Front month ITM buy/write

D

dojibear

I'd like to have your comments on this:
RIMM : Daily chart shows possible support @ 30.00

RIMM last trade @32.60

Sell 1 Call Sep 30.00 @ 2.90 = +290 -1 comm. = +289.00$
Buy 100 shares RIMM @ 32.57 = -3257 -1 = - 3258.00 $

Cost of investment = -3258 + 289 = -2969.00$

If from now untill next Friday, if RIMM does not break 30$, my call will be exercised :
Sell 100 shares RIMM @ 30 = + 3000 - 1 = +2999.00

Total return = -2969 + 2999 = 30.00$

ROI = 30 / 2969 = 1.01% in 8 days,
annualised = 1.01 / 8 x 365days = 46.1 % per year

The risk is RIMM breaks 30$ in 8 days, in this case, my Break Even Point of my long shares position will be 32.57 - 2.90 = 29.67

Does that seems to be a low risk conservative stratety, or are there flaws somewhere?
TIA

Cheers!! :)
 
The numbers for this are nearly OK, assuming the underlying stays above $30, but the "annualized" returns are meaningless unless you think you can do this every 8 days with no losses. Also, unless you want to own the stock, just selling a naked put will give you exactly the same risk/reward profile at lower cost. (You overlooked the carrying cost of owning the stock.)
Jessie
 
Also, if RIMM should advance by only 30 cents you would have been better off not being short the call. My preference would be a spread or a short put.
 
Rimm announced an increase in turnover guidance of $11 million and the traders bid up market cap by 25% or $500 million. I think there was a lot of short covering and the stock could fall back below $30 by options expiration. They have to win an appeal to not pay royalties and are facing increased competition.
 
Quote from jessie:

...but the "annualized" returns are meaningless unless you think you can do this every 8 days with no losses.
More...
True! :mad:

I should have added that my sentiment toward the market is neutral to weakly bullish.
RIMM gaped up from 28 to 35 in one day, I expect some sort of retracement, so long leap now is a bit risky.

I dont' like RIMM, so selling put is not preferable in my case. (maybe if it retraced to 30 with a long tail down green candle)
With this 'spread', it is the equivalent to short the stock @32.90 and cover @ 32.57, and the $ is already in my pocket at the time the 'spread' is made. I also have a larger room for error with a lower Break Even Point.

If RIMM broke below my Break Even Point, maybe suddenly I will like it ? :mad: :p

As for news, I try not to read too much, being affraid that it may influence my chart reading.

vh, jess, white, just, I appreciate your comments, it help me see things in different perspective.

Cheers!! :)
 
This technique (selling ITM/buy underlying) has become popular recently for different reasons.
If you find good option to sell is usually expensive due to volatility, so the risk is high. But if you want to use one being much less volatile the price is not attractive and combining with margin for long position in underlying makes this strategy not attractive.
However, when you think about it using SSF requiring only 20% margin then you may deal with real opportunities.
The catch here is that once stock goes down, your ITM becomes ATM and then by its nature will still be expensive while underlying will much more of its value, but there are some other alternatives to protect your position.
 
Quote from ChrisM:

...However, when you think about it using SSF requiring only 20% margin then you may deal with real opportunities.
The catch here is that once stock goes down, your ITM becomes ATM and then by its nature will still be expensive while underlying will much more of its value, but there are some other alternatives to protect your position.
More...
Hi ChrisM,
When you said '...other alternatives to protect your position", I supposed you meant buying some cheap puts as insurance? "AFLACK!!"

As for SSF, I am still waiting for its maturity, i.e. the volume to pick up. I haven't read nor looked into it, maybe they are trading with fair volume now.

I've thought about ITM vertical spread, but because I'll have to buy deep ITM call, and sell ITM call, the spreads are too high (and I'll have to pay it again to get out of the spread). However, this spread gives limited loss.

What concerns me most about this ITM buy/write is that the profits are capped small, and the losses are unlimited. It will take only one trade that goes sour on the day when I am not at my desk, or physically and/or mentally sick :) , hence not following initial plan, to wipe out most or all of profits from previous good trades.

I am new to option spreads, so whatever I said sounds naive, please forgive. :)


Cheers!! :cool:
 
I sell out of the money credit spreads and am short the rimm 30-32.5 bear credit spread. All my other positions are still out of the money but this one position will lead to a down month if the mm's keep it up here. I agree that just looking at the charts is probably a better idea than trading off the news/barrons!
 
The risk is much too high for only $30 reward...
I don't know this stock RIMM... but if for any reason, specific or not, it gapped down (as it gapped up recently) you never kow,.... the loss is huge...all that for $30 !!???
 
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