New to options but have a few questions...please help

[.sigma]

Think about this: your counter party has a wife and two kids, and has to make payment on his Ferrari. Why would he hand you his money? .

The counter-party is some secret algo machine hiding within a black box in Northern, New Jersey. lol

 

[.sigma]

But to the OP,

Instead ditch the shares and use that capital to buy a higher strike OTM call on top of the sold one, creating a vertical, up the lots, and you'll make way more money than any CC.

 

[cvds16]

the explanation about sell to close is wrong. You open a buy to open first and later close that with a sell to close. With a covered call it's an sell to open first, if you want to close that position it's a buy to close.

 

[JBuck]

So I have 100 shares of Mj

Sounds like you're asking about selling a covered call. I recommend that you look at the following educational information:

CBOE
http://www.cboe.com/strategies/beginner/equity/covered-calls-strategy/part1

http://www.cboe.com/framed/pdfframe...title=Who+Should+Consider+Using+Covered+Calls

Investopedia
Options & derivatives trading options trading strategy & education
https://www.investopedia.com/terms/c/coveredcall.asp

To answer your question, if the short call expires in-the-money the call writer can expect assignment. No matter how high MJ has risen, the investor is obligated to sell his shares at the strike price so the upside profit potential on the shares is capped. However, the investor keeps the option premium received and will realize the position's maximum profit calculated in advance. Any dividends received before expiration would increase this profit amount.

Best

J B

 

[ironchef]

I doubt most covered callers know about dividend risk

I never paid attention to dividend risks. I always thought they were priced in?

 

[ironchef]

The counter-party is some secret algo machine hiding within a black box in Northern, New Jersey. lol

OK, the owner of the black box has a wife, two kids and a Ferrari.

 

[.sigma]

I never paid attention to dividend risks. I always thought they were priced in?

I’m not saying you need to pay attention, most people don’t and can still successfully sell covered calls all day. I’m just saying having an understanding that dividend risk exists and how dividends alter options value.

I used to think of options as the hard to understand and complicated concept in finance (and granted it is difficult) and I used to think of stock as binary and boring, not much “thought”. But I’m realizing even stock shares can be very complicated and how dividends and liquidity is priced into the value of shares and what not. Option Theory is a great book that discusses the intricacies of options as well as stock.

 

[ironchef]

I’m not saying you need to pay attention, most people don’t and can still successfully sell covered calls all day. I’m just saying having an understanding that dividend risk exists and how dividends alter options value.

I used to think of options as the hard to understand and complicated concept in finance (and granted it is difficult) and I used to think of stock as binary and boring, not much “thought”. But I’m realizing even stock shares can be very complicated and how dividends and liquidity is priced into the value of shares and what not. Option Theory is a great book that discusses the intricacies of options as well as stock.

Thanks for your reply. You are a good person.

I was just sharing my approach, paying forward.

I am kind of unconventional. I understand the general principles of what goes into the option price but I don't have the tools to figure out the nuances of the price. Therefore I let the market price it for me.

My focus is really at a macro level assessing, at the ending of the time period, what is the probability the spot will be > or < what i paid for. This simplified the problem for me allowing a newbie to trade options without understanding the math and statistics. In this past decade, the market underpriced the upside, usually by a mile.

Have a good day.

 

[.sigma]

Thanks for your reply. I was just sharing my approach, paying forward.

I am kind of unconventional. I understand the general principles of what goes into the option price but I don't have the tools to figure out the nuances of the price. Therefore I let the market price it for me.

My focus is really at a macro level assessing, at the ending of the time period, what is the probability the spot will be > or < what i paid for. This simplified the problem for me allowing a newbie to trade options without understanding the math and statistics. In this past decade, the market underpriced the upside, usually by a mile.

Have a good day.

I’ve read many of your posts, you are extremely modest and humble. You definitely are knowledgeable and I learn a lot from your posts, and one great thing is you ask a lot of good questions to smart traders that expands even more wisdom. So thanks iron!

 

[Lou Greed]

So I have 100 shares of Mj and wanted to do a sell call on it.....do I choose sell open or sell close and why? I use E*TRADE and if it does hit the strike price will they automatically take the 100 shares i own if the person on the other end exercise’s their option, or do I have to transfer the shares?

If you are asking this question here, you should not be even considering trading options until you educate yourself further. There are plenty of free resources online and most brokers offer training courses. Personally, I think selling covered calls is a poor strategy, but it can work. I'm sorry to be harsh, but I've been there. You are only going to loose money and maybe a lot more than you are comfortable with if you don't take it upon yourself to study.