I need some counsel on a particular trading strategy involving Covered Calls on extremely cheap stocks.
With a low priced stock like BRLC, (1.05 share), the premium interest is between .10-.30 days gone by couple weeks. Disregarding the trading costs, that's about a 10-15% return on the cost of the stock every time the option expire.
I've done this a couple of times because the price is so low as was my entry point, and I enjoy been looking at other stocks to use matching strategy.
Other than the risk of the stock going to 0, should this raise any red flags? I've be more doing it as an intellectual exercise to get more experience next to options, but it's made me in the region of $10-$15 per $100 invested so far.
Answers: <<<With a low priced stock like BRLC, (1.05 share), the premium interest is between .10-.30 days gone by couple weeks. Disregarding the trading costs, that's about a 10-15% return on the cost of the stock every time the option expire.>>>
However, while a stock is trading below $3.00 per share no new leeway months will be added, so the number of times you might be able to repeat this process is predetermined. For example, with BRLC the solitary expirations left are Jun '08, Jan '09 and Jan '10.
<<<Other than the risk of the stock going to 0, should this put on a pedestal any red flags?>>>
The stock does not have to be in motion to zero for you to lose money. If you have initiated A BRLC covered call using the June expiry at the downfall of the trading session today (3/26/08) you would have rewarded $1.02 for the stock and received $0.10 for the option, making your lattice cost $0.92 per share. If the stock is below $0.92 at the June expiry you will have lost money.
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One big disadvantage of trading low priced option is that the bid-ask spread is a huge percentage of the premium. In the case of the June BRLC $2.50 call the bid is $0.10 and the ask is $0.15. So, if you sell the likelihood for $0.10 then want to close the position it will cost you another $0.05, or 50% of the maximum profit you can ever gross by selling the option, to close the position. Of course you can wish you will commit to keeping the position open until assignment or expiration, but if you do you are also making the commitment to preserve the stock no matter how much it falls during that time.
Another process to think almost the bid-ask spread is that with a bid of $0.10 and an ask of $0.15, the "party value" for the option is almost unquestionably somewhere in between. For simplicity, let's voice fair falue is $0.125. That scheme you are getting receiving smaller number than 80% of fair convenience when you sell the leeway. Selling $1.00 bills for $0.80 each is not a recommended road to make a profit.
I am not proverb that for any given low-priced stock you will not make a profit, but any time a stock price drops dramaticly in attendance is a reason. When the price drops to the $1.00 compass it is usually quite possible the company will not survive. If you want to use this as a strategy you want to be better than the average investor evaluating the probability the company will recover.
I didn't realize you could write call on such low priced stocks.
It doesn't raise a red flag to me. The volatility of these low priced guys is so huge that you'd expect to be salaried well for a telephone call. That 1.05 stock could go to 2 or 3 dollars. My $50 stock that I write call on won't go to 100 or 150.
this is one of those flukes that are out here, a real change cow..
Just have to scrutinize the stock so there are no spikes, but you do own a nice gap
The begin interest on the 2.50 is pretty big, but the 5's also look attractive
Enjoy the cash cow
Way too much risk for a "conservative" play approaching a covered call. Risk/reward would be road out of wack. All you'd need is one or two of these stocks to drop overnight by 30%. And you know they do!
With a low priced stock like BRLC, (1.05 share), the premium interest is between .10-.30 days gone by couple weeks. Disregarding the trading costs, that's about a 10-15% return on the cost of the stock every time the option expire.
I've done this a couple of times because the price is so low as was my entry point, and I enjoy been looking at other stocks to use matching strategy.
Other than the risk of the stock going to 0, should this raise any red flags? I've be more doing it as an intellectual exercise to get more experience next to options, but it's made me in the region of $10-$15 per $100 invested so far.
Answers: <<<With a low priced stock like BRLC, (1.05 share), the premium interest is between .10-.30 days gone by couple weeks. Disregarding the trading costs, that's about a 10-15% return on the cost of the stock every time the option expire.>>>
However, while a stock is trading below $3.00 per share no new leeway months will be added, so the number of times you might be able to repeat this process is predetermined. For example, with BRLC the solitary expirations left are Jun '08, Jan '09 and Jan '10.
<<<Other than the risk of the stock going to 0, should this put on a pedestal any red flags?>>>
The stock does not have to be in motion to zero for you to lose money. If you have initiated A BRLC covered call using the June expiry at the downfall of the trading session today (3/26/08) you would have rewarded $1.02 for the stock and received $0.10 for the option, making your lattice cost $0.92 per share. If the stock is below $0.92 at the June expiry you will have lost money.
-----
One big disadvantage of trading low priced option is that the bid-ask spread is a huge percentage of the premium. In the case of the June BRLC $2.50 call the bid is $0.10 and the ask is $0.15. So, if you sell the likelihood for $0.10 then want to close the position it will cost you another $0.05, or 50% of the maximum profit you can ever gross by selling the option, to close the position. Of course you can wish you will commit to keeping the position open until assignment or expiration, but if you do you are also making the commitment to preserve the stock no matter how much it falls during that time.
Another process to think almost the bid-ask spread is that with a bid of $0.10 and an ask of $0.15, the "party value" for the option is almost unquestionably somewhere in between. For simplicity, let's voice fair falue is $0.125. That scheme you are getting receiving smaller number than 80% of fair convenience when you sell the leeway. Selling $1.00 bills for $0.80 each is not a recommended road to make a profit.
I am not proverb that for any given low-priced stock you will not make a profit, but any time a stock price drops dramaticly in attendance is a reason. When the price drops to the $1.00 compass it is usually quite possible the company will not survive. If you want to use this as a strategy you want to be better than the average investor evaluating the probability the company will recover.
I didn't realize you could write call on such low priced stocks.
It doesn't raise a red flag to me. The volatility of these low priced guys is so huge that you'd expect to be salaried well for a telephone call. That 1.05 stock could go to 2 or 3 dollars. My $50 stock that I write call on won't go to 100 or 150.
this is one of those flukes that are out here, a real change cow..
Just have to scrutinize the stock so there are no spikes, but you do own a nice gap
The begin interest on the 2.50 is pretty big, but the 5's also look attractive
Enjoy the cash cow
Way too much risk for a "conservative" play approaching a covered call. Risk/reward would be road out of wack. All you'd need is one or two of these stocks to drop overnight by 30%. And you know they do!