On this past Tuesday (2 days ago) I sold 100 contracts of the U.S. Steel (X) 9/9/16 $39.50 Calls. This Call gave me a premium of $.41 ($4100). X is down today and it looks like I will not have to deliver the 10,000 shares because the Call expires tomorrow. As we know anything can happen with the market but I’m basing my opinion on a few indicators. #1, the $.41 premium is down to $.03. If the premium is down that low with only a day to go till expiration it normally means the volatility is not there to bring the stock to that Strike Price. Again, anything can happen but the odds are against it. Also if you study the “Greeks“, the $39.50 Delta and Theta with 1 day left, are low to where it makes me believe the stock will not hit that price by tomorrow.
With this in mind, I decided to sell another Call on the same 10,000 shares of X. I sold another 100 contracts of X with the same Strike Price of $39.50 and moved the Expiration Date to next week Sept 16th. This new Call gave me a premium of $.31 for a total of $3100. There are 2 reasons I sold this second Call on these shares. #1, I think the first Call will expire worthless tomorrow so I won’t have to deliver the stock. #2, Since the first premium is down to $.03 from $.41, I only have $.03 left of hedging if X goes down further. Now that I sold the second Call with the premium of $.31 it gives me another $3100 of hedging if the stock continues down. As in my “Triple Play Hedge” I’m getting paid for hedging. I’m giving this trade a Risk Factor of 3. It’s only a 3 until the first Call expires tomorrow. After that expiration the Risk Factor will move to a 1 because it will be a Covered Call. Here’s the order for this new Call:
Sell to Open 100 X 9/16/16 $39.50 C @ $.31 (+$3100)
You must understand how the premiums go down when the stock goes down or the time left to expiration gets smaller. This is so important to this business. If you have any questions on how the stock price and the movement of time effects the premiums, please send me an email. Also any questions on how the premium going down acts like hedging.
Steve
The Options Coach