The Hypothetical Trade Thread

[ownyourfuture]

A thread for posting hypothetical trades we'd like to make for any reason, perhaps just a gut feeling, & hopefully a detailed explanation why ?
Also, if possible, screenshots or something similar to show/prove the price of whatever trade you ‘hypothetically’ executed that day.

This way others can either praise, or ridicule us in the future. Just kidding

My hypothetical trade for today, will be selling covered calls on 200 shares of First Solar (FSLR) I’m not an ‘expert’ when it comes to selling covered calls, so for anyone here who might be interested, but has no idea how they work, here's a link.
https://www.lynalden.com/covered-calls/

Bank of America upgraded FSLR today, & at the time of my ‘trade’ (2.41 PM EDT), the shares were trading at $77.97 +5.29 (+7.28%) *See Screencaps*
With a cost basis of $34.63, I'm very pleased, but like most people, when the lure of easy money presents itself, I’m tempted to take advantage.
I hypothetically sold 2 May 18 covered calls, with a strike price of $90.00 At the time, the bid was $1.00 & the ask $1.19 I'll assume I put out an offer to sell 2 contracts at $1.07 & it executed. 200 shares x 1.07 = $214.00 less $10 commission = a net of $204.00




Here's what this means. The $204.00 I collected, is mine to keep no matter what. The person who bought the 2 contracts, paid me $214.00 + whatever commission his brokerage charges, for the right, but NOT the obligation, to purchase 200 shares of FSLR from me (‘call’ them away) for $90.00 a share anytime between now & May 18th.

Best case scenario for me. The stock goes up, (but not above 90) or trades sideways for a month.
Worst-case scenario for me. Another company makes a tender offer of $120.00 a share for FSLR. As soon as that deal was announced, whoever held the 2 contracts, would immediately exercise the options & ‘call away’ my 200 shares for $90.00 each. OUCH!

Misc. If you sell covered calls on a stock that pays a dividend, & a dividend is paid sometime during the contract, you still receive it. The only way you wouldn’t receive it, is if the option holder exercised the option & called away your shares before the ex dividend date.

I would’ve been on this covered call sale like a rash today, if I didn't have to keep a very close eye on my income relating to healthcare.

 

[LOL!]

I don't quite understand. Is it that you don't want negative responses to hypothetical trades? Or you want only positive responses? Or no responses and just others posting their own hypothetical trades?

As you know, I'm posting real trades on the LOL!'s Market Timing Newsletter. I usually give explanations, expectations, and what I intend to do in the future. I haven't noticed any significant negative responses (other than perhaps my own) nor would they bother me in the least to read them. Maybe when one is using real money folks are kinder ... I don't know.

 

[ownyourfuture]

I don't quite understand. Is it that you don't want negative responses to hypothetical trades? Or you want only positive responses? Or no responses and just others posting their own hypothetical trades?

As you know, I'm posting real trades on the LOL!'s Market Timing Newsletter. I usually give explanations, expectations, and what I intend to do in the future. I haven't noticed any significant negative responses (other than perhaps my own) nor would they bother me in the least to read them. Maybe when one is using real money folks are kinder ... I don't know.

Removed the special note.

 

[NW-Bound]

I don't do hypothetical covered calls. I sell real ones. Right now, I have 47 contracts out on various stocks that I hold. Most of these contracts will expire in a few days (April 20). The contracts are on about 1/5 of my shares.

I made 2.5% of portfolio last year with the contract premiums. This year, I made about 1.3% so far. That's more than my living expenses.

 

[ownyourfuture]

I don't do hypothetical covered calls. I sell real ones. Right now, I have 47 contracts out on various stocks that I hold. Most of these contracts will expire in a few days (April 20). The contracts are on about 1/5 of my shares.

I made 2.5% of portfolio last year with the contract premiums. This year, I made about 1.3% so far. That's more than my living expenses.

That's the same thing I used to do, but I never had anywhere near that many at one time. Strictly out of the money calls on slow & steady stocks like Johnson& Johnson, American Water Works, 3M, etc. Guessing I made an extra $5,000.00 selling them in 2015 & 16. Don't use any technical analysis, just gut feeling that something is overbought, like FSLR yesterday.

Did get burned badly with Eli Lilly one time. A week or so after selling calls, a promising report concerning one their experimental drugs was released & it jumped $12.00 in one day. I didn't want to sell my shares, so I had to buy back the options. Never sold calls on a pharmaceutical related stock again.

