Testimonials

June 6, 2013

A Naked AAPL Call

Filed under: Options Education — Tags: , , , , , , , , — Dan Passarelli @ 11:46 am

A naked call strategy is defined as an option strategy where a trader sells (writes) call options without owning the underlying stock. Some option traders may refer to this strategy as an “uncovered call” or “short call.”

The goal of the naked call is for the trader to collect premiums if the option expires worthless. A trader could sell an out-of-the-money (OTM) naked call each month and pocket premiums, provided the stock price either stays flat or drops. This process could continue as long as the stock remains below the strike price. For those interested in learning all the ins and outs of naked calls and possibly safer alternatives, please visit the Learn To Trade section of our website.

The Specifics
The maximum gain for selling a naked call is limited to the premium received for the call option. With that being said, the loss potential is unlimited – as the stock can rise indefinitely in theory. If the underlying stock’s price is above the strike price at expiration, it will result in the trader having to sell the stock at the strike price (which will be lower than the market price or current price).

A loss on the trade can occur if the stock price rises. If the price of the underlying stock is greater than the short call’s strike price plus the premium received at expiration, the option should probably be bought back to close the trade. If not, when the option is assigned and a short-stock position is acquired, further losses are possible. On the flip side, the maximum profit is achieved when the underlying stock is less than or equal to the strike price of the sold call at its expiration.

An Example
For this specific example, we will take a look at Apple (AAPL) – which is trading right around $440 at the time of this writing. A June 445 call carries a bid price of 7.50. If the stock remains below the strike price (445) by expiration, the call expires worthless and the call seller keeps the $7.50 in premium (less any commissions). The problem is if the stock rallies through the strike price at expiration, the call will be assigned, resulting in a short sale of 100 shares at $445. With the stock at $470, that would represent a loss of $25 a share, or $2,500. Subtract the $750 received in premium and the total loss comes to $1,750.

With unlimited loss potential, the naked call is considered one of the riskiest option strategies. A, perhaps, safer way to structure a trade with a similar risk profile is to sell a call credit spread. Selling a call spread will be discussed in future posts.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 30, 2012

Buying Call Options Rather Than Stock for AAPL

Filed under: Uncategorized — Tags: , , , , , , , , — Dan Passarelli @ 8:33 am

You have your eye on a stock, a very high-valued stock like Apple (NASDAQ: AAPL ). You believe that this stock, despite its high price, continues to have tremendous upside potential and could easily make it to $700 soon. The problem is that you don’t want to shell out $675 for one share of the technology giant. What can you do to maximize your money and cash in on the perceived upside? Easy, buy a call option rather than the stock.

Quick Definition
For the uninitiated, a call option is a bullish strategy wherein a trader purchases the right (but not the obligation) to purchase a stock at a specified price within a specific time period. One advantage to buying a call option rather than purchasing a stock is that you can gain a much larger percentage return on your investment. To learn more advantages, please check out the Options Education section on our website.

The Example
If you want to purchase 100 shares of AAPL stock at $675 it is going to cost you (100 X $675) $67,500.  However, let’s say that you decide to purchase 1 call option on AAPL (each option represents 100 shares) with a strike price of, say, 675 with a October expiration, which carries a price tag of $27. Rather than dishing out $67,500 for 100 AAPL stock shares, you instead pay $2,700 for the options – a rather nice difference of $64,800 that you can use for something else or to purchase other options.

The Money
The cost efficiency of purchasing call options can be far greater than simply purchasing shares of a stock, especially when you are dealing with high-priced stocks like AAPL. Remember that one option contract is the right to purchase 100 shares of a stock at that price. So, rather than purchasing 100 AAPL shares at $675 at the massive cost of $67,500; you have dished out a more reasonable $2,700 for the transaction. Of course this is the scenario if you want to be simply bullish on AAPL stock.

Conclusion
As you can see, it is possible to lay out far less money to purchase call options on a stock that to by the call itself. In fact, the earlier the expiration you choose, the lower the price you could pay. No matter what math you use, paying $2,700 is far better than paying $67,500 for the same product. What if you want to sell these options to someone who is willing to pay a higher ask price than you paid? That is another subject for another time. Remember, there is no fool-proof way to make money in the market – there is risk involved in any trading strategy. One way to make sure you maximize your cash is to make sure you study your subject, remember that knowledge is power.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring