EROC options are overpriced. The following strategy looks very attractive to me, but I probably won't do it because I don't want to sell $2.50 calls on EROC right now. I have a GTC order to sell some $5 CALLS if the price is right.
Anyway...this is using Jan 10 strike priced options using current BID prices
Buy 1,000 units EROC - - $2,820
Sell 10 $2.50 CALLS - + $750
Sell 10 $2.50 PUTS - + $350
Out of pocket $1,720 (in margin acct.) or $4,220 (if you're putting up cash collateral for PUTS)
On margin you'd be making $830, or about 48% on your out of pocket cash if EROC is above $2.50 by Jan 10 expiration. If units end below $2.50 you'd end up with 2,000 units of EROC w/ a cost basis of $2.11 per unit. (But you'd be laying out another $2,500 on margin to buy)
With cash you'd make about 20% if EROC ends above $2.50, and you'd still end up with $2.11 per unit otherwise, but no need to use margin.
Right now i'm essentially doing half of this trade by selling the PUTS, and buying the units, but I'm not willing to sell $2.50 CALLS.
These trades look a lot more attractive when the underlying is selling 10-15% below the CALL strike price. Just look at CEP right now. So if EROC drops to $2.30 or so I may well put on this position (with cash collateral). Otherwise I'll continue to try selling my $5 CALLS.
Thanks for the Put strategy. I am trying it on TNK (tanker stock).
I picked Nov to give the PPS time to go down and trigger my premium then back up to improve my position.
I set the premium so the exercised cost is one I would be comfortable with. It is a company I would like to have more shares of.
Not sure how I will feel if my exercise cost is above the stock price at the time.
So far it is just an order.
A few weeks ago, I sold 10x of the Jan 2.50 puts for .45. If I get put, my net is 2.05. I'm ok with that. These are "cash covered" so I had to set aside the $2,500, but my net set-aide is only $2,050. It's an 18% return on my gross set-aside in 6-ish months.
Thanks Jg and Rl,
Really interesting ideas.
You really got me thinking. I can't wait to try a few. I own 30 companies in my mutual fund and will explore each one, until something looks good. I really like the apache one.
The funny thing is that I didn't buy any options but I bought more sunoco today. I love getting paid 5% in a refinery. I also own bp and xom and eni. All have been good to me for income and some growth. Thanks again to both of you. I'm curious if you were brokers at one point in your lives. Good luck to all longs.
never was a broker but have traded for over 40 years and the idea I put out was given to me by another poster and I chose the stocks I liked, he prefered others. My favorite has been aapl, made half of my money on it in last 4 months, I also sell puts on it hoping to get some assigned. been selling 135 puts at $5 for aug already up a lot on them. will sell some 140 puts next month, I really want to own aapl again but let someone else pay me to do it. lol
Crazy things going on with the options today. Today I sold a few Jan Calls for $0.40 and bought them back for $0.05 all over like 3 hours.
Think that was the quickest money I've ever made.
I'll sell some more at $0.40 if possible.
I agree with your sentiment on the calls. I have a GTC order in to sell the Jan 10 $5 CALLS for $0.50, but not too optimistic about this one filling.
I'm currently short on the Jan 10 PUTS with an avg. price of $0.47, but my short PUT position only represents about 1/6th of my total EROC position now (if I get assigned). I'd probably sell more, but I'm working on a cash acct. so I post $2500 for every 10 contracts I sell.
I think CEP is much more attractive for this trade because it's trading a bit below the CALL strike price. When I started looking at this trade on the weekend it was set to yield 120% if CEP ends above $2.50 and end up with shares at a cost basis of $1.80 otherwise.
I am also long the stock and have sold $2.50 puts for January. I don't like the idea of selling calls when the stock is at a "bottom" as their value is less. I only sell puts when stocks have gone down significantly. Once EROC recovers on a upward price-swing, i'll sell calls. Probably the $5 calls (I sold some when EROC was at the peak a couple of months ago).