The reason I can't/won't sell them anymore is HC insurance related. If I had sold those calls yesterday, & next week FSLR skyrocketed, my shares would be called away & I’d have capital gains of around $11k which would trigger penalties related to healthcare, & would triple my monthly premium & double the deductible.

I still have an interest in selling calls, & that's why I started this thread.

*To anyone who might be reading this. Even though it's the only investment that's been discussed to this point, the subject can be anything, not just options.

 

[NW-Bound]

I use covered calls as a way to do market timing, and to curb my greed. I do more of it on volatile stocks or ETFs, such as EM, biotechs, and semiconductors. When I see that a sector has gone "crazy", but I do not yet want to sell, I write a covered call way out of the money.

The idea is to have the option expire worthless, but the market can be crazier than one can imagine, and I have kicked myself for selling too soon. Most of the time, the price turns around and I can buy them again lower than what I sold at. That takes patience though. Some ran away from me, and I could never buy them back at the same price. That's OK too.

As long as I make money on the average, it's good. Can't have every trade perfect every time.

 

[Texas Proud]

Curiosity question.... can you do covered calls in an IRA?


I do my trading in an IRA account so I do not care how much I make doing it... right now I am just buying and selling pref stocks and collecting their dividends... buy before ex divi and sell right after...

It is with small dollars, but the last year made almost $4,100 which is 32%.... I did have a few good ones in this past year and only one losing trade...

I am thinking about doubling the money but do not want to get too greedy as these are thinly traded shares...

 

[NYEXPAT]

Bought $10,000 USD worth of PEN today (shorting the Dollar) to hopefully offset the cost of our upcoming NYC vacation. Purchase price was 3.22 PEN to $1.00.

 

[Coolius]

Texas, I have been selling Covered Calls in my IRA for several years now.

As you have stated, one can use this strategy to juice the return of the IRA, but at risk of getting called and losing out on capital appreciation beyond the strike price.

I tend to be far more active trading options in taxable accounts, as I have approval for trading uncovered ( naked ) options there. This allows me to occasionally do multi-leg strategies like spreads, condors, butterflies, and verticals/diagonals.

 

[NW-Bound]

I have been doing covered calls in IRA accounts since before 2000. Recently, I have done some cash-covered puts. I would sell a stock, and then sell a put to buy it back at the same or lower price.

For example, as a lark on 3/27, I sold 100 of Berkshire B shares (out of many that I hold) for $20,055 cash, then simultaneously sold an April 13 put option to buy it back at $200/share, pocketing $322 after fee. On April 13, BRK-B closed at $197, and I had to buy the same lot back for $200/share (it is today at $200.38). My net gain is $370.28 after all trading fees, made in just 2 weeks.

The above was a successful trade. It made me $370 in a short time, and I ended up with the same shares. My goal is to have more like that.

I do this kind of trades in an IRA, so that I do not have to pay taxes. I do a few hundred trades like the above a year, and my tax return would drive myself insane if done in a taxable account.

I can write options for $3 with my Merrill Edge accounts. Stock and ETF trades are free. Option assignments are $7 each.

 

[FIRE'd@51]

For example, as a lark on 3/27, I sold 100 of Berkshire B shares (out of many that I hold) for $20,055 cash, then simultaneously sold an April 13 put option to buy it back at $200/share, pocketing $322 after fee. On April 13, BRK-B closed at $197, and I had to buy the same lot back for $200/share (it is today at $200.38). My net gain is $370.28 after all trading fees, made in just 2 weeks.

Just curious - why not simply sell the April 13, 200 strike call?

 

[NW-Bound]

Just curious - why not simply sell the April 13, 200 strike call?

That, I usually do, meaning selling covered calls. I usually sell out-of-the-money at strike prices a few percent higher than the current price. And I do this on an up day, being a market timer.

On that day, I tried to do something a bit different to amuse myself. I normally do not do options on BRK, as it is too stable and boring (the option premium is low). And the above was only the 2nd time I have done BRK options in all these years.

What happened was on that day BRK was dropping, and a put at 200 had a higher premium than a call at 200. And with cash-covered puts, I also do out-of-the-money, meaning using a strike price lower than the current price.

However, BRK is one of my long-term holdings, and I did not plan to reduce it. Hence, I set the strike price right at the then-current price. This worked out well. A lower strike price had a lower premium, and then I might not get the shares back.

