How You Can Positively Affect Corporate Stock Options

Like other strategies, the collar can be leaned toward the investor's perception of a corporate stock options direction and strength.Let’s look at the potential leans that can be taken. Say that you have a very strong feeling the XYZ is going to go up. Instead of buying a put and selling a call with strikes that are roughly equidistant from the corporate stock options price, you would sell a call that is further out-of-the-money.This would allow more room for a larger increase in the corporate stock options price because the stock would not be called away as early. You retain ownership for a longer period of time during the increasing price period.Of course, by increasing the distance of the option’s strike away from the corporate stock options, the amount of the call's premium will decrease. The overall effect is that you’ll have to pay more to own the position. (You will pay out more money for the put than you will receive from the call.)Again, we'll start with the same prices as in our original case, (stock $28.00, Dec. 27.5 put $1.00 and Dec. 30 call $1.00) only now we will change the Dec. 30 call at $1.00 to the Dec. 32.5 call at $ .35.In our other examples, we incurred no debit or credit from our option position. This time, with the bullish lean, a debit is incurred. The purchase of the Dec. 27.5 put for $1.00 combined with the receipt of $ .35 from the sale of the Dec. 32.5 call produces a $ .65 debit.Remember, this debit must be subtracted from the bottom line profit or added to the bottom line loss of the corporate stock options capital result. This means that before you make any money from the position, the corporate stock options must trade up $ .65.If the corporate stock options stay stagnant you will lose $ .65, and any capital loss you incur will be $ .65 worse. Now back to the position in our previous example. With the selling of the Dec. 30 call, we had an upside potential of $1.50. In this example things change.As was stated, our maximum upside potential is calculated by setting the corporate stock options price at the strike price of the short call which is 32.5 in this case. With the corporate stock options at $32.50 at expiration, you would have a $4.00 stock gain since the corporate stock options were purchased for $28.50.Remembering your $ .65 debit to enter the position, we subtract that from the $4.00 and we have a total maximum profit of $3.35. This is significantly more potential reward than our original example using the Dec. 30 call.As in all trading situations that offer a higher potential reward, there comes a higher potential risk. If the corporate stock options stay at $28.50, (the stagnant scenario) you have a loss of $.65 in option costs. In the down “scenario,” calculating the maximum risk is done by setting the corporate stock options price at $27.50 on expiration.The corporate stock options, purchased at $28.50 has lost $1.00. The options, not neutral, resulted in a $.65 loss. The total loss is $1.65. In both the “stagnant” and “down” scenarios, the loss increased over that in our original example. As you can see, the higher potential gain is accompanied by an increased potential risk...

A Strategy For Commodity Option Trading That Can Save You Money

Tax Deferral Strategies & Commodity Option TradingA Strategy For Commodity Option Trading That Can Save You MoneyFor years up until the burst of the bubble, investors needed only to be right about what kind of commodity option trading they got involved in. Should they buy XYZ, ABC or PDQ? The philosophy at the time led investors to believe that the purchase of the right stock in commodity option trading was the key to success. The question was not “which stock will go up?” but “which stock will go up more?” It was a time of buy and hold and the concept of sell was often overlooked and infrequently used in commodity option trading.This remarkable bull market phase was characterized by large moves, and also by some degree of investor complacency – in that they just bought, held, and waited to profit from their commodity option trading.When the bubble burst, commodity option trading became much more volatile, making it too dangerous to just buy, hold and wait. As quickly as an investor had a profit, the market could turn and they would suddenly be faced with a loss. The time of buy and hold had ended and the time of buy and sell had begun.The importance of taking a quick profit from commodity option trading now meant the difference between profit and loss. The shrewd investor took profits from commodity option trading quickly, instead of waiting and having those profits disappear. However, one of the problems investors then faced was higher taxes, in the form of short term capital gains.Investors who sold their stock accumulated from commodity option trading before holding for a one year period were hit with these higher short term capital gains taxes. Short term capital gains are treated as ordinary income thus taxed at that rate which for most investors is 25%. That tax is much higher than the long term capital gains tax of 15%, up to 67% higher.Prior to the burst of the bubble, an investor was pretty safe holding onto an investment gained from commodity option trading for a few extra months in order to get beyond the one year mark. Then they would sell their position and only incur the long term capital gain tax, which today is 15%.These days, it can be dangerous even waiting a couple of extra days, let alone weeks or months. That delay can mean the difference between having to pay taxes from commodity option trading or finding a previous gain to put against your new loss.Fear not investor … commodity option trading to the rescue! As we have established in “The Stock Replacement Covered Call Strategy,” a deep in-the-money call can be substituted for stock under appropriate conditions. In the Stock Replacement Covered Call, you used the purchase of a call with a delta in the mid to high 90’s to replace your long stock. As you saw, the call behaved very similarly to a long stock position.In this case, you will again use a deep-in-the-money call to replace your stock. This time, however, you will engage in a sale of the call to mimic the sale of the actual stock. With proper timing and call selection, you can hold on to the stock until the one year time line passes without risking the potential decrease in your commodity option trading profit. Let’s take a look at how this works.We begin our analysis by walking through a commodity option trading example. Let’s pretend that you were commodity option trading with stock XYZ at a price of $45.00 in January 2003. Over the course of the next nine months, XYZ traded up to $82.00. At this point (October - the ninth month of ownership), you feel that it is time to take your profit and sell your stock.However, since it has only been nine months since the purchase, you would be susceptible to the higher tax on your short term capital gains. But, by waiting another few months, you run the risk of the stock trading down and losing profits.If you sell the stock, you lose additional money because of the difference between short term (15%) and long term (25%) capital gains taxes. If you wait out the year, you risk the decrease in the stock price. What should you do?The best solution would be to sell a call option against your stock...

