relative options beginner, couple of questions

HornedOwl said: "I'm familiar with the pattern daytrading rule with stocks... however, does the same rule apply to options? 4 daytrades of xyzbf in a 3 day period, are you're classified as a PDT? Also, I've been playing with Covered Calls for a couple of months, but tomorrow (it IS tomorrow, right?) will be my first time having outstanding options that can be excercised. if they get excercised, does the transaction take place automatically sometime over the weekend or early on Monday, or does it require some interaction from me? bought 100 ALD at 29.1 and 100 HAL at 29.7, the calls mentioned below are for a Feb$30 strike. I am currently short one aldbf and one halbf (not diverse, but I do have other industries on my watch list now, not just energy), which consumes all of my cash and a good deal of my margin, but I'm happy with both positions and will pick up more ald if it gets excercised, and will pick up more hal if it gets bought also, but I would wait for it to go below 30. Any thoughts on what I've been doing here? selling a call if it goes over 50¢ and buying to cover if it drops down to 5 or 10¢ possibly several times a month? Ald has had a volatile month due to legal clashes with a hedge fund, which may or may not continue, and I was able to sell/buy several times. with reasonable success. the risks I see in this are A)being locked into a long position and unable to place a stop and B) limiting the potential returns. What risks am I overlooking? As an afterthought, my acct with scottrade currently only allows covered calls."

holzie said: "[QUOTE=HornedOwl]I'm familiar with the pattern daytrading rule with stocks... however, does the same rule apply to options? 4 daytrades of xyzbf in a 3 day period, are you're classified as a PDT? Also, I've been playing with Covered Calls for a couple of months, but tomorrow (it IS tomorrow, right?) will be my first time having outstanding options that can be excercised. if they get excercised, does the transaction take place automatically sometime over the weekend or early on Monday, or does it require some interaction from me? bought 100 ALD at 29.1 and 100 HAL at 29.7, the calls mentioned below are for a Feb$30 strike. I am currently short one aldbf and one halbf (not diverse, but I do have other industries on my watch list now, not just energy), which consumes all of my cash and a good deal of my margin, but I'm happy with both positions and will pick up more ald if it gets excercised, and will pick up more hal if it gets bought also, but I would wait for it to go below 30. Any thoughts on what I've been doing here? selling a call if it goes over 50¢ and buying to cover if it drops down to 5 or 10¢ possibly several times a month? Ald has had a volatile month due to legal clashes with a hedge fund, which may or may not continue, and I was able to sell/buy several times. with reasonable success. the risks I see in this are A)being locked into a long position and unable to place a stop and B) limiting the potential returns. What risks am I overlooking? As an afterthought, my acct with scottrade currently only allows covered calls.[/QUOTE] Alright, let's tackle this. Your first question about option PDT....same applies to stocks and options, it is basically a question of using unsettled funds. Most of the times, only if you have a margin account, it is easy to slip by with options. With cash accounts it is impossible. You will be exercised, no doubt about that and it will happen Monday morning. You will see your stock being sold at $30.00/share. You profit will be (purchase price + premium for call option sold) - $30 = profit. This does not include commissions. You should have told us how much you received in premiums for the call options and I could tell you if it would have been better to sell the 32.50 strike for less premium, considering you bought HAL at 29.70. You should have gotten pretty fat premium though for HAL. What you are doing is really an excellent way for a stock guy to increase his/her return on their long stock holdings. What you have to calculate is how economical the transactions are to you with respect to commissions. I know Scottrade is NOT an options broker so they SUCK with anything related to options. They charge for the sucking accordingly. I will give you an example of what I would have done if I bought 100 shares of HAL at 29.70. I will take March options as an example. I would sell the 32.50 calls, currently 0.25, for roughly 0.15 (calculated based on stock at 29.70). My commission would be $1.50. I would probably not get exercised so i would keep the $13.50 and sell the April 32.50 again next month. If HAL is higher than 29.70, let's say 30.38 as it is right now, I would sell it for 0.25 and so on..until one month I would get exercised. At that time I would make 32.50-29.70 = $280 on the stock PLUS all the premiums in between that I sold. That's just how I would do it, the way you did it is fine too as long as your commission cost after being exercised do not exceed your profits. Anything in between is gravy for you. However, being with an options broker, TOS, I would engage in the transaction this way: Let's take today's prices for a better example and more reality: To acquire 100 shares of HAL (currently $30.38), I would sell the HAL March07 30 put @ 0.65. My margin for this is $574 to sell the naked put but you should have be ready to have $2935 to buy the stock anyways. If you have a margin account like me, you should have ready 2935/2=1467.50 to buy the stock, potentially, at 30-0.65 = 29.35/share. Right of the bat, do you see the advantage I have? If I "loose" I still would get the stock cheaper than you got it. If HAL stays above 30, unfortunately, I will not get the stock but I still made $65 - commission, which is 65/1467.50 = 4.42% in 30 days return on stock I don't have. If I was exercised and got the 100 shares at 29.35, I would start start selling either the 30 strike calls or 32.50 strike, depending how fast you wish to unload the stock or how much premium is offered at each strike at the time. Either way, you would make good money considering it is a stock transaction. Just remember that I do not advocate naked options trading, which is a 99% certain suicide. I never sell naked calls, ever, only covered calls. To me, the covered call acts as a limit price to sell but I get paid while waiting to be filled. I only use naked puts to buy EXACTLY the amount of stock I am intending to purchase and I am certain I DO want to actually own the stock, even if it meant holding it for a few months. I do this in my Roth IRA all the time and it simply works. I allocated part of my regular margin account to do this with select stocks...currently MRVL, and IMH. On IMH, I own a lot of shares already and I sell the calls against it for very little premium but the 12% dividend just keep coming in. I always want to get more so I sell the 7.50 puts month after month for nice premium but have no luck getting exercised, but that's ok with me. Your last question was regarding buying back your puts. You can do that if the commissions allow it. Nothing wrong with it if its profitable, but make sure you are not selling puts for speculation, that would be an absolute NO NO. Holz."

HornedOwl said: "yeah, I'm watching commissions, they're a bit higher than trading stock, still $7 per transaction, but an extra $1.25 per contract. my measly one-contract trades run me 8.25 in and out. but this feels safer than just holding the stock and hoping it goes up. I like that I can hold the stock UNTIL it goes up and gets excercised. I probably should move out a strike, that definitely cuts into any profit, but would make me less likely to worry about buying back the call, doubling my commission. All in all this is a blast. I occasionally find myself saying things like "I hope my stock goes down today", then having to explain it to anyone standing around listening. but if one must obsess over something, might as well make it worthwhile. I've read your posts on puts and like the concept there, but that will have to wait a while as my acct is currently limited to Covered calls. I like the idea of a limit buy without tying up the entire amount of cash waiting for the limit to execute. getting over beginner jitters, in Jan, I started selling calls slightly OTM (and starting to learn the jargon) most of my call trades have been for around a net of $10 or $20 profit. a couple of times, I bought higher than I originally sold for (psychological lesson) because I wanted to stay in the stock position. I think I've mostly gotten over that, after a couple of hard lessons. example... sold HALBF at (I forget now but this is close) .20 or .30, HAL started going up, bought to close the contract at .80. for a net loss of $70 or 80 (I'm rounding my commission from $8.25 per to $10 per because I'm lazy) watched HAL continue to go up, then started to drop taking the option price down with it (this was all this week, Monday and Tuesday I think). I've done this once before, for a $30 (1% of my account) loss, kicked myself then, kicking myself now. yesterday, I decided to try and recover some of that loss, so I sold a halbf for .75 and that's the contract that's open now. my aldbf plays have been considerably less exciting. sell around .5, buy around .2 (.1 if I can get that for it) I sold my latest call on this sold for .2 after I bought out of the previous contract at the exact same price, since I didn't think it would be very active after that, and wanted to make another $11.75 (boy was I wrong), with the plan to just ride it out, and I'm doing that. watching the stock shoot up after i sold. I was slightly disheartened, but that lesson had been learned. if they both stay over 30 tomorrow and get excercised, I'll shuffle the deck and start another hand slightly wiser and with more chips. as soon as this acct reaches 4500, I'll open a Roth, probably also with Scottrade with 500, and start working on that using a strategy much like this one, high div and covered calls. so I'm looking for kinks in the plan now. Thanks for all of the insight."