Just some luck with the above trade...

 

[FIRE'd@51]

What happened was on that day BRK was dropping, and a put at 200 had a higher premium than a call at 200. And with cash-covered puts, I also do out-of-the-money, meaning using a strike price lower than the current price.

OK, so you basically legged into the trade. You sold the stock at 200.55 and then sold the put later after the stock had gone down, thereby getting a greater premium. When the stock was 200.55, the 200 strike call was 0.55 ITM and would have had a greater premium than the 200 strike put which at that instant was OTM.

What would you have done if the stock had gone up right after you sold the shares?

 

[NW-Bound]

No. Not this time.

I sold the put immediately after I entered in the market order for the stock sell. They were less than 1 minute apart.

The down trend on the stock was going on the day before, and also on that day when I made the trades.

If the shares immediately moved up from the $200.55 price that I sold, I would still go through with the put option sale.

PS. People were betting that BRK would go down, hence I got $3 for strike price of $200, while the then-current price was $200.55. And it did go down to $197 when the option was assigned 2 weeks later.

 

[NW-Bound]

Here's one of the trades that did not work out as well as my earlier example.

On 3/19, I sold a stock that shall remain nameless for $190/share. It was going down, and the next day, 3/20, I sold a put at the strike price of $160/share, thinking it would not go that low.

Today, this put option is going to expire and I will have to buy the stock back at $160. The current price: less than $130.

So, in this case, I would not do as well as I would staying out of this stock and keeping cash.

But the selling of the shares + selling of the put option is still better than not doing anything.

 

[ownyourfuture]

My 'hypothetical' trade is to sell two May 18-2018 65$ covered calls on Pinnacle Foods (PF) @ 1.00$ (hold 240 shares)
Total = 200$ less 10$ commission = net $190.00

Reason: Shares are up almost 10.00% today because……………..
On Thursday, activist investor Jana Partners revealed that it has big plans for Pinnacle Foods Inc. ( PF) after disclosing a 9.1% stake in the packaged foods manufacturer. In a regulatory filing, the New York-based hedge fund said it is keen to explore a range of options with Pinnacle, including a potential sale. “We are aware that Jana Partners has made a 13D filing regarding its investment in Pinnacle Foods,” a Pinnacle spokesperson said in an email to Reuters.

 

[NYEXPAT]

Hypothetically Bought Bitcoin at $8838.34 looking for $12,000.

 

[ownyourfuture]

Today, this put option is going to expire and I will have to buy the stock back at $160. The current price: less than $130.

We've all been there

 

[NW-Bound]

I hope you were not "there" too often. If you did, I can see why you only do "hypothetical" trades now.

I have been selling calls mostly, and try to not get assigned. If I did, I would wait to buy the stock back. I recently switched to doing out-of-the-money puts, and just got a bunch of them getting exercised today. I have been marking all the contracts to market, so the loss was not a surprise.

Will see if these shares turn around and make me money. May have to sell covered calls at much lower strike prices now. The bull market is getting long in the tooth.

 

[NYEXPAT]

Hypothetically Bought Bitcoin at $8838.34 looking for $12,000.

Would have sold today at 9695.00 or about a 9% profit over two weeks.

 

[NYEXPAT]

Bought $10,000 USD worth of PEN today (shorting the Dollar) to hopefully offset the cost of our upcoming NYC vacation. Purchase price was 3.22 PEN to $1.00.

Still holding this one although I am down 8/10ths of a percent.

 

[Ready-4-ER-at-14]

I am curious how you options sellers handle the last few days of the contract.

Do you buy back the contract in last few days for like a dime just to go flat or do you ride it out?

I get real nervous when I have a multiple month option I PURCHASED bouncing around at the end and tend to go flat about a month before expiration unless it is way way out of the money. I suppose the average daily volume of your underlying stock is a factor as well.

It seems the options tutorials and lessons I've had suggest getting flat early but always like to hear how others do things.

 

[NYEXPAT]

Shorting Bitcoin at $9800.00 tonight.

 

[NYEXPAT]

Shorting Bitcoin at $9800.00 tonight.

Covered at $9490.00, for a gain of 3%. Thinking is the Japanese markets will push for $10,000.00 when they open later.

 

[Totoro]

Do you buy back the contract in last few days for like a dime just to go flat or do you ride it out?

I let it ride out.

Mostly because it is the cheapest way for me given how my broker handles it.