In
our last article I focused on selling Calls and Puts. This
article will focus on selling Calls and Puts based on a real
trade in the current market conditions. Back in October 2001
I purchased long-term options.
LEAPS are defined as long-term listed options having maturities
as long as two and one-half years (they were purchased on
the QQQ's).
Think of the Q's as a stock. For this article I will use
round numbers, rather than the exact purchase and sell numbers
used in an actual contract. When purchasing options, you
can purchase as many contracts as you wish or can afford
from 1 contract to 1000.
I bought 10 contracts on the January 2004 35 Puts at $600
per contract and 10 contracts on the January 2003 40 Calls
at $700 per contract. This means that I have until January
2003 and January 2004 to exercise my rights to purchase the
Q stock at 40 or to sell the Q stock at 35. Remember that
I can do this at ANYTIME until January 2003 and 2004.
In this case I really do not care if the stock goes up or
down as long as it moves either above 53 (the strike price
plus cost of option, 40 + 13 or below 22 the strike price
minus cost of option, 35 - 13) by 2003 and 2004 respectively.
Since there is sufficient time, before my option expires,
I have decided to increase my cash flow. I want to bring
cash into my account. So I decide to sell some calls and
puts (called writing calls and puts or going short calls
and puts) against my purchased calls and puts (called long
calls and puts). The Q's appear to be consolidating (going
sideways) so I sell the December 2001 42 calls for $125 per
contract. That immediately puts ($125 times 10) $1,250 into
my account. And I sell December 2001 35 puts for $2.20. This
places $2,200 into my account for a total of $3,450 credit.
By December on expiration day, the Q's were below the strike
price of 42 on the calls that meant that my short call expired
worthless and I kept all of the $1250. In the meantime, the
puts had expired worthless in November and I sold another
December 35 for $140 ($1,400) that expired worthless by December.
This resulted in a $4850 cash inflow to my account, which
was used to secure additional calls and puts. After December
I wrote the March 42 calls for $215 (2,150) and these were
bought back for .35 giving me a profit of $214.65 ($2146.50).
In summary:
First understand the terms here. When you go long you buy/purchase
the option. When you go short you sell/write the option.
When you buy you pay out money, when you sell or short you
take in money.
I went long on long-term options and short on short-term
options in order to make some cash from the options. Remember
if you sell something you can always buy it back. What you
buy it back for (lower or higher) determines your profit
or loss.
My total initial cost for the purchase in October was $13,000.
My income to date (for this article) was $6996.50, which
has decreased my cost for the initial purchase from $13000
to $6,003.50, and I still have all of 2002 and 2003 to use
the long options as collateral to generate additional income.
I hope you have some questions pertaining to this article
because this means you are beginning to understand options
trading.
Previous Options Articles:
Options Start
Options Article 1
Options Article 2
Options Article 3
Options Article 4
Options Article 5
Options Article 6
Jenyce Johnson
Options Strategist, Trader and Coach
Not a licensed professional
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