Options

Question 1

What is the daily routine?

Answer 1

1. Open portfolio in power options
2. Open StreetSmart Edge
3. Analyze each position using power option analysis tool and Edge technical indicators. Buyback short positions on down days, sell short positions on up days.
4. Make adjustments and record
5. Make planned trades
6. Look for new positions
7. Enter new positions and record
8. Monitor

Question 2

What is the trigger point for adjusting a covered call?

Answer 2

1. Stock price near breakeven
2. Option price drops over %80
3. Option price increases %50
4. Technical indicators
5. Sentiment changes on underlying stock

Question 3

When adjusting a covered call, what actions may be taken?

Answer 3

1. Roll down
2. Roll out
3. Buy back and then wait until the stock moves higher to adjust.

Question 4

When should you wait for a stock to appreciate vs. rolling out or down at the current stock price?

Answer 4

Use a combination of news and technical indicators to determine which is better. This analysis should include the income you are giving up while waiting and the expected gain if the stock does appreciate.

Question 5

What are the three golden rules of options trading?

Answer 5

1. You must be able to tolerate some risk.
2. You must only sell options on stock you would otherwise like to own.
3. You must have a plan with multiple exit strategies.

Question 6

What are the exit strategies discussed by Ellman?

Answer 6

1. Let assignment happen. (stock stays above strike price)
2. Let option expire worthless (close to expiration and option is out of the money but stock is expected to appreciate in value) (Wait for a short time to see if you can get a better option premium)
3. Roll down (If a stock is unexpectedly declining in price, or breaking down fundamentally or technically)
4. Buy back the option and do nothing (When option price drops to below 20% of original value and we think the stock will appreciate in value.
5. Convert dead money to cash profits. (If a stock is unexpectedly declining in price, or breaking down fundamentally or technically)

Question 7

What are your choices on expiration Friday when the option is out of the money?

Answer 7

1. Let the option expire and either keep the stock to write another call sell the stock to get into another position.
2. This is determined by figuring out if security is worth going another call round. Is it still technically and fundamentally sound?

Question 8

What are your choices on expiration Friday when the option is at the money or in the money?

Answer 8

1. Roll out
2. Roll out and up
3. Let assignment happen
   The choice depends on your stock sentiment. However, the deeper the strike price is in the money, the less likely a roll will work. In this case, just let assignment happen.

Question 9

When do you NEVER hold or write a covered call?

Answer 9

EARNINGS REPORT.