Leaps Options Strategy
What are the risks covered by written calls with jumps?
I saw an infomercial again this weekend on writing options covered call and jumps to generate returns with low risk. This morning (after having learned what a LEAP is) that I was looking priced options for the possible strategies and try to understand the real risks of using LEAPS, instead of operating the underlying stock (if this question is probably very simplistic). This morning, the prices on the appeals of QQQ at $ 45 are approximately: January 09 – Jul 07 at $ 2.45 $ 0.90 If I buy a LEAP January 9 at $ 2.45 then I continue to write a call a month and receive about $ 0.90 per month until January 9? This implies that if 9 January LEAP is exercised I receive enough to buy another jump and repeat the cycle each month. What am I missing here? It generates the return of approximately 40% per month at low risk, so it can not be correct or we'd all be retired and living off "Sure Thing". Thank you for that
Before answering this, Let's Get some terminology down. When you sell an option contract to purchase, you give the buyer the right (but not the obligation) to buy a specified amount of shares for an agreed price. The designated amount of stock is usually 100 shares, but it could be different in certain situations. The agreed sale price is called the strike price. regular options have expiration dates coming out for several months. At LEAP is essentially an extended term option that has expiration dates coming out for almost 3 years. Otherwise, a jump is essentially the same as a "normal" option. A covered call is an option that you sell stock cons that you currently have. If the buyer exercises the option, you sell your shares during the exercise price and the shares are automatically transferred on behalf of the purchaser of the option. Assuming a stock option contracts are written against 100 shares, you can sell a contract appeal against any set of 100 shares at a given time. All additional contracts that you sold would be considered "naked" and you might obliged to buy shares at current price if the buyer chose to exercise them. So, to answer the last part of your first question, You can sell either the July 7 call or call on January 9, but you can not sell both and considered covered. (You can, however, sell the July 7th call, wait until it expires, then sell on August 7 call and repeat this cycle several times.) Now, there are risks involved in selling covered calls. The first is that the price rises above the exercise price and the buyer exercises the option. It not a bad thing … you both make money from this agreement. The second risk is much more serious and involves the possibility of writing a appeal against a holding company that speculation is suddenly down quickly. If this happens, your broker may require you to close the position first option before sell the stock and the stock price would continue to decline. You'll still keep the premium you have done for the sale of the call, but you lose money on the stock itself. To avoid this, I recommend selling only shorter-term options (I sell calls that are only one to two months' duration), and only sell on more stable, neutral in stock upward. Stay away from the sale of covered calls against stocks highly speculative! There a reason why their premiums are high prepayment!
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