more about option options

[KTP]

That other thread about the Ford motor options got me thinking.

I have 6000 microsoft options due to expire in Feb 2011 with a strike price of $25. Ok, so they are worth about $5 and change right now each, and I am getting itchy to lock in some gains before earnings (though it may go up after earnings, who knows?)

What if instead of exercising the options now, I sell some June or July options with a strike price of say, $32? I then keep a portion of the 6000 $25 options to cover these in the event the price jumps. Haven't I just made more money than if I sold the options at $31 outright? This assumes you could sell July $32 microsoft options for $1 or $2 each (havn't checked the prices yet).

I have never thought about actually selling options...but if I am covered by the options I own, it seems like very little risk...

Even if terminated from employment, you have 6 months to exercise options, hence the June or July date.

[Beppington]

Options are too complicated for me.

I took a one-day class on options once, & when the teacher said, "The bottom line is, when you buy options, you're positive you know more than the market knows."

Me to him: Oh, well, then good day to you sir! ... aka "A good man knows his limitations."

[Broken Arrow]

Ah, now we're cooking with option grease! Yes indeed, cover those calls!

But wait, don't you have to have real underlying assets first before you can write covered calls? So, don't you have to exercise some of your options first anyways? I don't know if you can cover calls with just options....

Well, either way, the obvious downside to something like this is that you're still in the game, and obligated to sell these option (which is fine if that's what you want instead of sitting in cash). What's more, if MSFT jumps even more than that, your gains are going to be muted.

But you know what? If you're in the money, I say screw the earnings seasons. Too many big wheels try to game these things that we little guys are at their complete mercy. If you're posting a gain, and you want to sell, then by George, let no one stop you from laughing all the way to the bank. Besides, this quarter seems a little soft anyways. Alcoa was a bad omen. Heck, I'm excited with just 1% gain right now!

And finally, yes, I agree options trading can also be extremely dangerous. At least what KTP is suggesting here though, is to use options to mitigate risk rather than leverage it, which I personally think is the only sensible way to trade options.

[KTP]

I kind of view this idea as a way to lock in some gains while getting some use out of the fact that the options don't expire for a year (and I have others that don't expire for 2.5 years). Options that are that far out are usually more expensive to purchase than options that expire in 3 to 6 months.

But it all seems a bit difficult to set up for such a small amount of money that I don't think I will bother. At most I could make $6000 or so, and it sounds dangerous if I don't set things up correctly.

Anyway, in about 4 hours I will know a lot more when intel posts earnings. Strong intel earnings will mean microsoft makes a run up to about $33 pre-earnings (Jan 28). Weak intel earnings will mean microsoft will trade at about $29 over the next few days and maybe climb to $31 again pre-earnings. My guess is 70% chance of strong intel, 30% chance of weak intel. Those numbers came from a position very close to my lower back.

[Beppington]

I kind of view this idea as a way to lock in some gains while getting some use out of the fact that the options don't expire for a year (and I have others that don't expire for 2.5 years). Options that are that far out are usually more expensive to purchase than options that expire in 3 to 6 months.

But it all seems a bit difficult to set up for such a small amount of money that I don't think I will bother. At most I could make $6000 or so, and it sounds dangerous if I don't set things up correctly.

Anyway, in about 4 hours I will know a lot more when intel posts earnings. Strong intel earnings will mean microsoft makes a run up to about $33 pre-earnings (Jan 28). Weak intel earnings will mean microsoft will trade at about $29 over the next few days and maybe climb to $31 again pre-earnings. My guess is 70% chance of strong intel, 30% chance of weak intel. Those numbers came from a position very close to my lower back.

They're probably sitting in a board room taking bids; Highest bidder gets the strong or weak earnings numbers he wants reported.

I love a great conspiracy!

[Slug]

Don't you have your options through MSFT? Often in the case of options issued by your company, I thought you didn't actually get the shares, you just get the money. I could be totally wrong, but you should be sure you're going to get the shares rather than the cash else you'd then have to go out and buy the shares to sell the covered calls.

[KTP]

If I had sold 3000 July options for $1 each at $33 a share and the price actually hit $33 a share between now and July, couldn't I sell a portion of my 6000 Feb 2011 options and use the proceeds to buy July $33 options to cover the July $33 options I sold?

Like I said, I don't think making $3000 is worth the trouble.

[kv968]

3000 July options? Remember, 1 option = 100 shares.

[KTP]

my mistake. My options are 1 for 1, so I thought the ones you would buy would be 1 for 1 also. Ok, so I would buy 30 July $33 options.

Intel just blew earnings out of the water, so this has to be good for Microsoft. I think we will see $32 tommorow, maybe $33 by earnings.

I keep telling myself "don't be greedy", but when every $1 rise is $6000 it is hard