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.
- Sell 1 ITM Call
- Buy 2 ATM Calls
- Sell 1 OTM Call
In
The Money (ITM):
- For a call option, when the
option's strike price is below the market price of the underlying asset.
- 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:
