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Anyone know a good covered call service
- Thread starter 64c2
- Start date
Rallymode, yes I realize that. I've been through numerous of these FDA anticipations. I'm of the opinion that there is an FDA announcement, either favorable or unfavorable, that the IV will drop by at least 50%, thus creating a very nice vega profit. Of course if the FDA announcement is favorable, the stock closing at or above the strike price of my written calls will be a virtual certainty. In that case, my inclination would be to let them simply call my stock away.
Note: I meant to say $150 million cash in the above posting.
Thanks for the posting.
Bob
Note: I meant to say $150 million cash in the above posting.
Thanks for the posting.
Bob
Hi BobQuote from exQQQQseme:
Rallymode, yes I realize that. I've been through numerous of these FDA anticipations. I'm of the opinion that there is an FDA announcement, either favorable or unfavorable, that the IV will drop by at least 50%, thus creating a very nice vega profit. Of course if the FDA announcement is favorable, the stock closing at or above the strike price of my written calls will be a virtual certainty. In that case, my inclination would be to let them simply call my stock away.
Note: I meant to say $150 million cash in the above posting.
Thanks for the posting.
Bob
What do you do if the iv drop is accompanied by a stock price drop of large proportion?
db
Hi thereQuote from cohenmichaela:
I can't answer your question because I can't validate the exact moment your pricing was taken from. I took quotes of AGIX at 15:50.00. Here are the prices
AGIX = Bid 10.23, Ask 10.24
March 10 Call = Bid 1.10, Ask 1.35
March 10 Put = Bid 1.05, Ask 1.10
Assuming nickel pricing if I sold the call @ 1.20 (stepping in the spread) and bought the put @ 1.10 and the stock @ 10.24 (synthetic long call) I would have done a conversion with a flat risk profile.
The call and put transactions leave me with .10 credit. That credit represents the cost of me holding the long AGIX stock until expiration. In fact, the spread will leave you negative. Paying the spread will only yield roughly 3.5 percent annualized to offset the carry on the stock.
Again, usually when the calls and puts differ in price by more than carry there is an arb. When it does happen it's normally due to a corporate action event.
I need some clarification please.
I thought the real cost of the synthetic 10 strike call is 1.10 (cost of long put) plus 0.24 (10.24 stock price minus put strike of 10), i.e. 1.34.
You then sell the real 10 call for cr of 1.20. This gives you a loss of 0.14. Iow the conversion would have given you a 0.14 loss, not a flat risk profile.
Please correct me if I'm missing something.
Best
db
Quote from daddy'sboy:
Hi there
I need some clarification please....
Please correct me if I'm missing something.
No, you aren't missing anytying, cohenmichaela has the
transaction backwards. Buy the call for 1.20 (if you can
get it) and sell the put at 1.05. That equals synthetic
long the stock paying a total of 10.15 at expiry. Now
sell the stock for 10.23. You bought at 10.15 and sold
at 10.23 for a profit 0.08. You tie up 10.23 + 0.15 =
10.38 so your return for the two weeks until expiry
is 0.05/10.38 or 20% annualized. Risk free. Plus the
interest on the short stock position.
.
Thanks for the reply. I can follow your synthetic argument, it's simply the reverse of cohenmichaela (his is a conversion, yours a reversal). However, shouldn't that profit read 0.08/10.38? And where/how do you get 10.23+0.15 from? Surely the return is calculated using the profit divided by the cost of the stock, the former being 0.08 and the latter being 10.15.Quote from Kevin Schmit:
No, you aren't missing anytying, cohenmichaela has the
transaction backwards. Buy the call for 1.20 (if you can
get it) and sell the put at 1.05. That equals synthetic
long the stock paying a total of 10.15 at expiry. Now
sell the stock for 10.23. You bought at 10.15 and sold
at 10.23 for a profit 0.08. You tie up 10.23 + 0.15 =
10.38 so your return for the two weeks until expiry
is 0.05/10.38 or 20% annualized. Risk free. Plus the
interest on the short stock position.
.
Thanks for your patience.
db
Quote from daddy'sboy:
Thanks for the reply. I can follow your synthetic argument, it's simply the reverse of cohenmichaela (his is a conversion, yours a reversal). However, shouldn't that profit read 0.08/10.38? And where/how do you get 10.23+0.15 from? Surely the return is calculated using the profit divided by the cost of the stock, the former being 0.08 and the latter being 10.15.
Thanks for your patience.
db
You are correct, I forgot to include the intinsic value. The only point I was trying to make is that either way (conversion or reversal) there is no free money or pricing disparity. If you can come away with a credit by stepping into a spread you still won't beat the carrying cost. The risk profile is flat regardless.
Ok, let me give real numbers of the actual trade I presently have on. All dates and amounts are actual and the prices are NET of commission.
Date of Transaction: Feb 22, 2007
Purchased 200 shares of AGIX: Price $11.59
Sold to Open: 2 AGIX Apr 12.50C: Net Received: $4.68.