Effects Of Volatility On The Time Spread For Commodity Options Trading

When purchasing a time spread, the investor should pay attention not only to the movement of the commodity options trading price but especially to the movement of volatility.Volatility plays a very large roll in the price of a time spread and, as we have stated, the time spread is an excellent way to take advantage of anticipated volatility movements in a hedged fashion.Since the time spread is composed of two options, the investor should understand the role of volatility in commodity options trading as well as in time spreads. Let’s start with commodity options trading volatility.A commodity options trading volatility component is measured by a term called vega. Vega, one of the components of the pricing model, measures how much a commodity options trading price will change with a one point (or tick) change in implied volatility. Based on present data, the pricing model assigns the vega for each option at different strikes, different months and different commodity options trading prices.Vega is always given in dollars per one tick volatility change. If an option from your commodity options trading is worth $1.00 at a 35 implied volatility and it has a .05 vega, then the option will be worth $1.05 if implied volatility were to increase to 36 (up one tick) and $.95 if the implied volatility were to decrease to 34 (down one tick). Remember, vega is given in dollars per one tick volatility change.As we continue to discuss vega, keep these facts in mind:
Vega measures how much a commodity options trading price will change as volatility changes.
Vega increases as you look at future months and decreases as you approach expiration.
Vega is highest in the at the money commodity options trading.
Vega is a strike-based number – it applies whether the strike is a call or a put.
Vega increases as volatility increases and decreases as volatility decreases.It is important to note that a commodity options trading volatility sensitivity increases with more time to expiration. That is, further out-month commodity options trading have higher vegas than the vegas of the near term options. The further out you go over time, the higher the vegas become.Although increasing, they do not progress in a linear manner. When you check the same strike price out over future months you will notice that vega values increase as you move out over future months.The at-the-money strike in any month will have the highest vega. As you move away from the at-the-money strike, in either direction, the vega values decrease and continue to decrease the further away you get from the at-the-money strike.Remember, vega (an option’s volatility component value) is highest in at-the-money, out-month commodity options trading. Vega decreases the closer you get to expiration and the further away you move from the at-the-money strike. The chart below shows vega values for QCOM commodity options trading.As you look at the chart observe the important elements: the commodity options trading price is constant at 68.5; volatility is constant at 40; time progresses from June to January; and finally, the strike price changes from 50 through 80. Notice the increasing pattern as you go out over time. Also notice how the value decreases as you move away from the at-the-money strike.
Chart 3-Vega Stock Price 68.5 Vol.40
Strike
June
July
October
Jamuary
50
0
.008
.064
.114
55
.004
.030
.102
.153
60
.023
.063
.135
.184
65
.053
.090
.157
.205
70
.056
.094
.165
.215
75
.032
.077
.154
.213
80
.011
.052
.142
.203Another important fact about vega is that it is a strike-based number. That means that the vega number does not differentiate between put and call. Vega tells the volatility sensitivity of the strike regardless of whether you are looking at puts or calls. So, the vega number of a call and its corresponding put are identical...

