.90 – thru Fidelity… I did a limit order…(I raised my limit right after the open)
Price moved up on Interactive Brokers , did any one go through with this trade ? its quoting 100/4.40 for may expiration..
I could go through with the SWN trade at 3.90 .. which was within his parameters, first time i succeeded in matching his price limits..
Dan et al, Tried to put on CRUS, & UNP trades but the price was so far off your recommended numbers even with the market down this morning, that I did not do so. Is it possible that these numbers will move back closer to your suggestions and can I put a limit order in at your numbers and hope?
Actually , what would be nice is a way to scale the initial recommendation with the market move.. If the stock price/call option moves up the morning after the recommendation, we should have a way to caliberate , what is a reasonable price to pay at the higher stock/option price ..even if it is outside the range as specified in the UNP/SWN examples..
DAN – this one ran away from me, was at $3.90 for about a minute and I was out hunting a coyote in the snow at 6:30am PST(really, I was)…should I take a few contracts here or wait? When is it too late?
Great call on CRUS thanks for that!
LC
Irish_Eyes UNP Fill
Was able to buy at 6.20 at open as well. Not so good on SWN as I up-ticked that as well and should have waited. Just a little tip for other OMMs… I usually put up a 5-10 day / 5 minute chart and try to buy on dips on entries. I never, except for today ;-), but at the open. The UNP is tough though for reasons Dan gave and the Barron’s article over the weekend. (I think it was Barron’s)
Mark Dz
Hey Lori… hope you shooed away the coyote! On the video for the UNP May/$100 call, Dan says to pay no more than $3.90. I went ahead and put in my order… with a limit price of $3.90. If the stock price falls… which it may because it spiked pretty good today (but the fall may only last a few minutes), then at least my order is in… otherwise, we’re chasing it. If you think of how he’s priced this model, you can kind of guess the #’s (if you’re a math flunkie like me) if you pay up above the $3.90 call option price. Just makes your Target/Return less and the risk is greater if the stock does somehow, flatten and not reach your target. If we pay $4.65, which is the call price at the close for today, for the May/$100, then… the stock price has to go up to $104.65 for us to be in the money. That’s break-even, I think… Okay… so, any further upside is good for us, but Dan’s called that target/return price at $10.00 (call price) once the stock price goes to $106-107. Now, you sell your call at that time… at the call target price of, $10.00. Your profit is $10 minus $4.65 equals, $5.35. (100 shares at 5.35=$535.00) Anyone else, who paid no more than $3.90 has a higher profit. Based on Dan’s block chart, your profit on that call will be $10 minus $3.90, which equals $6.10 (100 shares at $6.10=$610). Anyone who captured that call at less than $3.90 has a higher profit even still… if this trade goes as planned. Have I said it right… make sense? Shoot me down if I’m wrong. I can take it! Hope you had a good day today. :>
A coyote? All right … 🙂
What is “Autotrade”? …and, How does it prevent driving up the option prices on what we are trading here?
Hi Dan , for how long does the trading idea remain valid? As you can see, the current price for the options are far above what you had suggested. If it comes back to the suggested level during the next 5-10 days, is it still a buy?
Dan, What do you consider an acceptable level of liquidity in option trading?
DAN Thanks for posting the new stops. I feel better now, since I’m new to options I had no clue what to do. Marian
Where are they posted?
Iker Leyejui – Dan sent them in a Email tonight. Marian
Dan I looked at the video again to get a better understanding of the trade and it really helped, I didn’t get in the trade but eventually will. When you said you would be out of the trade long before expiration, do you put out the sell signal or do we ?
Dan has a target shown on the option trade highlighted in green. I believe if the option value gets to this level it is time to take profits.
Hi Dan. UNP is pulling back, I was not able to buy the first time, is it still a buy?
Hi Dan: I am thinking of getting in to the UNP option trade and would like your opinion after the stock has pulled back. Eventually I would love to see you give a little lesson on how to pick deep in the money calls for such stocks like Google and Apple.
Fortunately I chose not to chase the UNP trade, It looks like both the 95 @100 calls got stopped out. For new byers ,at which point is it worthwhile if at all to enter this trade at the much lower prices?
Bummer, I did get stopped out. The stock bounced off the 50DMA but there was some very heavy selling which pushed it to the 50DMA. So I guess I might wonder if it would take some time for the stk to recover.