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Short Term Expiration Activity

Short Term Expiration Activity. BCSI Example. Thursday 11/18/10- Sold 4 Nov $26 Puts for $.65 Sold 5 Nov $25 Puts for $.35 Total Collected: $26 Puts - $154.29 $25 Puts - $171.43 Total Collected - $428.58.

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Short Term Expiration Activity

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  1. Short TermExpiration Activity

  2. BCSI Example

  3. Thursday 11/18/10- Sold 4 Nov $26 Puts for $.65 Sold 5 Nov $25 Puts for $.35 Total Collected: $26 Puts - $154.29 $25 Puts - $171.43 Total Collected - $428.58

  4. Thursday Price on BCSI:Open $26.92High $27.43Low $26.72Close $27.10

  5. Thursday Close: $27.10% Drop to $26 = 4.1%% Drop to $25 = 7.7%

  6. Friday Price Action:Range $25.54 - $26.73Close = $26.62

  7. On Friday Morning, Ibought back the $26 put for $.25

  8. Net Return: Sale of $26 Puts - $257.15 Sale of $25 Puts - 171.43Purchase of $26 Puts – (102.86) Total Gain on Deal - $325.72

  9. How Much MarginRequired toDo This Deal?

  10. To sell Naked PutsYou need to beapproved byYour Broker

  11. Typically, theyrequire a 20%Deposit toSell Naked Puts.

  12. 4 x 100 x $26 = $10,4005 x 100 x $25 = 12,500Total Margin = $22,900Cash Required x 20% = $4,580

  13. 1 Day Return =$325.72 / $4,580 =7.1%

  14. Same Trade WithA Different Strategy …Usea Bull PutSpread

  15. Sell Nov $26 Put for $.65Buy Nov $25 Put for .35Net Credit to Account-$.30

  16. Margin Required $26 - $25 = $1.00Less: Credit Received of $.30 $.70Net Margin = $.70 x 100 = $70

  17. Let’s Assume you sold 10 Spreads$70 x 10 = $700Margin Needed $70 x 10 = $700If held to close on Friday:Return = $300 / $700 = 42%

  18. These Spreads Could havebeen done on the $25 / $24 Strike!

  19. Sell 10 Nov $25 puts @ $.35Buy 10 Nov $24 Puts for $.10Net Credit Received $.25$.25 x 100 = $25 x 10 = $250$250/ $750 = 33% Return

  20. Short Term-Defined as2 Weeks toExpiration Or Less

  21. Time of the MonthWhere PremiumErosion is theFastest!1. The Weekend Before Expiration2. The last day ofExpiration

  22. Strategies to Capture Short Term Premium … 1. Sell a Naked Put 2. Sell a Bull Put Spread 3. Sell a Bear Call Spread 4. Short Term covered call5. Vertical Spreads

  23. Let’s revieweach strategy.

  24. 1. Selling a Naked Put Pros: a. You collect option premium b. You can earn profits without owning the stock Cons: a. You need to be approved by your Broker to sell Naked Puts as it is considered a “risky” transaction b. Margin required in some cases, is the full value of the stock represented by the puts you sell

  25. How do you Enter a Naked Put Trade?You Sell to Open a Put.

  26. I only sell naked putson a stock that Ido not mind owning!

  27. 2. Sell a Bull Put Spread-Bullish Strategy Pros: a. Considered less risky than selling naked puts b. The spread offers downside protection c. Typically, approval by the Broker is less stringent than selling puts d. Margin is less than selling puts Cons: a. Less profitable than selling a naked put because you are buying a put at a lower strike price

  28. How to Place anorder for a Bull Put Spread?Sell a Put at a Higher Strike PriceBuy a Put at a Lower Strike Price

  29. Margin Required fora Bull Put SpreadDifference in Strike PriceLess the Credit Received.Eg, Sell a put at $20 Strike for $.80Buy a put at $17.50 for $.25Net Credit Received is $.55 or$55 per Spread.

  30. Difference in Strike Prices$20 - $17.50 = $2.50$2.50 x 100 = $250Less Credit of $55Net margin Required = $195If you collect the full $55,yourreturn is55/195 = 28%

  31. 3. Sell a Bear Call Spread- Bearish Strategy Pros: a. The spread offers upsideprotection b. Broker approval is less stringent than selling naked puts c. Margin is the same as Bull Put Spread (Less than selling naked puts) Cons: a. Like the Bull Put Spread, less profitable than selling naked puts, but also less risky

  32. How to Place anorder for a Bear Call Spread?Sell a Call at a Lower Strike PriceBuy a Call at a Higher Strike Price

  33. Margin Required is theSame as the Bull Put SpreadDifference in Strike PriceLess the Credit Received

  34. Bear Call Spread ExampleSay you think DV will close under $45 with 1 ½ weeks to expiration.Stock trading at $44.01.Sell 1 Dec $45 call for $.70Buy 1 Dec $50 call for .05 Net Credit to Account = $.65or $65 per Spread

  35. Bear Call SpreadMargin RequirementDifference in Strike Prices-$50-$45 = $5Net Credit Received = .65$5 - .65 = $4.35$4.35 x 100 = $435 per SpreadProfit Potential is DV closesunder $45 in 1 ½ weeks.65 / 435 = 14.9%

  36. Short TermCovered CallsBuy Stock and SellCalls Againstthe Stock inthe Front Month

  37. This is a StrategyI Love!Returns can be upto 5% for 2 Weeks.And if you don’t getassigned, you cansell calls again!

  38. Final Strategyto Consider

  39. Vertical Call SpreadDefinition: Purchasea Call Option at onestrike price andSell a Call Optionat the nexthigherStrike Price.

  40. Vertical Put SpreadBuy a Put at a higher Strike priceSell a Put at a lower Strike Price

  41. You can use thisStrategy to takeadvantage ofthe limited timevalue in an option

  42. Vertical Call ExampleTIE is trading at $18.58on 12/7 and optionexpiration is on 12/17.Buy (1) Dec $19 call for $.40Sell (1) Dec $20 call for $.15Net Debit of $.25 per Spread

  43. TIE Vertical Call ExampleThe cost is $25 per spreadto buy the $19 call andsell the $20 call that expirein 10 days.If TIE moves up to $20, the$19 calls will be worth $1 or$100 per spread allowingyou to make 4 times your money

  44. All these Strategies arebased on taking advantage of when Time Value willerode the fastest.

  45. Fastest Time Decay …1. The weekend before expiration2. Thursday of expirationuntil Friday afternoon ofexpiration

  46. Sell TimeandCollectPremiums!

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