(Stock Option Analysis) Is This A Good Trade?

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.

Email:

“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.

7 Comments

  1. MIKE BAIN on July 15, 2013 at 10:43 am

    This will be a silly trade. One will be giving up .35 to make .44 but commission and fees will consume that. Will spread not also affect this? will be a reasonable trade to make if one hold many shares but not good with 100 shares.

  2. vols1950 on July 15, 2013 at 11:18 am

    I would like to get at least 5 per cent on the trade. I would not do this trade because there is no money to be made in it.

  3. Scott on July 15, 2013 at 12:06 pm

    It makes no sense to do a covered call on a stock price this low. Probably thinly traded. And recovery is tough if the price falls. Unless you are buying massive amounts of this, commissions will kill you

  4. Alice Butterworth on July 15, 2013 at 1:01 pm

    Newby to selling options myself. but: hi beta with great promise but operating in the hole! Conflicted future. Going to get max $3.44. Profiting 9 cents. Yes expect exercise because all options in the money are exercised unless you call broker and say don’t. To nail 6 cents not counting any commissions, could have sold SPDR 166.00 at 28 and bought SPDR 165.50 for insurance (credit spread) at .22. Only .50 risk instead of holding a stock that keeps you at $2.91 risk. Better candidates for buy and sell calls would be solid performers. Option Genius: Is this critique reasonable? ab

  5. Stan Ensch on July 15, 2013 at 1:37 pm

    I see this as a losing trade because the $0.09 premium for 100 shares will
    not cover the cost of commissions and fees.

  6. Ray B on July 15, 2013 at 2:37 pm

    I find your response disappointing for an Options “expert”. You should have told this person — It is a lousy trade, stay away from it! First rule of CC or NP selling is that the stock has to worth owning — that lets this dog out. This trade “may” make a few cents, but this type of trade in the long term will see you losing lots of funds when the poor stock sinks below your cost.

    • Genius on July 16, 2013 at 11:45 am

      I do not hold myself out to be a “expert”. There are many traders much smarter than I. This includes many of my members. The man had already done the trade and asked me to look at it. I gave my opinion and posted it here so everyone could learn and share their opinions as well.

      I have no idea if AKS is worth owning or not. I would have to look at the fundamentals of the company before deciding which I doubt you have done either. Just by looking at a chart does not tell you if a company is a good long term hold.

      On that note, if I had to trade this stock I might have sold naked puts instead. Limited risk, better reward.

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