holzie said: "No problem, but you need to revise your plan. Scottrade charges $17 for "exercise" or "assignment", which is an added cost to you. This is why I suggested selling 1 strike higher (skip-a-strike) then you currently do so you won't get exercised all the time. Did you notice how you described that you are worried about you being exercised, or you keep buying stuff back when it goes higher? That's exactly what you want to avoid here. You need to avoid the being emotional about that trade so you have to make it a win-win for you. If you sell the 32.50 strike instead of the 30 strike, you will only pay 8.25 one time and let it expire worthless. If your stock shoots up to or past 32.50, well hell, you won again because you made $250 on the stock, plus the call option - $17 for getting assigned at the end of the month and handing over your stock to somebody else. Also by selling one strike higher, you are putting yourself in the good scenario that you are getting paid while you wait for the stock to go past your range. So basically the 32.50 call is your limit order to sell and preferably you will get to sell 2-3 calls against your stock before the stock moves there. You have to really watch how much you pay in commissions, including possible assignment. Thus, you should probably pick a really great stock with slightly higher volatility so the call premiums are higher. A high dividend on the stock doesn't hurt either. Currently the only stock I can think off is PCU. If you could sell naked puts to acquire the stock at $60, you could sell the March 60 put at 0.60 and wait for it UNTIL full expiration. Or if you really wanted it, you could sell the March 65 put for 1.50, so your cost for the stock would be 65-1.50 = 63.50/share. You could then sell the 70 strike calls around 1.50-2.00 each month, plus getting paid the 12% dividend. This being said, I know that it would require most of your capital to potentially hold 100 shares of PCU so I would advise against it! For now anyways. I am sure you will get better and better at this as this is not a very complicated strategy. Ask for help anytime. Holz."

HornedOwl said: "Glad I read that post before I left for work yesterday... I had completely overlooked the execution fee. Thanks for pointing that out to me. Taking that into account, I bought out of the aldbf at .30 since I wasn't thrilled at the prospect of 17 to sell, then another 7 to recover the stock (closed 30.19) on Tuesday (Earnings are 2/28, exdiv is 03/16). This was indeed a speculative moveexplained below... At current share price, being executed and repurchasing 100 shares would cost $43. (If I am calculating right) $17 execution, $7 buy commission, and $19 above my sell price to purchase my 100 shares... I'm getting more confused now putting it in text than I was yesterday actually planning it... It cost me 38.25 to buy an aldbf. and since I planned to imediately repurchase my shares, I figured this was the better move. if the share price goes down more than a nickel or so on tuesday, I'll eat crow. but it'll be a cheap crow. I left the halbf contract open, as I don't plan to buy back unless I have available funds if/when it returns to mid$29. This is where I'm more curious than anything... Hal closed at $30.05. assuming the person who ended up holding my call paid literally anything for it, plus their own assignment fee, it seems to me that it would be smarter for them to "opt" NOT to excercise this option as they could probably buy the shares for less than they could execute the option... maybe I'm reading too much into this, and should be looking for something to do with my cash when it comes in on tuesday"

RaymondKH said: "One of the required mindsets of Covered Calls is the willingness to sell the security at the written strike price and walk away. There's always bigger fish to fry anyway. Since many brokerages charge a flat fee for assignement, the overriding scenario is to trade with enough stock and enough contracts such that the cost for assignments becomes a small enough cost. Covered Calls are always a dilemma. On one hand, you wouldn't want to own the underlying if it weren't a great stock to own, on the other hand, you'd gotta have the discipline to be able to walk away from a solid stock in the event of an assignment. If you don't own the stock already, sometimes a Bull Credit Spread might be something worth considering, but of course, predicting precise Profit/Loss on two derivative instruments can make calculations a bit more complicated. Covered Calls are also a capital drain whereby you need to fork out the dough to purchase the stocks. As a result, a lot of people write calls on stocks that they have been holding for a while in an attempt to squeeze out more yield on an otherwise sideways stock. Of course, this scenario causes pain when all of a sudden you find yourself parting with your stock in an assignment scenario. Hence the importance of having the mental preparedness of walking away form the stock once assigned. Alas, many people also forgot to consider any capital gains taxes that might be incurred as a result of the stock sale. You might also incurr wash trade tax considerations if you sell and buy back within a month. Make sure you consult your tax professional for details. So I guess at the end of the day, there are 3 things one should look at before setting up covered call trades: 1) Be psychologically prepared to walk away from the stock once it's assigned 2) Understand the commission schedule and assignment costs 3) Know thy tax laws and related ramifications (consult your tax professional) Some points have already been mentioned before, but I just wanted to chime in. :-) - R."