Net Debit: $ 6.91 x 200 shares = $1.382.
========================
Analysis
Max Risk: $6.91 per share, or $1.382 in total, and only if AGIX stock goes to zero at any time in the future if I am still holding the stock.
Break Even at April Expiration: $6.91. Example: Assume the stock closes at $7.91 at April closing. The writen call will expire worthless and my position would be worth $1,582, for a $200 profit on a $1,392 investment for about 55 days.
Let's say that the stock drops about 50% in value from it's present $10, and is trading at $5 at expiration. At that point I could sell the stock for $1,000 and realize a loss of $392. But, before doing that, I would first look at the May Calls and see what the IV looks like for a possible write, thus reducing my overall net debit by the premium received for the sale of the new options. This is not to say that I would do this, but it certainly is an alternative available to me. I love flexibility.
Let's now look at the potential upside. Assume that the FDA rules favorably on this new miracle drug. The stock goes to the moon. I'm delighted to do nothing and have my 200 shares called away from me for $12.50 each, or $2,500, resulting in a net profit of $1,118 profit on a $1,382 investment over the same 55 day period. If the calls get assigned prior to expiration, so much the better.
Therefore, in all due respect to some of the previous postings, I don't consider this trade analagus to either "playing with fire" or a potential "nuke".
Comment on potential FDA action-
First thing I want to state for the record that I haven't a clue what the FDA will do. But, for sure the pending FDA action is the reason for the incredibly high Implied Volatility (IV). I have studied many many stock and option situations involving FDA anticipated action. They seldom do a flat rejection. Instead, if they are not in a position to approve the application, they often remand it for further study. Many times that "further study" merely means nothing more than increassing the size of the placebo vs actual sample. In very rare instances this can result in options several months out having a higher IV than options in the near term months. To say the least, it's all pretty darn interesting.
Bob
Date of Transaction: Feb 22, 2007
Purchased 200 shares of AGIX: Price $11.59
Sold to Open: 2 AGIX Apr 12.50C: Net Received: $4.68.
Net Debit: $ 6.91 x 200 shares = $1.382.
========================
Analysis
Max Risk: $6.91 per share, or $1.382 in total, and only if AGIX stock goes to zero at any time in the future if I am still holding the stock.
Break Even at April Expiration: $6.91. Example: Assume the stock closes at $7.91 at April closing. The writen call will expire worthless and my position would be worth $1,582, for a $200 profit on a $1,392 investment for about 55 days.
Let's say that the stock drops about 50% in value from it's present $10, and is trading at $5 at expiration. At that point I could sell the stock for $1,000 and realize a loss of $392. But, before doing that, I would first look at the May Calls and see what the IV looks like for a possible write, thus reducing my overall net debit by the premium received for the sale of the new options. This is not to say that I would do this, but it certainly is an alternative available to me. I love flexibility.
Let's now look at the potential upside. Assume that the FDA rules favorably on this new miracle drug. The stock goes to the moon. I'm delighted to do nothing and have my 200 shares called away from me for $12.50 each, or $2,500, resulting in a net profit of $1,118 profit on a $1,382 investment over the same 55 day period. If the calls get assigned prior to expiration, so much the better.
Therefore, in all due respect to some of the previous postings, I don't consider this trade analagus to either "playing with fire" or a potential "nuke".
Comment on potential FDA action-
First thing I want to state for the record that I haven't a clue what the FDA will do. But, for sure the pending FDA action is the reason for the incredibly high Implied Volatility (IV). I have studied many many stock and option situations involving FDA anticipated action. They seldom do a flat rejection. Instead, if they are not in a position to approve the application, they often remand it for further study. Many times that "further study" merely means nothing more than increassing the size of the placebo vs actual sample. In very rare instances this can result in options several months out having a higher IV than options in the near term months. To say the least, it's all pretty darn interesting.
Bob
With these high IV pending FDA announcements, occasionally you'll see a reversal where there is a lcoked in profit. Problem is, the stock isn't borrowable.Quote from cohenmichaela:
The only point I was trying to make is that either way (conversion or reversal) there is no free money or pricing disparity.
You painted the rosy side of the AGIX story. The other side of the coin is:Quote from exQQQQseme:
Therefore, in all due respect to some of the previous postings, I don't consider this trade analagus to either "playing with fire" or a potential "nuke".
Phase 2 ARISE trials had problems and the company was accused of fudging the numbers. Phase 3 will have to do a big turn about to overcome this.
There have been situations where the FDA gave conditional approval and the stock was more than halved in price. If this happens or if there's a thumbs down verdict, IV will contract more than 50%. More likely, it will go down toward its historic average of 50% ... maybe even lower if the verdict is final and there aren't other new products in the pipeline, near term.
If the above happens, their balance sheet will be irrelevant. You'll be collecting peanuts for covered calls in subsequent months... that is, if it holds $5. Below that and you'll be digging out for years, if not holding wallpaper. Flexabillity? You'll have little to none.
I have no clue what the FDA decision will be but as IV Trader said, you're playing with fire.