Here are
some sample options strategies on two stocks, which show what happens under
various types of options scenarios. The two underlying stocks are ILMN and
AMZN. For this exercise, I pulled daily options quotes from CBOE.com http://www.cboe.com/DelayedQuote/QuoteTable.aspx
Before
you consider playing with options be sure you know when they expire! Here is
the 2012 expirations calendar: http://www.cboe.com/AboutCBOE/xcal2012.pdf
Basics:
When you trade options contracts the standard contract size is 100 (options-
calls or puts)
Strike price is the price on the face of the
option.
Uncovered
Option - A type of options contract that
is not backed by an offsetting position that would help mitigate risk. “Trading
naked”, as it is called, poses significant risks. However, an uncovered options
contract can be profitable for the writer if the buyer cannot exercise the
option because it is out of the money.
To
translate this Jargon: uncovered or naked option is when you don’t own the
stock or a commodity but you sold a call or a put contract. You can also be
uncovered when you buy a put, which will give you the right to sell a stock or
a commodity at a strike price, when it’s higher then the current price of the
stock. Buying an uncovered put is not risky because you will almost always be
able to buy the security at a lower price and will be able to resell it to the
put writer at the strike price.
Out of
the money options are those that have a strike price that is too high or too
low making them worthless before they expire.
Here is
an example of writing uncovered calls and puts:
|
Uncovered Calls and Puts
|
||||
|
ILMN
|
Expiration in March
|
Max Risk Exposure
|
||
|
Close
on 3/10/2012
|
50.12
|
|
|
|
|
Close
on 3/16/2012
|
49.93
|
|
|
|
|
|
Call @ $50
|
Put @ $50
|
Call @ $50
|
Put @ $50
|
|
On
March 3/10/2012
|
0.6
|
0.35
|
|
|
|
Expired
un-exercised Gain/ (Loss)
|
60
|
35
|
|
|
|
If
called on the 16th
|
n/a
|
7
|
|
|
|
Gain/(Loss)
|
60
|
28
|
unlimited
|
4,965
|
|
AMZN
|
Expiration in March
|
|
|
|
|
Close
on 3/10/2012
|
184.32
|
|
|
|
|
Close on
3/23/2012
|
195.04
|
|
|
|
|
|
Call @ $180
|
Put @ $180
|
Call @ $180
|
Put @ $180
|
|
On
March 3/10/2012
|
5.35
|
1.21
|
|
|
|
Expired
un-exercised Gain/ (Loss)
|
535
|
121
|
|
|
|
If
called on the 23rd
|
1,504
|
n/a
|
|
|
|
Gain/(Loss)
|
(969)
|
0
|
unlimited
|
17,879
|
You can
see that because ILMN did not fluctuate before the expiration date the writer
of the hypothetical call and the put earned 60 and 28 dollars respectively. Here
is how it worked: It would not make sense for the holder of the call to
exercise it because the strike price was $50, which is higher then $49.93 (the
stock closed before the expiration date). On the other hand, the holder of the
put contract could have exercised the put and made the writer buy the stock
from them at $50. The assumption is that the writer would turn around and sell
it at $49.93, thus losing $7 on 100 shares.
This
table also shows the possible loss in the even the underlying stock went up.
When it comes to calls the possible loss is really unlimited. On the other hand
the loss on puts is limited to the multiple of the difference between the
strike prices on the put and the close price of the stock before expiration.
Now in
the example with AMZN you’ll see that the stock jumped from $184 to $195 in 12
days. Also, you’ll notice that due to this change the options did not expire on
the “expiration calendar date” but continued to trade through the 23rd.
The writer of the call ended up loosing $969, because they had to sell the
stock to the call holder at $180, while it was trading at $195. But because
there was a profit from the original sale of call options was $535 the loss was
not the full $1,500. Put expired unexercised because the strike price was lower
then the close.
An
uncovered bull call spread is constructed by buying a
call option with a low exercise price, and selling another call option with a
higher exercise price. Often the call with the lower exercise price will be
at-the-money while the call with the higher exercise price is out-of-the-money.
