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Coveredcall

Options Idea: Sell The Sep. 2020 PSTH/U Synthetic Covered CallIf you trust Bill Ackman, his new SPAC Pershing Square Tontine Holdings looks like a great candidate for a very short-term covered call position. Ackman has been on fire lately. Last year his flagship fund Pershing Square Holdings was up 58% and this year to date he’s up 46% after he turned a $27 million hedging position into $2.6 billion as markets tanked in March. What’s a SPAC? A SPAC (Special Purpose Acquisition Company) is a blank check company used to take a private company public. Instead of raising capital in a public offering, a private company can merge with a SPAC and get a guaranteed injection of cash at a predetermined price. Transaction costs and uncertainty are much lower. Management at a company looking to go public should prefer to go public via a SPAC as long as Ackman gives them the same valuation they would get from a traditional IPO. You can do this trade by simply buying 100 shares and then selling a call against it, but we did this trade synthetically using 3 options: Bought the March 18, 2021 $20 Call @ 3.90 Sold the March 18, 2021 $20 Put @ 1.75 Sold the September 18, 2020 $25 Call @ 0.35 Synthetic Covered Call A synthetic covered call is constructed by buying an at the money call and selling an at the money put and then selling another out of the money call. You get the same profit and loss graph as a normal covered call, but with no dividends (not a problem here) and with reduced capital outlay. PSTH.U closed at $21.83 on the day of our trade, so instead of using $2183 in cash for 100 shares, we used $862 in margin and took a position twice as large as our normal position size by going synthetic for the same capital outlay. We sold a short-dated out of the money call to help reduce our initial cost basis to the current trading price of PSTH/U, since the March 2021 options don’t have much liquidity. We may sell a few more covered calls against this position to bring our cost basis down to $20, which was the price of the SPAC's IPO and the redemption value of the SPAC's cash in trust. Redemption Value : PSTH.U shareholders have the option to redeem their shares for the $20 IPO price after the merger is announced. Let’s assume the market doesn’t look favorably on Ackman’s deal, PSTH.U shareholders can redeem their shares for $20 and exit before the merger is completed. Read the full prospectus for details (including scenarios where you might get less than $20, its complex). However, for us, this puts an effective floor on PSTH.U’s value at $20. If we want to stay conservative (and we are), we’ll sell calls to get our cost basis closer to $20. However, if you are bullish on Ackman like we are, we do not recommend selling calls against this position for an extended period. If a merger announcement is positively received by the market, the price will gap up instantly as investors realize they can immediately participate in the newly merged company’s equity via a position in PSTH.U. Those of us invested in PSTH.U have looked on in envy as KCAC (another SPAC) just struck a deal to take Quantumscape (an EV battery-maker) public. Shares in KCAC closed up 87% the day after merger news. This is why you don’t want to be stuck with a short call in PSTH.U when the merger news comes out. If the news is extremely positive, you might give up a huge windfall. Since SPACs have a limited lifespan, 2 years usually, as time continues it becomes increasingly dangerous to have a short call open on PSTH.U if your ultimate goal is to have a long position in Ackman’s merger pick. Our objectives for short call income generation against this position are as follows: Initial Objective: $0.32 (Recover Liquidity Loss) Secondary Objective: $1.83 (Reduce cost basis to the Redemption Value) We completed our initial objective by selling the Sep 18, 2020 call at $0.35 and we entered this trade $0.03 below the cost of going long. Again, our goal here is simply to increase our buying power on a trade we consder low-risk due to the redemption option. We may continue to sell calls for a limited time until we get our basis to $20. We don’t want to have a long call open at the time the merger is announced. 20-PSTHU-01 Opening Date: Sep 4, 2020 Expiration Date: March 19, 2021 DTE: 196 IV: 33.29% IV Percentile: N/A (less than 1 year trading) Odds of Winning: 54.55% Odds of Losing: 45.45% Win: > 21.80 @ Expiration Loss: < 21.80 @ Expiration Reg-T Margin: $862 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we’ve made a profit on our synthetic covered call. Since our position has a long call that means our potential gain is unlimited after Sep 18, 2020. Up to Sep 18, we are limited in our gain by our short $25 call. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. Since we’ve sold a naked put we have losses all the way to $0. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
PLong
by OptionsCoach
