93 comments

  1. avatar Dr. Science says:

    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.

  2. avatar Michael says:

    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 ??

    • avatar BigLad says:

      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.

  3. avatar Michael says:

    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–

  4. avatar Mark says:

    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

  5. avatar jeff says:

    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.

      • avatar DelKittie says:

        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.

  6. avatar Zatodeb says:

    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

  7. avatar Morpheous1 says:

    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

    • avatar Rick44 says:

      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

  8. avatar romar says:

    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.

  9. avatar poppy says:

    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.

    • avatar SamG says:

      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.

    • avatar david says:

      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.

      • avatar poppy says:

        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

  10. avatar Charles Hurbis says:

    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).

  11. avatar Frank Ura says:

    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?

    • avatar david says:

      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

    • avatar Henry says:

      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.

    • avatar Asim Verma says:

      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.

  12. avatar Billy Brooks says:

    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.

    • avatar david says:

      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.

  13. avatar Dale Arfman says:

    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.

    • avatar dunsek says:

      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.

  14. avatar Bud Benson says:

    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.

  15. avatar David Lylis says:

    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.

  16. avatar David Lylis says:

    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.

    • avatar pdocker says:

      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).

        • avatar BigLad says:

          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.

          • avatar David Lylis says:

            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!

          • avatar BigLad says:

            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.

          • avatar 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.

    • avatar Gene says:

      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.

  17. avatar wanda innes says:

    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.

  18. avatar Eric Evans says:

    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.

  19. avatar Jeff Lowell says:

    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…

    • avatar Mickie Edwards says:

      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.

  20. avatar Irish_Eyes says:

    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.

  21. avatar Rahul Toley says:

    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..

  22. avatar Malcolm says:

    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?

    • avatar Rahul Toley says:

      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..

  23. avatar Lori Crow says:

    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

    • avatar Mark says:

      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

    • avatar Mickie Edwards says:

      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. :>

  24. avatar RR Dutta says:

    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?

  25. avatar Joe Lopez says:

    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 ?

  26. avatar Sissel Berntsen-Heber says:

    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.

    • avatar Michael Loewenthal says:

      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?

      • avatar Remie says:

        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.

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