I just bought back the 5 contracts for $0.80 that I sold last week for $4.30. I actually made the 80% profit threshold I wrote about recently and decided to buy the contracts back. I sold them for $2141 and bought them back for $408 with a net profit of $1733 or 8% profit in 4 days. I still suspect that DUG will rally as oil prices drop abruptly once we get past these government market shenanigans but anything can happen. I could sell January 09 $43 strikes for about $3 to rake in another $1500 but I’ll wait to see what happens with DUG over the next couple of weeks.
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Can you explain this with an example so it is a little more clear.
Thank you
What do you need me to explain?
On Sept. 18, I purchased 500 shares of DUG at $43.50.
I immediately sold 5 contracts on DUG for the $43 October strike for $4.3 per contract = 100 (shares) x 5 (contracts) x $4.30 = $2,100. I was paid $2100 by someone for the right to buy my 500 shares of DUG for $43.00 by October 17th.
On October 17th, I am required to sell 500 shares of DUG at $43 if DUG is greater than or equal to $43. If DUG is below $43 then I’ll hold on to the 500 shares.
People always ask, “Why would someone pay you $2100 for the right to buy DUG at $43?”
The answer varies, option traders can make a lot of money if DUG goes through the roof at trades at $60 over the next 30 days. Remember, I’m OBLIGATED to sell DUG at $43 no matter how high it is trading.
Because DUG dropped from $43.50 to $35 that means the options became worth much less because of the drop. I decided to buy back my 5 contracts for $0.80 each so it cost me around $400.00 therefore I am no longer obligated to sell my 500 DUG shares to anyone.
Since I sold them for $2100 and I bought them back at $400, I get to keep the difference AND the shares.
Does this help?
Yes it does help. Thank you. I read the post again and then realized that you expect DUG to rally close to expiration and that is why you decided to buy the contracts back.
This is what happens when I miss my coffee and can’t think straight
What brokerage do you use for your accounts? With your brokerage, when you get assigned, how soon do you know it? It is as soon as it happens (if you’re checking your account history)? Or is there a lag?
I got assigned on expiry this month, but didn’t know it until the next Monday. Was wondering if that’s usual or if it varies depending on the brokerage.
BTW, thanks to you and this website, I executed my first ETF covered call this month. Bought 100 UYG at 21.19. Sold Sept UYG 21 calls at 1.45. And got assigned. Small potatoes, I know, but gotta start somewhere! Thanks!
Eric,
I use many different brokers with the various accounts I have. Normally, most brokers have a rule that if an option is within $0.01 “in-the-money” it will automatically be assigned.
If you buy XYZ at $20 and sell the $20 strike and XYZ trades at $20.01 on expiry then there’s a 99% chance that it will be assigned automatically.
If XYZ is at $19.98 then there’s a low probability that it will be assigned but it may still happen.
Options actually expire on the third Saturday of each month but because the market is closed on Saturday, the last day to trade is the third Friday of every month. You should know by Sunday if your option got assigned or not or follow the general rules and assume that if it’s within $0.01 of strike that it’s been assigned.
Lastly, it *may* take up to THREE days to settle the trade if you got assigned so you *may* not be able to trade again until Wednesday during an assignment executed on Saturday.
The *may* depends on the type of account you have and the margin rules applied to you.
As for you’re first trade, congrats. You’ve taken the first step in learning how to make some REAL money in the stock market on your own and not relying on unscrupulous mutual fund managers.
Let me add, if you’re trading small amounts, be sure your commissions don’t eat too much into your profits. Be weary of assignment fees and buy/sell commissions!
It isn’t the amount that matters but the strategy. All you have to do is add a few zeros to understand what I’m talking about.
If you would have bought 1000 shares of UYG at $21.19 and sold the calls for $1.45, you would have made $1450. Imagine 5,000 shares and you’re talking $7,250 (or course diversify when possible).
It’s the percentage that is critical!
Yes, commissions I knew about, but I didn’t know about assignment fees until I got assigned but will keep them in mind from now on.
I also wrote my own version of your ETF cashinator. May I ask where you get your options data from? I’ve been screen-scraping my data.
The data is available from a variety of sources, I use a variety of sources depending on which source doesn’t have problems: yahoo, google, cboe, etc.