Online Option Trade Analysis
Got an email question today about a potential trade. Actually the email says he already made the trade. Let’s take a look and see if it makes sense.
“I’m looking at one of the companies Xpound has covered: AKS.If I bought 100 shares of this company at $3.35 and I sold 1 July 20 Call at $3.00 for .44 credit, how would this trade play out if I was assigned? Is there an issue with the $3.35 and $3.00 difference?Thanks for your help.”
Ok, so this is a covered call on a very low dollar stock. Alarm bells are already going off in my head. I do not like low dollar stocks because they can be very volatile.
Looking at the chart I see that earnings is coming up on 7/23 which is after expiration. These July options expire on the 19th. So that is ok.
Stock seems to be moving sideways which is fine.
On the option chain TOS is not showing me any volume in the July 3 calls. But there is plenty of open interest so that should be fine too.
Let’s look at the math.
Stock bought at 3.35
Option premium was .44
So each share cost : $2.91
If stock called away, it will be at $3 so the profit per share will be .07 cents.
.07 divided by 2.91 is 2.4% return for the week. Double that if you are using margin. This is before commissions and interest.
Stock right now is at 3.35 and has moved up since last week. The last time it closed below $3 was 6/26. So it looks safe to say that the stock will be called away. Delta of the $3 call is .86 so the probability of a close below $3 by that model is about 15%.
If the stock closes above $3 on expiration Friday, the stock will be called away and the trader will be paid $3 per share. There is no issue with the $3.35 and $3 difference.
My thoughts? Decent options trade. But what I don’t know is when he actually got into the trade.I wouldn’t want to be in this trade for more than a week or two.
As I look at the trade right now, the Stock would cost $2.98 after selling the call and that is definitely not worth the risk.
What do you think? Please leave your comments below. Also, be sure check out our previous blog posts for options trading system tips and strategies on trading stock options.