Jan 14, 30 call on VZ, almost no time premium

[perrytime]

VZ is 37.21. I find it hard to believe the sentiment for VZ is that it won't break 40 over next 2 yerars. Hence the call option, Jan 2014, strike price of 30, selling for 7.75 seems like a pretty low risk to me. OR maybe it just means everyone thinks VZ will drop significantly in the not to disatant future for better entry point? opinions welcome.

 

[ziggy29]

Are you talking about writing a call on VZ here for 30? It sounds to me that if VZ closes above 37.75 in January 2014, you've lost on the deal because you have to deliver shares at 30 which are worth more than 37.75. So the loss per share you would take there exceeds the 7.75 premium you would gain by writing the calls. These calls are already 7.21 in the money, and only a 54 cent gain in the share price would wipe that out. Add in bid/ask spread and commissions to trade the options contracts and this is only a profitable trade if VZ shares decline from here.

A 7.75 price on this option would seem to indicate the market thinks the share price will drop a bit here in the next two years.

 

[FIRE'd@51]

VZ is 37.21. I find it hard to believe the sentiment for VZ is that it won't break 40 over next 2 yerars. Hence the call option, Jan 2014, strike price of 30, selling for 7.75 seems like a pretty low risk to me. OR maybe it just means everyone thinks VZ will drop significantly in the not to disatant future for better entry point? opinions welcome.

The premium seems about right to me. Take a look at this option price calculator.

You're looking at a two-year call on a low-volatility stock that yields 5.4%, which will reduce the stock price by about 4 points over the next two years due to the ex-dividend effect. So, in affect, the stock price looks more like it's currently in the 33-34 range to the call buyer.

 

[ziggy29]

You're looking at a two-year call on a low-volatility stock that yields 5.4%, which will reduce the stock price by about 4 points over the next two years due to the ex-dividend effect. So, in affect, the stock price looks more like it's currently in the 33-34 range to the call buyer.

D'oh -- yeah, forgot to account for the dividends, and the fact that each share will produce about $4 in dividend income and drop the stock price by that amount over the two years.

 

[perrytime]

thanks

appreciate the feedback and link, in my simplistic view, looking at 10 yr chart, VZ appears to have broken 40 regularly. A lot depends on where market goes next 2 years.

 

[cb7010]

How About Buying The Jan 2014 Calls..then..

...sell covered calls on those..for example, you can buy the Jan 2014 30 calls for $7.70 today and then sell some April 2012 38 calls for $.78..if VZ closes above $38, then you make a 10%+ return for three months..if not sell another batch of covered calls

 

[perrytime]

explain

I need some explination on that idea. I am not approved for uncovered call writing, so i would have to own VZ to write an option. RIght? you seem to imply that buy buying the jan 14 call I can then write an april call option, is that correct?
If yes, and if I write 38 calls, sell for 0.78 and Vz goes to 40, then I have to buy to cover call, I don't see how I made $. Or do I sell my Jan 14 calls at that point?

 

[cb7010]

Do a search for writing covered calls on LEAP options. Again, it's really a covered call strategy and probably best suited on a stock that you are neutral to slightly bullish on over the LEAP period. The idea is that if you can get a LEAP with very little time premium, as in this case, the income percentage from the options is much higher than owning the shares. Of course, you will not collect the dividends by only holding the options, so you must factor that in. If you get to expiration and the stock has risen above your written call strike price, you have several options. You can roll the option to a new one with a higher strike price, or you can buy back the written option and sell the LEAP...I've done this several times; but, never let one go to expiration, so not sure what happens mechanically..you should ask your broker to be sure..anyway, just a thought and an alternate way to look at options with negligible time premium.

 

[utrecht]

That's actually called a diagonal spread. You may need a different level of options approval to trade spreads depending on your broker. As cb7010 said though, the risk reward profile is very similar to a covered call (but leveraged) as long as the LEAP you buy is very deep ITM.

 

[FIRE'd@51]

I've done this several times; but, never let one go to expiration, so not sure what happens mechanically..you should ask your broker to be sure..anyway, just a thought and an alternate way to look at options with negligible time premium.

If you go to expiration and the short call is in the money you will be assigned. You can then exercise the long call and deliver those shares, thereby closing out the position. In this type of trade where there is no time premium in the long option, this is often the most efficient way to close down the position, since the bid-ask spreads may be fairly high relative to intrinsic value.

 

[utrecht]

How do you exercise the long call? Ive never done it. Do you have to call the broker?

 

[FIRE'd@51]

How do you exercise the long call? Ive never done it. Do you have to call the broker?

Yes