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American International Group, Inc. Message Board

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  • messnervan messnervan Jan 14, 2010 1:28 PM Flag

    Someone keeps selling me May 40 calls

    Let's say the stock price averaged 29 when you bought your calls. The premium of $1.20 is a locked in 4.1% return in just four months. If the stock goes up but stays under $40 he also has a gain in his stock. If it goes over $40 and you call it away he adds another 38% gain to the premium for a total of 42% in four months. Quite a gain.
    If the stock decreases he loses nothing until it goes below $27.80. At that time he makes a decision as to whether to keep the stock or to sell the stock and buy back the calls - in which case, depending on how much the call prices have decreased, he might take a loss of 2 or 3%.
    Of course there may be tax considerations and commissions but in general it's not a bad deal.
    There was a study many years ago showing that option writers "win" far more often than option buyers.

 
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