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Any Options Traders check this out...

  • 16-01-2009 9:49pm
    #1
    marathonic
    Registered Users, Registered Users 2 Posts: 1,684 ✭✭✭


    I have never traded options before. However, can you tell me if the following is a correct analysis of the situation for Agnico-Eagle Mines, a gold miner traded on the NYSE.
    • The shares are trading at $50.45 so I can buy 100 for $5045
    • May 09 $65 call options are trading at $3.90 so I can sell 1 for $390 (as each option represents 100 shares)
    • May 09 $50 put options are trading at $8.50 so I can sell 1 for $850 (as each option represents 100 shares)

    Therefore, if I buy the shares at $5045 and sell the options at $390 + $850 = $1240, I will have an initial cost of $3805.

    If the shares are above $65 in May, the call option that I sold will force me to sell the shares at $6500 - a 71% profit on my $3805 investment.

    If the shares are between $50 and $65, I keep the shares at a cost of $38.05 each - a 25% discount from todays market price.

    If the shares are below $50, the put option that I sold will force me to buy an additional 100 shares at $50 each. This would mean that the 200 shares will have cost me $5000 + $3805 = $8805 or $44.02 each - a 13% discount on todays price.

    All of the above would then mean that, the only way I could lose money is if Agnico-Eagle Mines drops more than 13% between now and May.

    Am I reading into the above correctly?


Comments

  • #2
    DJDC
    Closed Accounts Posts: 365 ✭✭DJDC


    Nice post, good to someone discussing something other than Anglo shares.

    For someone who has never traded options before, trying to do arbitrage trades on options with different strikes is very much jumping into the deep end.

    The market is very much in bear mood at the moment so selling ATM put options is very risky. If the price drops to $30 you are in for a killer loss. I'll have a look in greater detail when I get the chance.


  • #3
    marathonic
    Registered Users, Registered Users 2 Posts: 1,684 ✭✭✭marathonic


    I've looked into Options alot over the weekend and have come to the conclusion that my analysis in the first post is correct. However, I have decided against that particular trade as I'm already overweight in AEM (at almost 15% of my portfolio) and want to reduce that - not by selling AEM but by buying other stocks.

    A strategy that I'm very interested in is selling naked puts in two companies that I do not currently own but am interested in buying. This would be one for April and one for July expiry.

    I may then sell some covered calls on half of the shares that I currenly own - which will limit my upside to about 20% - most of the ones I'm looking at expire in April.

    That way, if the market as a whole goes down, I get to keep all my covered call premiums and can put them, together with the premiums from the naked puts, towards the purchase of the shares that I sold the puts for. If the market as a whole goes up, my upside is limited but I still have the premiums from all my Options sold.

    Does this seem like a more sensible, less risky strategy than the first? I think the worst thing that can happen is that my shares that I sold the covered calls for rise dramatically (meaning I'll miss out on alot of the gains) and the shares that I sold puts for drop dramatically (meaning I'll have to buy, for example, $40 shares for $55).


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