How Time Decay Affects Commodity Options

Time decay, also known as theta, is defined as the rate by which a commodity options value erodes into expiration. The value of the commodity options over parity to the stock is called extrinsic value.Since commodity options are a depreciating asset, meaning they have a limited life, the extrinsic value in the commodity options will wither away daily until expiration. This “decay” is not a linear function meaning it is not equally distributed between all of the days to expiration.As the commodity options gets closer to expiration, the daily rate of decay increases and continues to increase daily until expiration of the commodity options. At expiration, all commodity options in the expiration month, calls and puts, in-the-money and out-of-the-money must be completely devoid of extrinsic value as noted in the time value decay charts below.As more time goes by, the commodity options extrinsic value decreases. Again, it is important to note that the rate of this decrease is not linear, meaning not smooth and even throughout the life of the option contract. An option contract starts feeling the decay curve increasing when the option has about 45 days to expiration. It increases rapidly again at about 30 days out and really starts losing its value in the last two weeks before expiration.This is like a boulder rolling down a hill. The further it goes down the hill, the more steam it picks up until the hill ends.By selling the commodity options and owning the stock, the covered call seller captures the extrinsic value in the option by holding the short call until expiration.By selling the commodity options and owning the stock, the covered call seller captures the extrinsic value in the option by holding the short call until expiration.At The Money Call vs. In The Money Call At The Money Call vs. In The Money Call
Key Point – The covered call strategy provides the investor with another opportunity to gain income from a long stock position. The strategy not only produces gains when the stock trades up, but also provides above average gains in a stagnant period, while offsetting losses when the stock declines in price.We have now seen how a covered call strategy is constructed and how it is supposed to work. Keep in mind that the trade can be entered into in two ways. You can either sell calls against stock you already own (Covered Call) or you can buy stock and sell calls against them at the same time (Buy Write).Example 1You own 1000 shares of Oracle at $9.50.The stock has been stuck around this level for a long time now and you have grown impatient. You finally give in and sell the front month (November for example) at-the-money calls. The at-the-money calls would have a strike price of $10 if the stock was trading at $9.50.You sell the calls at a $.50 premium per contract which creates a $10.50 breakeven point. Remember, in a buy-write, the breakeven point is the strike price plus the option premium.
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How You Should Employ The Different Spreads To Your Commodity Futures Options Trading

There are two main types of vertical spreads for commodity futures options trading. There is the vertical call spread and the vertical put spread. Each spread allows you to do two things. First, you can buy it, making you long the vertical spread. Second, you can sell it making you short the vertical spread. Both can be employed to take advantage of directional commodity futures options trading plays. When we use the term “directional stock play,” we refer to using vertical spreads to capitalize on anticipated stock movements either up or down.A bull spread is used when the investor feels that commodity futures options trading is most likely to go up. As we recall, “bullish” means to have a positive outlook on a commodity futures options trading movement. There are two ways to set up a commodity futures options trading bull spread. The first is with the use of calls. In this case, a bullish investor would buy a vertical call spread (bull call spread). Buying a call with a lower strike price and selling a call with a higher strike price accomplish this.The second way to construct a commodity futures options trading bull spread is with the use of puts. A bullish investor could sell a vertical put spread (bull put spread) hoping to profit from an increase in the commodity futures options trading value. The investor would sell a put with a higher strike price and buy a put with a lower strike price. Let’s take a look at how the P&L chart of a Bull Spread looks below.
To recap, if you feel commodity futures options trading will be increasing in value, you may put on a bull spread by either buying a vertical call spread (bull call spread) or selling a vertical put spread (bull put spread)A commodity futures options trading bear spread, however, is used when, you the investor, feels a commodity futures options trading is likely to trade down. Remember, “bearish” means that one’s outlook on the future movement of the stock is negative. To take advantage of this expected downward movement, the investor would put on a commodity futures options trading bear spread. This can be done in either of two ways.First, the investor can do it using puts. The purchase of a vertical commodity futures options trading put spread (bear put spread) can be accomplished by purchasing a put with a higher priced strike and selling a put with a lower priced strike.The second way an investor can construct a bear spread is by using calls, specifically, by selling a vertical call spread (bear call spread). You do this by selling a call with a lower strike price and purchasing a call with a higher strike price.So if you think that commodity futures options trading is likely to decrease in value, you sell a vertical call spread (bear call spread) or purchase a vertical put spread (bear put spread). Let’s take a look at the P&L diagram for a Bear Spread below.
Finally, there are two fundamentals that are universal to all commodity futures options trading vertical spreads. These fundamentals are critical to understanding the foundation of the vertical spread strategy: (1) you can determine a vertical spread’s maximum value by taking note of the difference between the two strikes and (2) vertical spreads have intrinsic value...