MODEL: DIY QUASI-ANNUITY VIA SPY COVERED CALLI've been meaning to do a post for a very long time here on a do-it-yourself quasi-annuity via covered call, and here it is. To oversimplify things, most annuities involve you making an initial payment, after which you receive fixed payouts, generally represented by an annualized rate of return. Here, I look at modeling a do-it-youself annuity using a covered call that looks to collect a fixed credit via roll of short call at regular intervals, with the credits received on rolls acting as the fixed payout portion that an annuity would provide, with the drawback being that your "principal" (i.e., the value of your SPY shares) can not only increase, but also decrease over time. For purposes of this model, I'm looking to start the process by buying a SPY 300 covered call, although you can certainly use any options liquid underlying to do the same thing. This would have cost 289.43 ($28,943) to put on as of today's close, and 289.43 will be your cost basis in your shares. For purposes of this model, I'm looking to generate a 5% return on capital on an annualized basis via premium collection, so 5% of $28,943 equals 1447.15 or about $120.60/month. Consequently, I should look to collect at least that amount in credit for each roll I do or call against I sell. Naturally, 5% ROC isn't the sexiest thing in the world, but would beat the vast majority of broad market or exchange-traded fund sector yields out there at present, and you're doing this to generate a fixed income stream, not blow the doors off the wagon. And we'll see how that goes ... .
AMEX:SPY
by NaughtyPines
Possible Trend Lines that Bears and Bulls Can Agree OnFirst off I was going to make this a private idea because it is long term.. and if you follow me then you know I DO NOT like long term predictions. Intra-day clues and signs are much more valuable to traders like me, but today's end was so crazy I thought it might be a move that is following a longer term trend. It definitely made me go "hmm". What Happened: Listed are trend lines that I think are possibilities. It is NOT a coincidence that we ended near the gap from last week... there are no coincidences in the market. This fits within a softer trend upwards. So Where to Now? From here we could get a bounce up (I like 288 pushing towards 292) or further down if we wish to test some important values. 283 right off the top of my head would be the next move, but there is still room further down if the market so desires. Bullish or Bearish? We should remain bullish on SPY until we close daily below the 20 period moving average. Now this does not mean that I am bullish every trading day, but on the grand scheme of things yes. Tomorrow I would say that a gap up is very possible but watch the Asian markets for an idea of what's to come. Could be up, down, sideways.. who knows! Please comment comment comment.. I can never have too much input on my ideas!! Also check out my previous ideas to see that I am a pretty good trader. I called this down movement today and I plan to forecast what's coming next as well. So give me a like and follow :D
AMEX:SPYLong
by itsQure
TUTORIAL: COVERED CALL STRIKE IMPROVEMENT VIA ROLL AND FINANCINGOne of the primary reasons people poo-pah covered calls is because they cap out max profit. There are two things these naysayers overlook and they are (a) you can roll out your short call for duration and credit, thereby decreasing your cost basis and increasing your potential max profit; and (b) you can always "finance" short call strike improvement, albeit at the cost and risk of doing an additive adjustment trade in the event that you can't improve the strike satisfactorily. Pictured here is a deep in-the-money SPY December 18th 255 covered call. If I do absolutely nothing, my SPY long shares are going to be called away, if not at expiry, then earlier by someone exercising their long calls. Say, however, I want to stay in the stock, as well as improve my cost basis and the short call strike such that my max profit potential is increased by the amount of strike improvement. As previously mentioned, there are a couple of ways to do this. The first is to look at merely rolling the short call out in time and examining whether the strike can be improved while still getting a credit. One thing you'll immediately notice when you do this with the December 255's is that the strikes are five wides so that if any improvement is going to be made, it will have to be from the 255's to the 260's or higher. With the December 18th 255's going for 50.85 at the mid, I'll have to look at 260's in an expiry in which they pay more than 50.85 to get a credit on the roll, and the first expiry in which that occurs is in January of 2022 where the 260 is paying 51.00 at the mid price. In other words, I'd have to roll the calls out a whole year to improve them by five strikes, all for a measly .15 ($15) credit. That being said, I also increase my max profit potential by the width of the improvement (5.00) plus the credit received (.15) or for a total of 5.15, so that is not entirely a bad thing were I to do that. It is also the most straightforward way to improve your short call strike without adding risk or tying up additional buying power. If, however, I'm not big on rolling out that far out in time, I can also looking at financing the strike improvement via an additive trade for which I receive a credit that exceeds the cost of the strike improvement, with the down side being that any additive trade has its own buying power effect and side risk. Here are a couple of examples: Roll the December 18th 255 up to the December 18th 265 for a 7.40 debit and sell the December 18th 240 put for a 7.64 credit. I improve the short call strike by 10.00 and receive a net credit of .24 (7.64 - 7.40). Net delta of the position increases from 20.99 to 42.18. Roll the December 18th 255 up to the December 18th 269 for 10.37 and sell the December 18th 240/343 short strangle for 10.44. Here, I improve the short call strike by 14.00, and receive a .07 credit to do it. The net delta of the position increases more modestly from 20.99 to 28.02 because the short strangle is delta neutral, with all of the net delta pickup coming from the roll of the short call.
