The NS RIG puts I sold were exercised; here are the results:
The option package was "$2314.38 cash in lieu of shares, 47 shares of RIG." I put up $8000 per contract to secure the position. The contract was exercised.
I received:
$2,314.38 cash
47 shares of RIG (current market value, at $91.85/share, is $4,316.95)
$1705 option premium($17.05 per share, 100 shares per contract)
I paid:
$8,000 cash
So, my net gain is Cash + RIG + Premium
or $2,314.38 + $4,316.95 + $1705 = $8336.33
I paid $8,000 to get $8,336.33, approximately a 4.2% return in one month. If I could do that all the time, I'd write a book.
However, I repeat that NS (Non-Standard, also called "exotic") options are not for beginners. They can be very tricky, and you can lose a lot of money very quickly.
An unexpected result of the transaction is that my average buy price for RIG is now $126.28--my broker has a buy price of $8,000/47 shares, or $170.21 per share for my new shares. It will have no affect on my trading (or for tax purposes in my particular type of account) but it makes an ugly red mark in my portfolio. Let the record show that my effective buy price is ($8,000 - 2,314.38 - 1,705)/47 shares or $84.69 per share.
Showing posts with label NS. Show all posts
Showing posts with label NS. Show all posts
Tuesday, January 19, 2010
Monday, December 21, 2009
Sold NS RIG puts
NB: NS trades are not for beginners. Sit down with pencil and paper to work these out, or you can make an expensive mistake.
* * *
I sold 2 contracts of Jan $80 RIG puts for $17.05. The unusually large option premium (21%!) is because this is a non-standard (NS) option. An event occurred which resulted in these shares trading in an unusual package. Usually, one contract is a promise to buy or sell a package of 100 shares at the strike price. In this case, the package is "$2314.38 cash in lieu of shares, 47 shares of RIG." Non-standard options are indicated by NS in the Option Chain screen.
The discussion below uses just one contract as an example, for the sake of simplicity.
I have still put up $80 * 100 = $8000 per contract to secure the puts. The possible outcomes are:
a) RIG is trading above $80 on the January 2010 expiration date. I keep the $17.05 premium, and get the cash securing my put back, for a 21% gain in approximately a month.
b) RIG is trading at or below $80 on the expiration date. I purchase 47 shares of RIG at $80 a share, and "purchase" $2314.38 cash. That would mean I was trading $8000 for $6074; uh-oh.
However, the net picture is better than it appears for b).
Remember the option premium. I'm paid $17.05 per share or $1705 total for writing this put. The total value of the property I end up with varies depending on the value of the stock at expiration. I consider RIG to be one of my core holdings--I already have 2.5% of my portfolio in it, and plan to make that 5%. These two contracts, each conveying 47 shares of RIG, will do that if exercised.
The total value of b) is $1705 + (47 * RIG) + $2314.38. I'm paying $8000 for this package, so $1705 + (47 * RIG) + $2314.38 = $8000. Solve for x (in this case, RIG, the market value of the stock). I will break even on b) when RIG is trading for $84.69 or above.
Naturally, if RIG tanks, or even stagnates for a significant period of time, I'll stay in the red on possibility b). That's why this NS option is trading for such a high premium, but it's also the reward that makes this risk worth taking.
* * *
I sold 2 contracts of Jan $80 RIG puts for $17.05. The unusually large option premium (21%!) is because this is a non-standard (NS) option. An event occurred which resulted in these shares trading in an unusual package. Usually, one contract is a promise to buy or sell a package of 100 shares at the strike price. In this case, the package is "$2314.38 cash in lieu of shares, 47 shares of RIG." Non-standard options are indicated by NS in the Option Chain screen.
The discussion below uses just one contract as an example, for the sake of simplicity.
I have still put up $80 * 100 = $8000 per contract to secure the puts. The possible outcomes are:
a) RIG is trading above $80 on the January 2010 expiration date. I keep the $17.05 premium, and get the cash securing my put back, for a 21% gain in approximately a month.
b) RIG is trading at or below $80 on the expiration date. I purchase 47 shares of RIG at $80 a share, and "purchase" $2314.38 cash. That would mean I was trading $8000 for $6074; uh-oh.
However, the net picture is better than it appears for b).
Remember the option premium. I'm paid $17.05 per share or $1705 total for writing this put. The total value of the property I end up with varies depending on the value of the stock at expiration. I consider RIG to be one of my core holdings--I already have 2.5% of my portfolio in it, and plan to make that 5%. These two contracts, each conveying 47 shares of RIG, will do that if exercised.
The total value of b) is $1705 + (47 * RIG) + $2314.38. I'm paying $8000 for this package, so $1705 + (47 * RIG) + $2314.38 = $8000. Solve for x (in this case, RIG, the market value of the stock). I will break even on b) when RIG is trading for $84.69 or above.
Naturally, if RIG tanks, or even stagnates for a significant period of time, I'll stay in the red on possibility b). That's why this NS option is trading for such a high premium, but it's also the reward that makes this risk worth taking.
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