Options Basics Part II Class 8

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1 Options Basics Part II Class 8 UD Osher OLLI Spring 2019 Rajeev A. Vaidya Guy Werner Disclaimer in plain language: Opinions are like noses, everyone has one! You are going to see mine today!! I am simply sharing my perspective. This is not investment advice or recommendation. Form your own opinion, make your own decisions. 4/15/2019 Rajeev Vaidya - OLLI 1

2 Class # 8 Exit Strategies Generic exit strategies for Call and Put Options Specific Exit Strategies for Covered Calls Guy s Investment Plan Rajeev s Investment Plan Allan Ellman s recommendations 4/15/2019 Rajeev Vaidya - OLLI 2

3 Choices the buyer and seller have on a call option Call Buyer Buys to Open a net debit Position opened Call Seller Sells to Open a net credit Stock price goes up Volatility stays the same Opt. Int Value goes up Opt. Ext Value decays with time Buyer can Sell to Close profit Seller can Buy to Close position to limit loss before expiration Stock price goes down Volatility stays the same Opt. Int Value goes down Opt. Ext Value decays with time Buyer can Sell to Close position to limit loss Seller can Buy to Close profit Stock price < Strike price Option expires Out of The Money Option premium decays to zero. Buyer loses all of the premium paid for the Option. Seller keeps all of the premium received on the Option Stock price below breakeven Buyer has loss on the trade Stock price is above breakeven Buyer has unrealized profit on the trade Stock price > or = Strike price Option expires In The Money Buyer puts up capital to buy the underlying at strike expiration Seller puts up capital to buy the underlying at market price and deliver it to the buyer at strike price. Seller s loss is reduced by premium received. time April 19 Rajeev Vaidya 3

4 Choices the buyer and seller have on a put option Put Buyer Buys to Open a net debit Position opened Put Seller Sells to Open a net credit Stock price goes up Volatility stays the same Opt. Int Value goes down Opt. Ext Value decays with time Buyer can Sell to Close position to limit loss Seller can Buy to Close profit before expiration Stock price goes down Volatility stays the same Opt. Int Value goes up Opt. Ext Value decays with time Buyer can Sell to Close profit Seller can Buy to Close position to limit loss Stock price below breakeven Buyer has unrealized profit on the trade Stock price = or < Strike price Option expires In The Money Buyer can sell the underlying at strike price. Seller puts up capital to buy the underlying at strike price. Seller s loss is reduced by premium received Stock price is above breakeven Buyer has a loss on the expiration Stock price > Strike price. Option expires Out of The Money Option premium decays to zero. Buyer loses all of the premium paid for the Option. Seller keeps all of the premium received on the Option time April 19 Rajeev Vaidya 4

5 Traders & Keepers Guy Werner Exit Strategies for Covered Calls Nothing in the plan prohibits from buying back a call and selling the underlying in the event of a dramatic change in the underlying or the market. Traders - Exit Price will be set at the start of the trade Usually set at 20% of the premium (set with a BTC GTC order on all trades over a week in length) Will maintain a paper exit price on the underlying. Will close the trade if the underlying falls below the exit price before the end of the day. Keepers if a keeper runs up in price. Potentially BTC the call option. OR Roll out OR Roll up the call option. 4/15/2019 Rajeev Vaidya - OLLI 5

6 Rajeev s trading plan Exit Strategies for Buy Writes Nothing in the plan prohibits from buying back a call and selling the underlying in the event of a dramatic change in the underlying or the market. Exit Price on the underlying will be set at the start of the trade Usually set below a support level Placed as a conditional close order at the start of the trade. Exit Rules outside the automatic exit with the conditional order Sell to unwind early to protect profits. Higher exit as expiration period nears end. 50% gains in early part of the expiration 75% gains in second half 90% gains near expiration. If underlying declines but stays above exit and call option declines significantly Buy option to take profits Make an independent decision on the underlying based on fundamentals and technicals. Resell call as underlying recovers. If underlying stock is near strike price at expiration Accept assignment and take profits. Let the call expire and sell the underlying at the next session open. If underlying stock rises well above strike price Buy the call and sell the stock if potential profit exceeds plan. Roll calls only if a clean start at today s conditions meet the plan entry rules. 4/15/2019 Rajeev Vaidya - OLLI 6

7 Rajeev s trading plan Exit Strategies for Buy Writes Exit Rules outside the automatic exit with the conditional order Sell to unwind early to protect profits. Higher exit as expiration period nears end. 50% gains in early part of the expiration 75% gains in second half 90% gains near expiration. If underlying declines but stays above exit and call option declines significantly Buy option to take profits Make an independent decision on the underlying based on fundamentals and technicals. Resell call as underlying recovers. If underlying stock is near strike price at expiration Accept assignment and take profits. Let the call expire and sell the underlying at the next session open. If underlying stock rises well above strike price Buy the call and sell the stock if potential profit exceeds plan. Roll calls only if a clean start at today s conditions meet the plan entry rules. 4/15/2019 Rajeev Vaidya - OLLI 7

8 Class # 8 Exit Strategies Generic exit strategies for Call and Put Options Specific Exit Strategies for Covered Calls Guy s Investment Plan Rajeev s Investment Plan Allan Ellman s recommendations 4/15/2019 Rajeev Vaidya - OLLI 8

9 Additional advice on CCs and BWs Allan Ellman Blue Collar Investor Website - Beginner s Corner Books Encyclopedia Covered Call Writing Selling Cash Secured Puts Exit Strategies for Covered Call Writing Cashing in on Covered Calls Newsletter / Premier Membership Weekly recommendations on CC/BW set-ups Many added benefits Investopedia - Tasty Trades Free ebook The Secret Side of Trading on the website. Street.com - CBOE Strategies summary on website. 4/15/2019 Rajeev Vaidya - OLLI 9

10 Class Schedule 4/15/2019 Rajeev Vaidya - OLLI 10

11 Thanks!! Happy Investing!! My Class website 4/15/2019 Rajeev Vaidya - OLLI 11

Options Basics Part II Class 7

Options Basics Part II Class 7 UD Osher OLLI Spring 2019 Rajeev A. Vaidya Guy Werner Disclaimer in plain language: Opinions are like noses, everyone has one! You are going to see mine today!! I am simply