CC3: Selling an ITM Option on Yahoo (Covered Calls 3)



View Tek's whole beginner options course: http://www.informedtrades.com/f115/ Practice options trading with a free practice trading account: http://bit.ly/apextrader VIDEO NOTES: In this video, we will continue looking at choices of Call Options that a trader could sell to place a Covered Call on Yahoo. At the time of making this video, Yahoo is $33.76 a share. In the last video, we looked at 2 Out-of-the-Money Strike Prices that a Trader could sell to place a Covered Call on Yahoo. Instead of selling a Call Option that is out-of-the-money, a more risk adverse trader could choose to trade some of his upside potential for some downside protection by selling an Option that is In-The-Money. Instead of buying 100 shares of Yahoo for $33.76, and then choosing to sell a $34 or A $35 Strike Price, a Trader could choose instead to sell the $33 Strike Price. The $33 Strike Price costs $2.05. Selling the $33 Strike means that the Trader collects $2.05 up front. If the Price of Yahoo is still above $33 when the Option expires, the Option is exercised which means that the trader sells his 100 shares of Yahoo for $33 a share. He paid $33.76 for Yahoo and sells it for $33.00, so he loses $76 cents a share on Yahoo. But he was also paid $2.05 up-front selling the Call Option, so his profit is $1.29 a share. The trade is closed meaning that all risk is taken off of the table. If the price of Yahoo drops and stays below $33, the Option the trader sold expires worthless. The trader keeps his 100 shares of Yahoo and the trader keeps the $2.05 that he was paid up-front as profit. The next month he can sell another Call Option and repeat the process. The trade is still ongoing, so risk of loss is still present. The Trader paid $33.76 for Yahoo and he collected $2.05 up front, so his current Break-Even point is $31.71. If the trader wants even more downside protection, the Trader could place the Covered Call by buying 100 shares of Yahoo for $33.76 and selling the $32 Strike Price. The $32 Strike Price costs $2.66. Selling the $32 Strike means that the Trader collects $2.66 up front. If the Price of Yahoo is still above $32 when the Option expires, the Option is exercised which means that the trader sells his 100 shares of Yahoo for $32 a share. He paid $33.76 for Yahoo and sells it for $32.00, so he loses $1.76 a share on Yahoo. But he was paid $2.66 up-front selling the Call Option, so his profit is 90 cents a share. The trade is closed meaning that all risk is taken off of the table. If the price of Yahoo drops and stays below $32, the Option the trader sold expires worthless. The trader keeps his 100 shares of Yahoo and the trader keeps the $2.66 that he was paid up-front as profit. The next month he can sell another Call Option and repeat the process. The trade is still ongoing, so risk of loss is still present. The Trader paid $33.76 for Yahoo and he collected $2.66 up front, so his current Break-Even point is $31.10. Let's compare selling these two Strike Prices to selling the 2 out of the money Strike Prices that was discussed in the last video. To re-cap, at the time of making this video, the price of Yahoo is $33.76. If the price of Yahoo is above the strike price when the Option expires, the Option is exercised which means that the Trader sells his 100 shares of Yahoo to the buyer of the Option at the Strike Price of the Option. This is known as being Called Out. Getting called out closes the trade, locks in profit, and removes all risk. If the Trader sells the $34 or $35 Strike, the price of Yahoo has to rise for the Option to be exercised, where as if the Trader sells the $32 or $33 Strike, the Option will be exercised unless the price of Yahoo drops. Selling an Out of the Money Option will generate more profit if the option is called out. Part of the profit will come from the rise in the price of Yahoo and part of the profit will come from the premium the trader collects from selling the Call Option.

Comments

  1. you speak too fast


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Visibility: 1143

Duration: 5m 52s

Rating: 8