Days Remaining: 22. If you haven't read my January 20 post, this post will mean little to you. I would suggest you read the January 20 post before proceeding with this one. We are 5 days into the trade I described in my last post. As you recall, I sold a contract that allows the purchaser of that contract to sell me 1,000 shares of Qualcom stock for $37.50 per share. For that privilege, the contract purchaser paid me $800 which was credited to my account right away. Since my maximum loss is far greater than my maximum profit, it is necessary that I monitor this position closely to manage my risk.
As of January 25, Qualcom stock is $38.66. This is a slight drop from the $38.87 price when I purchased the stock. While this is not highly significant, you have to remember that it only requires a drop of $1.20 or so until the option is in the money and I will be forced to buy the stock. Even though the stock has dropped in price, the put option which usually moves in the opposite direction of the stock has dropped to $.60. This means I could buy that contract back to day for $600 and pocket the $200 differential. If I think Qualcom prices are going to continue drop, I should do that. If I think the stock is going to stay even or increase, I can make another $600 over the next 22 days by holding on to the contract. There are other strategies but we will hold off on that discussion until these become more viable. Is this as exciting as watching paint dry? Some of you might think so but it is exciting to me as I monitor several positions at once. To stop the suspense right now, I will say that I am still bullish on Qualcom stock and I plan to hold for now. At this point, it may valuable to introduce two simple components which make up the value of an option.
Intrinsic Value This component is a measure of how much the option is "in the money". It is the strike price (the price at which I have to buy the stock or $37.5) minus the current price of the stock, in this case, $38.66. Since the number is negative, we can assume that the contract has no intrinsic value. If the stock were selling at $36, the intrinsic value would be 37.5-.36 or $1.50.
Extrinsic Value This component is the amount that the price of the option exceeds the intrinsic value. It is the option price minus the intrinsic value. In this case, since the intrinsic value is zero, the option $.60 option value is all extrinsic. While this may not seem like a very important point, it is when you consider one of the few sure things in the financial markets is as follows: On the day following the expiration date, the extrinsic value of any option is zero. This is why I like option strategies so much. Over the next 22 days, I know that the extrinsic value of my Qualcom contract will be zero. If the stock price doesn't fall below the strike price, the value of this contract will be zero and I will be able to keep the entire $800 I got for selling the contract. I guess I'm simple minded because I like sure things.
These are Simple Concepts Which May Not Mean Much at This Point. They will become more significant as we discuss other trading strategies in the future.
You Meet Interesting People in the Strangest Places. Interesting people add much in the way of meaning to your life. A few days ago, I saw a short TV spot about the only sky cap at the Beaumont Airport. He has had the job for 50 years. That may not sound too amazing until you find out that he has had the job since he was 52. Do the math. He is 102. Still drives (has a new pick up). still cuts his own yard, and he doesn't even wear glasses. He says the secret to his success is, "Treat everybody right and do it from your heart." I don't know about you but he sure makes me feel guilty about complaining over the trauma of the aging process.
No comments:
Post a Comment