For example, an investor owns a 100 shares of stock "ABC"and is scared the stock may drop in price. The type of option to be bought would be a put option. An investor buying a put option has right but not the obligation to sell their shares at the strike price prior to or at expiration. In this case, the buyer of the put option is buying a put as insurance. If the price of the stock dropped a large amount, the buyer can exercise the option and will be able to sell the stock at the strike price. The option seller is obligated to buy100 shares of stock "ABC" at the strike price if the option is in the money at expiration or is exercised by the buyer prior to expiration. For this obligation by the option seller, he or she is paid a premium upfront. When the option seller is assigned the stock, he or she is "put" the stock.
The stockholder who owns 100 shares of stock can also sell a covered call option. The covered call allows the investor or trader to be paid a premium upfront for the obligation to sell their 100 shares of stock at the strike price on or before the expiration date.
An individual can also buy options without owning stock. In this case, options are a form of leverage without using debt. When an investor is bullish on the stock, he or she can BUY a call option contract(s) at a strike price and expiration day. The opposite of this for when a person is bearish on a stock, the person can BUY a put option contract(s) at a strike price and expiration date. In both these cases, the option buyer pays a premium.
Recent Option Trades
My 2 recent option trades involve covered calls.
Option Trade Number 1
On June 5, I sold 2 covered call option contracts on my position in Rogers Communications Class B Non-Voting (RCI.B.TO) stock
Net Premium Received = $20.05
Option Assignment Fee = $24.95
Current Annual Dividend = $1.96
# of days to expiration = 46
Strike Price = $ 65.00
Return = premium received / money received from selling at strike price
= $20.05 / $13000
= 0.00154
= 0.154%
This return is for 46 days
Annualized return = 0.154% *(365/46)
= 1.222%
These returns are small. The annualized return of 1.222% is slightly higher than the interest on my high interest savings account of 1.1%. The annualized return is rather low, but this is due to selling the option deep out of the money.
If this option is assigned, the capital gain would be slightly if I sold the stock at the strike price without an option. This is due to the net option premium received is less than the option assignment fee.
Capital gain = # contracts*100 shares*strike price + net option premium - option assignment fee - (adjusted cost base of stock purchase)
Option Trade Number 2
On June 8, I sold 1 covered call option contracts on my position in Restaurant Brands International (QSR.TO ) stock.
Net Premium Received = $34.05
Option Assignment Fee = $24.95
Current Annual Dividend = $1.80 US
# of days to expiration = 43
Strike Price = $ 82.00
Return = premium received / money received from selling at strike price
= $34.05 / $8200
= 0.00415
= 0.415%
This return is for 43 days
Annualized return = 0.415% *(365/43)
= 3.52%
This annualized return is much greater than the interest on my high interest savings account of 1.1%. I sold this covered call option contract with the option being deep out the money. The annualized return is higher the the first covered call as QSR.TO stock price is more volatile than RCB.B.TO.
Summary:
The return on these positions is small as I sold these option contracts deep out the money. This is still a possibility of these options being assigned before or at expiration day. I wrote (sold) covered call options on these positions to get some more money out of the markets.
Disclosure: Long QSR.TO, RCI.B.TO
DISCLAIMER
I
am not a financial planner, financial advisor, accountant or tax
attorney. The information on this blog represents my own thoughts and
opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
No comments:
Post a Comment