Monday, April 27, 2015

Options trade: GM


Today I sold the following covered call in General Motors

  • 1 Sell GM Jan 15 2016 $40 Call (Open) --- $.98 --- Net proceeds --- $90.30

Unlike my first experiment with GE (deep in the money call) I took a much more conservative approach this time. Currently GM is trading around $35.75 as I type so a lot of price appreciation would have to occur to lose these shares. Quite honestly it wouldn't bother me to lose them at $40.

At first glance the premium of $90.30 doesn't seem overly impressive by itself.  However, when you consider 100 shares of GM currently pays $144.00 (yearly) after its recent dividend raise the combination of the two is actually very nice.

Going forward these are the types of option trades that I plan on making. Lower risk plays that will give my yearly income a boost.

DEFY MEDIOCRITY

7 comments:

  1. Very nice!

    You have plenty of room for price appreciation and you get to artificially boost the dividend by almost 100% over the option expiration period (assuming 3 more dividends).

    Cheers

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    1. GYFG,

      I'm just trying to keep adding more coal to the furnace every week. I really like the spread on the GM call I sold. I need to start trying to figure out more ways to multiply my dividends outside of traditional purchases. I'm looking for new ways to expand my empire and I think options be an integral part of my future income streams.

      MDP

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  2. MDP, are you using sharebuilder for your options? Have you thought about other brokerages with lower fees?

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    1. Div Son,

      Yes I am using Sharebuilder right now. The fees actually aren't that bad. My charge for this transaction was $7.70 ($6.95 + .75 per option sold). I think because I was so conservative with my strike price (ie it is quite a bit higher than the current price) it looks like my cost is unusually high compared to my premium.

      My previous GE call was deep in the money and paid over $1150 to open and my transaction cost for the two calls sold was a little over $8.00.

      As far as Sharebuilder's option price updates, it leaves a lot to be desired. I might use a better platform in the future.

      MDP

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  3. I am trying to understand how this works.

    1) Is this a covered call because you already own the shares?
    2) What happens if the price hits $40 before 1/15/2016? Does it matter when the price crosses $40? Will the option be automatically exercised when the price hits $40 or someone has to elect to exercise the option so that your shares are sold?
    3) What happens if the price does not hit $40 before 1/15/2016?
    4) Will you get dividends for this trade during this timeframe? If yes, is it because you already hold the shares?

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    1. DGJ,

      Before I answer the questions please refer to the DISCLAIMER above. :-)

      1. They are covered calls because I own the shares already. This makes it easy to deliver the shares in the event GM surged to say $100 overnight. If I didn't own them, then I would have to produce the shares (ie I would have to pay $100 in order to deliver them at the $40 exercise price). That would not be good.

      2. Since I received $.98 x 100 shares as a premium, the party who paid the $98 plus commission would probably not exercise their option to buy the shares at $40 since they actually would have to pay ($40 + $.98) x100 plus commissions to receive the shares. As far as I know the option doesn't necessary have to be exercised @ $41 (approximate breakeven) point. Common sense tells me that if GM was trading at $43 then it would make sense to pay the ($40 + $.98) x 100 because they immediately could resell the shares at a $200 profit. However it is an option to buy. In theory they could not exercise the option hoping the price continues to rise and then buy the shares at a later date prior to the option expiring. Remember the buyer of the option has only invested $98 plus commission. When he exercises his option to buy he has to pay the for the full share count $40X100 or $4,000 plus commission. A lot of option traders buy and sell the options without exercising them hoping to make their money on the spreads.

      3. If the price stays below $40 +$.98 option price then no one would be interested in paying me $40 a share so I would keep the shares and the option buyer would lose his ($.98 X 100) and nothing else. I would keep my 100 shares as well as the option premium of $98.00 less commissions of course.

      4. Since I own the shares I get to keep the dividends. So I could keep my shares, receive the dividends and make money with the option premium. Potentially this could almost double my income from the shares which is pretty cool.

      I still have a lot to learn about options, but this is one of the simplest and least risky options trade to do.

      I hope this helps.

      MDP

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    2. Thanks MDP. These answers really helps and brings me one step closer (in a very long journey) to understanding how options work. I am sure this is just the tip of the iceberg and there is lot more to it. Will continue to read about this as I come across and maybe hopefully I start out with some simple option trades like this one.

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