Both calls must have the same underlying security and expiration month.
|
Uncovered Bull Call Spread
|
||
|
ILMN
|
Expiration in March
|
|
|
Close on 3/10/2012
|
50.12
|
|
|
Close on 3/16/2012
|
49.93
|
|
|
|
Buy Call @ $50
|
Sell Call @ $55
|
|
On March 3/10/2012
|
0.6
|
0.15
|
|
Expired un-exercised Gain/ (Loss)
|
(60)
|
15
|
|
If called on the 16th
|
n/a
|
n/a
|
|
Gain/(Loss)
|
(60)
|
15
|
|
Net Gain/(Loss)
|
(45)
|
|
|
AMZN
|
Expiration in March
|
|
|
Close on 3/10/2012
|
184.32
|
|
|
Close on 3/23/2012
|
195.04
|
|
|
|
Buy Call @ $180
|
Sell Call @ $185
|
|
On March 3/10/2012
|
5.35
|
0
|
|
Expired un-exercised Gain/ (Loss)
|
(535)
|
225
|
|
If called on the 23rd
|
1,504
|
(1,004)
|
|
Gain/(Loss)
|
969
|
(779)
|
|
Net Gain/(Loss)
|
190
|
|
This is
a strategy will work if the stock is expected to go up beyond the shorted (sold
call option strike price). You see that because ILMN did not move very much the
investor would have lost $45. They let the call contracts bought for $60 expire
and the written call contracts sold for $15 expired unexercised.
An
uncovered bull put spread is constructed by selling higher striking in-the-money
put options and buying the same number of lower striking in-the-money put
options on the same underlying security with the same expiration date. The
options trader employing this strategy hopes that the price of the underlying security
goes up far enough such that the written put options expire worthless.
|
Uncovered Bull Put Spread
|
||
|
ILMN
|
Expiration in March
|
|
|
Close
on 3/10/2012
|
50.12
|
|
|
Close
on 3/16/2012
|
49.93
|
|
|
|
Sell Put @ $55
|
Buy Put @ $50
|
|
On
March 3/10/2012
|
4.54
|
0.35
|
|
Expired
un-exercised Gain/ (Loss)
|
454
|
(35)
|
|
If
called on the 16th
|
n/a
|
7
|
|
Gain/(Loss)
|
454
|
(28)
|
|
Net
Gain/(Loss)
|
426
|
|
|
AMZN
|
Expiration in March
|
|
|
Close
on 3/10/2012
|
184.32
|
|
|
Close on
3/23/2012
|
195.04
|
|
|
|
Sell Put @ $185
|
Buy Put @ $180
|
|
On
March 3/10/2012
|
3.1
|
1.21
|
|
Expired
un-exercised Gain/ (Loss)
|
310
|
(121)
|
|
If
called on the 23rd
|
n/a
|
n/a
|
|
Gain/(Loss)
|
310
|
(121)
|
|
Net
Gain/(Loss)
|
189
|
|
As you
can see, this strategy worked well in both scenarios but was particularly
successful for AMZN because of the drastic change in price. In other words the
naked puts written went on unexercised and puts purchased cost less then the
gain.
Uncovered
Short Call Butterfly
A short
butterfly position will make profit if the future volatility is higher than the
implied volatility.
1. Sell 1 ITM Call
2. Buy 2 ATM Calls
3. Sell 1 OTM Call
In
The Money (ITM):
1. For a call option, when the option's
strike price is below the market price of the underlying asset.
2. For a put option, when the strike
price is above the market price of the underlying asset.
|
Uncovered Short Call Butterfly
|
|||
|
ILMN
|
Expiration in April
|
||
|
Close on
3/10/2012
|
50.12
|
|
|
|
Close
on 3/16/2012
|
49.93
|
|
|
|
|
Sell Call @ $45
|
Buy 2 Calls @ $50
|
Sell Call @ $60
|
|
On
March 3/10/2012
|
5.6
|
2.16
|
0.26
|
|
Expired
un-exercised Gain (Loss)
|
560
|
(432)
|
26
|
|
If
called on the 16th
|
(493)
|
14
|
n/a
|
|
Gain/(Loss)
|
67
|
(418)
|
26
|
|
Net
Gain/(Loss)
|
(325)
|
||
|
AMZN
|
Expiration in April
|
||
|
Close
on 3/10/2012
|
184.32
|
|
|
|
Close
on 3/23/2012
|
195.04
|
|
|
|
|
Sell Call @ $175
|
Buy 2 Calls @ $185
|
Sell Call @ $195
|
|
On March
3/10/2012
|
13.44
|
6.8
|
2.95
|
|
Expired
un-exercised Gain (Loss)
|
1,344
|
(1,360)
|
295
|
|
If
called on the 23rd
|
(2,004)
|
n/a
|
n/a
|
|
Gain/(Loss)
|
(660)
|
(1,360)
|
295
|
|
Net
Gain/(Loss)
|
(2,020)
|
||
In this
situation the combination worked against the investor in both scenarios. Max
Profit = Net Premium Received - Commissions Paid. Max Profit is Achieved When
Price of Underlying <= Strike Price of Lower Strike Short Call OR Price of
Underlying >= Strike Price of Higher Strike Short Call.
Here are
references used for this summary:
