1-day Advanced Options Seminar
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MIRVS VRSVS
2009
2008 was a disastrous year for stocks! If you have significant stock holdings in the company you work for, or most other stocks, they are likely worth a lot less than you paid for them. Let's take a look at how you can use options to create a little extra income, while you wait for the stock to recover.
Perhaps you own 2000 shares of Suncor. Your average price is $45 per share, and Suncor is currently trading at about $29 per share on the TSX. You could sell 3 contracts of the May $34 Call option. As of March 27th, the bid price of the option is $0.93, so you would receive $279 (minus commission costs) immediately. That is a 0.31% return for two months, or 1.86% annualized - not great, but better than nothing.
If Suncor stays below $34 per share until after May 15th, 2009, when the Call options expire, then there are no further implications. The options expire worthless, and you have $279 to do with as you please.
If Suncor rises, and gets to $33.66 (1% less than the $34 strike price of the Call options), I suggest that you buy back the Call options. Many brokers will allow you to "program" this trade to happen automatically. It will likely cost you more than the $0.93 to buy back the Call options, unless it is very close to the May 15th expiration date. Nevertheless, it is important to close the option position, otherwise you will be obligated to sell 300 shares of your Suncor stock for only $34 per share. Let's say it costs $1.57 to buy back the options - $471 in total. You now look ahead and see that if you sell 4 contracts of the June $36, you could bring in a total of $530, which more than covers the $471 that you spent to close the May $34 contracts. Again you program a conditional trade to buy back the 4 contracts of the June $36 Calls if Suncor should rise above $35.64.
Always if the stock stays where it is, or falls, the Call options will expire worthless. If the stock rises too high, you can close the Call option position, and then regain your losses by rolling to a higher strike price with more contracts, or to a higher strike price with a more distant expiration, or both. Try to work things out such that the strike price exceeds your $45 average cost, before you sell more than 20 contracts, which is the maximum that your 2000 shares will support.
Buying and selling of options involves risk and is not suitable for all investors.