Oh, I missed that part. In that case, I'd just sell.
Right method to off-load NFLX stock options
- Thread starter simpleThought
- Start date
Oh, I missed that part. In that case, I'd just sell.
Yeah.. by selling I meant exercising...
Good points. Looks like the way I have been playing it so far is not that bad, which is getting rid of 15% every year. I do have more than 0.5M centered on it still though, which is 70% of my portfolio.
In the last one year, the great difference is my level of understanding. And if anything and some of the discussions truly were helpful.
In essence, it is 70% of my portfolio on NFLX options. And my tax bracket is 40%+ with fed+CAtax+etc. And I have 4 more years to do whatever with it. And I did sell 15% this year so far, though I may have pulled the trigger too early for the year
@ OP I am not the right person for the tax implications. My idea to keep it simple by selling naked calls was based on the fact that surely you can borrow the margin very cheaply with your vested options. Whilst Ironchef is right that the premium will only cover part of a drawdown in the case of NFLX you need to see that in context. The jan19 ATM call trades at 55$ or so, hence you can absorb a 17% drop before you start losing on your actual options. Furthermore as opposed to selling at current prices you are in effect pocketing an additional 55$ if NFLX stays put or rises.
Margin wise it requires about 6,000$ per option although a nicer broker could do it for much less (Mine would only lock up 3200$ for a naked call) if you need to borrow that money for a year that should not cost that much. I dont see a collar as being that much more advantageous if you cannot get your stock-options to be seen as covered call writing because the sold call of the collar will be naked anyhow. The only additional advantage you then have is that you are covered for your downside beyond -17%.
However, more coverage can be obtained by selling deeper ITM (with higher margin requirement). Alternatively if NFLX does tank badly you can always buy the jan19 320 calls back and sell calls again at lower levels, the amount of potential cover is finite but could get you a long way. Its hard to estimate exactly how much cover you can build but a quick unsophisticated calculation based on current option prices (a big if there) indicates you can get 100+$ of cover hence an almost 30% drop of NFLX.
Yet another way to do it is to constantly sell the ATM options for the next month. The premium in them is very dear and could get you much more than 55$ from today till jan19. However if you do that you need to take into account that if NFLX keeps rising you will need to be buying back at successfully steeper prices the sold calls. This can get uncomfortable and one must never forgot the golden rule: The market can stay irrational longer than you can stay liquid.
Somebody correctly pointed out that the time value is close to zero for deep ITM options. However you can cash in on the time value by selling the premium. As you dont care about the upside this seems to be an attractive way to go from a purely strategic perspective. Taxwise - no clue what happens.
Margin wise it requires about 6,000$ per option although a nicer broker could do it for much less (Mine would only lock up 3200$ for a naked call) if you need to borrow that money for a year that should not cost that much. I dont see a collar as being that much more advantageous if you cannot get your stock-options to be seen as covered call writing because the sold call of the collar will be naked anyhow. The only additional advantage you then have is that you are covered for your downside beyond -17%.
However, more coverage can be obtained by selling deeper ITM (with higher margin requirement). Alternatively if NFLX does tank badly you can always buy the jan19 320 calls back and sell calls again at lower levels, the amount of potential cover is finite but could get you a long way. Its hard to estimate exactly how much cover you can build but a quick unsophisticated calculation based on current option prices (a big if there) indicates you can get 100+$ of cover hence an almost 30% drop of NFLX.
Yet another way to do it is to constantly sell the ATM options for the next month. The premium in them is very dear and could get you much more than 55$ from today till jan19. However if you do that you need to take into account that if NFLX keeps rising you will need to be buying back at successfully steeper prices the sold calls. This can get uncomfortable and one must never forgot the golden rule: The market can stay irrational longer than you can stay liquid.
Somebody correctly pointed out that the time value is close to zero for deep ITM options. However you can cash in on the time value by selling the premium. As you dont care about the upside this seems to be an attractive way to go from a purely strategic perspective. Taxwise - no clue what happens.
I really like the idea of selling the call options to take advantage of the time value (though it is technically nil).
I did call and found out that margin or LOC on stock options is not an option on these options, either from my banks or from eTrade. so any margin account work goes away.
Putting it together, I went ahead and sold a small percentage today and might sell more once I finish my 2017 tax return (as my accountant can suggest better with AMT).
And plan to sell enough to keep securities after tax and do covered calls.
Again, Thanks a lot for those who contributed. It was super educational as well as prepped me to sell with confidence as I covered the other bases this time. I am sure there is more to learn and I will continue to do.