AMEX:SPYEducation
by NaughtyPines
5
ASSIGNMENT: NIO SHARES/NIO FEBRUARY 21ST 5.5 COVERED CALLThis is a continuation of long-running trade that I kicked the can on. (See Post Below). With price finishing the day wayyy below my 10 short put, I will find shares in my account next week via assignment. In anticipation of that occurring, I previously sold a February 21st 5.5 call and have a cost basis of 5.22. I'm fine with being called away at 5.50 should that occur, but will continue to reduce cost basis in the stock going forward if that doesn't happen. Delta/theta: 62.98/.81 Extrinsic: .34.
NYSE:NIOLong
by NaughtyPines
3
BYND: DEC 20TH 80 COVERED CALL (REVISED)Posting a revised visual depiction of this trade (see Post Below) showing the 80 short call strike that covers the stock, plus the December 20th 115 short call I sold against on the post-earnings pop to $90 or so, along with my cost basis. With price breaking my short call here slightly, I may add short call to cut net delta in the position, particularly given the fact that background implied remains high (61.5%), earnings are in the rear view, and I don't have a ton of much else going on ... .
NASDAQ:BYNDLong
by NaughtyPines
OPENING: GLD OCT112/AUG 122 Diagonal / PMCCOpened a 'poor mans covered call' on GLD. Going long on this alternative asset class to diversify the portfolio. My overall bias is higher gold based on the technical price trend since 2016 and expect we'll soon see a reversion towards the mean/median price range. Bought the OCT 112 CALL at 86 deltas, 105 days to expiration as a stock replacement for 8.12 and sold the AUG 122 call at 26 deltas, 42 DTE for 0.67 net debt: 7.45. The debt paid is 75% the $10 width. breakeven: Long call strike price 112 + net debit paid 7.45 = 119.45 Max loss on setup: 7.45 Max profit on setup: width of call strikes - net debit paid = 2.55 ROC at max profit is 34% Credit premium on net debt = 9% Notes: If I don't close the whole trade before the Aug expiry (or the short call expires worthless) I can sell another call in the Sep cycle to further reduce my cost basis on the long Oct call. In comparison to buy the conventional covered call play on GLD would cost 11,880 - the 67 short call for 11,813, or use over 8000 in buying power. The call credit premium is a meager 0.567% return on capital. ------------------------- More info on this strategy : www.tastytrade.com
AMEX:GLD
by dime
2
OPENING: EWZ SEPT 31ST 31 MONIED COVERED CALL... for a 29.39/debit per one lot. Metrics: Max Loss: 29.39 per contract on setup Max Profit: 1.61 per contract on setup (5.48% ROC) Break Even: 29.39 on setup Delta: 37.54 Theta: 1.40 Notes: Roll the short call out on significant loss of value,* to maintain the desired net delta of the position, and/or to defend the break even. I would note a couple of things: (1) The Max Loss metric assumes you do nothing (no rolls) and that the underlying goes to zero, which is theoretically possible, but unlikely, since it's an exchange-traded fund made up of multiple moving parts, as opposed to being a single name underlying. (2) Similarly, the Max Profit metric assumes you do nothing, and that the underlying finishes above the short call strike at expiry. Rolling out the short call for credit decreases your cost basis and break even, and therefore increases your profit potential. The basic point of the strategy -- regardless of whether you go monied or sell an out-of-the money call -- is to reduce cost basis in the underlying over time without necessarily having to rely on favorable movement. Consequently, you can make money over time if (a) the underlying doesn't move; (b) the underlying moves in a bullish manner; or (c) the underlying moves bearishly --- as long as you are able to collect a credit for a roll of the short call. The only situations in which rolling produces diminishing returns is where (1) the underlying rips up such that