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Incyte Corporation Message Board

  • jacosa jacosa Mar 15, 2013 10:43 AM Flag

    No $%^&

    With the warning that I'm the world's third worst trader...
    I just sold 5 INCY Sept 25 puts (this is equivalent to buying the stock and writing a $25 call, but the transaction cost is lower for me, the position closes itself when it succeeds and it is inexpensive to extend if it "almost" succeeds). I really THINK the stock is about to jump on news, but I'm not confident enough to increase my unhedged exposure. The choice of Sept rather than Jun expiration is partly a response to transaction costs, but as much or more because I consider late Summer/early Fall seasonally favorable for speculative medical issues.

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    • rebeccaherbstinvestor_fan1 rebeccaherbstinvestor_fan1 Mar 15, 2013 10:40 PM Flag

      Not sure I understand this trade. I only know a shallow level on option trading. So, let me see if I understand this position. First, you seem to have some confidence that, long-term, INCY will go up. Even possibly 'jump' on news sooner. You already own straight shares of INCY(what you refer to as your unhedged exposure, I would assume). Which takes us to this put trade. If I understand this correctly, if this position expires at any price over 21.90, you will keep the $1,550 premium from writing this contract. Anything under 21.90 and you would pay. The amount would depend on how much below 21.90. However, here is what I don't get. If INCY goes under 21.90(the break-even point on both sides of the trade) AT ANY TIME before Sept; is the buyer of this Put able to exercise the option??? He/she doesn't have to wait until Sept? In other words, if the Market tanks, for the next 2 months; and INCY is back at $20; can the buyer of this put exercise on you right then? They don't have to wait until September to exercise? I am a rookie at options......

      • 1 Reply to rebeccaherbstinvestor_fan1
      • In general, an option has time value (in this instance, the put starts with about $0.15 of cash value and $2.95 of time value). Suppose that in early July INCY is at $20. The option has $5 of cash value, but it will probably also have an additional buck of time value. So a speculator who bought a put like the one I sold would pay $6. He could combine it with INCY he owned (worth $20) and receive $25 from me. He's better off not involving the put. Of course, he could have bought the put today for $3.10. At that fantasized time he'd have a put that he could sell for $6 or get $5 of value by exercising. Again, he's better off not to exercise. So even though American-style options can be exercised at any time, they generally aren't. The time value is a 'wasting asset,' and a good general principle is "sell wasting assets." The time value of a put usually reaches zero early in its expiration week, making rollover (if appropriate) economical.

        If I firmly believed that INCY was headed straight for the skies, it would be better to buy the stock outright. But expecting the stock to do generally well and be above its present price in late Sept (generally a time of strength for this sort of company, while late Jun is generally a time of weakness), I stand to get something like a 30% annualized yield on money put at risk (about $22) with a low transaction cost.

    • let me guess.... #1 worst trader - Vaseline, #2 TJ's brother Kevin!

 
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