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Making money off of a trending stock...Making money off of a trending stock...
Corey said: "Alright, so I am just trying to understand options here...trying to see how I can make them work in my favor. Lets say I think that a certain stock will be trending for the next several months. Lets use MOT as an example. Pretend, for a moment, that I think it will be trending between $18.50 and $20.00 for the next three months.
So I figure I have to take a position where I collect premiums between the two prices, but I am hedged if it goes up and hedged if it goes down.
So I figure I have to write to collect the premiums. I figure my best bet is to write a call at 18.50 and a put at 20.00. Does that make sense?
Is this how it is normally done? Is there a better way to hedge my risk?"
Rbreb13 said: "If you think its going to trend that way. I would just sell covered calls and wait. You can always buy them back to close the trade if you all of a sudden think the stock is going to go up.
MOT has really lousy prices for the options though. For making a profit anyways.
Holzie or Drdan can probably help you with a hedge strategy, personally I wouldn't bother. If it trades flat it would just be a waste of money imo."
geb said: "I would agree with Rbreb13 here in that you would not really need to hedge this trade by taking both sides. Also if you believed that the stock was going to trade between 18.50 and 20 you would want to so sell the call option with a strike price of over 20 so the option would expire out of the money. But in this case if you sell the call you are only getting a very small premium. If you were to hedge this in the way you described you would have a very limited possible profit of the premium from selling the call plus the premium from selling the put. This trade would be most profitable if the stock ends up right in the middle but the potential loss is much greater then potential profits. For this reason if you felt that the stock was going to trade in that range the best move would to just sell either the call option for 20 or just sell the put option for under 18.50."
holzie said: "The guys are both right, the premiums are kinda low. It doesn't mean that you can't make money of course. But in this case it will be all about the cost of your commissions.
Let's say you have 100 shares of MOT right now and MOT is @ 19.26. The only
option you could really sell is the Mar 20 call @ 0.25 ($25). If your commission is coming close to $10 for this transaction, than it is a looser. Mine would be $1.50 so if I happened to own MOT I would still do it. Not only that, my broker doesn't charge me commission when I buy back a sold option for 0.05 or less.....so I would have the added flexibility. You would probably just want to let it expire worthless so you wouldn't have to pay the roundtrip commission.
If you could sell naked puts, and had good commish., than I would start with selling the Mar $19 put for 0.40, that could get you the stock for 18.60/share, low enough in your range to start selling the calls against it.
Think about it and you can always look for another candidate :)
Holzie."