Another Profitable Strategy For Commodities Options Trading

The fact that you are creating the covered call strategy (buy-write) for commodities options trading, by doing the vertical spread is very important to note. For margin purposes, the vertical spread will be margined at a much more favorable rate than the traditional buy-write because you do not own the actual stock for the commodities options trading and therefore do not have as much to lose. This is especially important to investors/traders who trade on margin.This scenario includes another significant value added benefit that you receive. When you purchase a spread, the most you can lose is the amount you paid for the spread, which in this case is $10.15.As you already know, the biggest risk in a covered call/buy-write strategy is a large downward move in the stock from commodities options trading. If you had done this trade with the actual stock from commodities options trading and the stock from traded all the way down to $20.00 from $60.00 (although unlikely) we would stand to lose almost $40,000.However, if you did the trade with the 47.5 calls in place of the stock via the vertical call spread above, the maximum loss is what you spent on the commodities options trading. Remember, you purchased the vertical call spread for $10.15. If you traded the spread an equivalent amount of times to equal 1000 shares, you would have bought a total of 10 spreads.The total dollar amount of your investment would be $10,150.00, as opposed to $58,900 had you bought 1000 shares of Amgen outright. Your loss will be maximized at $10,150 if the commodities options trading ventures traded down to $20.00 as opposed to a $38,900.00 loss in the case of outright stock ownership. Even if the stock were to trade down to $0, your maximum possible loss would still be $10,150.This is because once the commodities options trading goes below $47.50, the December 47.5 calls become worthless thus the calls can not lose any more money no matter how much more commodities options trading ventures trades down.In order to continue or “roll” this position, you will have to roll two options into the next month instead of one. In a traditionally structured covered call strategy (long stock, short call), you are dealing with only one option series.However, in the commodities options trading replacement strategy, you have a second option series (the call you purchased to replace the losses during your commodities options trading) to roll into the next month. This may incur an additional commission but the commodities options trading is obviously well worth it when you look at the previously stated risk/reward scenario and the size of the capital outlay needed to initiate the position.Conclusion: As we detailed here, the stock replacement version of the covered call/buy-write strategy is an example of the proper use of option leverage. It offers the investor a bigger percentage return, less risk and less capital requirement than the traditional covered call/buy-write strategy.Anytime you are interested in a high dollar stock, first look to see if there are any deep in-the-money calls that fit this replacement scenario and evaluate if this might be a better option...

How This Strategy Can Drastically Effect Your Commodities Options

Looking at the collar in the “stagnant” scenario, the commodities options price would be unchanged thus neutral in terms of return. Therefore, the potential profit or loss would come strictly from the debit or credit of the two options.If the commodities options do not move, as in our example, both the put and call would finish out-of-the-money and be worthless.Our profit or loss would simply be calculated from whether you paid for the collar or collected from the collar and how much that amount was.Using the same prices as the previous example (the commodities options purchase price of $28.00, the Dec. 27.5 put $1.00 and the Dec 30 call $1.00) we will now take a look at the “down” scenario. Let’s set the commodities options price at $28.00 on expiration. At this price both the Dec. 27.5 put and the Dec. 30 call are out-of-the money and worthless. Since there is no credit or debit incurred in the option position ($1.00 inflow from the calls, $1.00 outflow from puts) the total return of the position is simply the gain or loss from the commodities options.With the commodities options purchase price of $28.50 and a commodities options price of $28.00 on expiration, there will be a $ .50 loss in the position. Setting the commodities options price at $27.50, we see that the Dec. 27.50 puts and the Dec. 30 calls are again worthless and with no debit or credit incurred, the positions profit or loss will come down to the gain or loss on the commodities options.With the purchase price of the commodities options being $28.50 and the commodities options price at expiration $27.50, there will be a $1.00 loss. In this case, we have reached the maximum loss. No matter how low the commodities options go, you can only incur a maximum loss of $1.00.Now, let’s set the commodities options price at $26.00 and see if this holds true. With the commodities options at $26.00 on expiration, the Dec. 30 calls are out-of-the-money and worthless. The Dec. 27.5 puts, however, are in-the-money and now worth $1.50.The commodities options you purchased for $28.50 is now worth $26.00 on expiration which is a $2.50 loss. Combining the $2.50 stock loss with the $1.50 gain in the puts and you have a $1.00 loss in the overall position.This demonstrates that $1.00 is the maximum loss of the position. Keep in mind that if the commodities options position creates a debit or a credit, it must be added to, or subtracted from the stock loss.Most of the time, there will be a small debit or credit incurred in the option position. It is relatively infrequent that the put and call used in the collar are trading at the exact same price...