the short call you're attempting to sell does not have significant extrinsic value, in which case, your best option is to exit the trade at or near max and re-up if a play remains attractive; or (2) where the underlying has lost so much value that you can't get paid for a reasonably delta'd short call no matter how far out in time you go. Whether you go monied or out-of-the money is, in part, a risk tolerance choice. The trade-off you make in going deeper is that you potentially give up some profit potential on setup in exchange for a more forgiving break even. The primary reasons I go monied over out-of-the-money with these: (a) I'm just looking for a "trade," not an investment. If I was eyeing the setup as an "investment" and wanted to remain married to the shares, out-of-the-money would probably be the way to go; (b) I'm looking to preserve capital in the setup. This usually occurs where the stock I'm married to has had a huge up run and rewarded me hansomely, but I'm worried about this being the potential end of the ride -- I drive the short calls into the money to give me better downside protection; and/or (c) I lack conviction that the underlying will maintain its current level. * -- The most often cited metric is to roll the short call when it's lost 50% of its value. However, a lot of the decision-making process behind whether to roll has to do with how much time is left in the setup. If the short call is at 50% max with four days to go and price is well above my short call, well, I just might want to let it play out. If I'm three days into the play and the underlying has dropped significantly, rolling out at that point makes more sense than waiting, since the underlying may continue to move against me and waiting to roll may not be beneficial for credit collection if that occurs.
AMEX:EWZLong
by NaughtyPines
4
HPQ covered strangle Rather than just holding HPQ stock with hope that it may go higher this year, collecting a 2.5% yield while waiting, I instead plan to sell options premium this week against my $22 cost basis for a higher return on capital. Implied volatility on HPQ is over 30% and rising as we near the earnings report date of May 29 after the close. Of the past 8 quarterly earnings reports, the stock has ended a few percent lower on only 3 occasions. I could sell the stock for a tidy gain around 24 where it reached a couple times already this year. The 24 strike at 21 delta means almost an 80% chance the call will expire worthless and I keep the credit of 25, or about 1.1% of the cost. Because after transaction fees, this credit is small, I'd want to instead A) sell the lower 23 strike at 36 delta for $50 credit, or B) also sell an 'out of the money' put for additional credit (forming a covered strangle) if I'm willing to add to the stock position at a lower price on pullback, or C) both. The trade order for a covered strangle would be something like : SELL -1 STRANGLE HPQ 100 20 JUL 18 23/21 CALL/PUT @1.00 Selling a covered strangle on HPQ is attractive for several reasons: although it means a higher chance of assignment fees at the 30 delta strikes, it brings in nearly 100 credit, which is 4.5% of the current spot price of HPQ (27% annualized). The HPQ daily options volume is only about 8,000 so the 'at the money strikes' closer to the current stock price are the most liquid and easiest orders to fill. At 21 a share adding another lot is a small commitment. Fundamentally, I believe the stock fair value is higher so I'm willing to risk adding another 1 lot of stock if the stock drops or holding if HPQ trades sideways. The price support around 21 looks solid on the stock going back almost a year. The current Trefis fair price estimate for HPQ is around $25. Based on the 2018 EPS estimate of 1.96, and a long term 5% EPS growth over next 3-5 years, my DCF model suggests a current fair value of $25.50- $27 range.
NYSE:HPQLong
by dime