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Technical Tools Used:
Brian Overby’s paper trade strategies based on Michael’s analysis -
Michael's analysis is bullish. Brian discusses two strategies, a shorter term Long Call that will avoid the earnings announcement on October 16th, and a longer term Fig Leaf trade that will have the long call expiring in January. Both paper trades will be affected by the dividend, and in the case of the Fig Leaf paper trade, there is an additional element of dividend risk.
“Dividend risk” arises from the possibility that a short call holder may be assigned the day before the ex-dividend date, causing the trader to be short the stock going into the ex-date. When that occurs, the trader actually owes the dividend when it gets paid. At TradeKing, you would see the Dividend amount deducted from your cash at the time it’s paid.
It’s a real risk that is often misunderstood, and Brian indicated that he only considered a position with dividend risk in this case, because the factors are not optimal for early assignment (i.e. With the short option currently out of the money, and with 23 days to expiration as of August 28th, the time premium is not likely to be less than the dividend amount.) You can learn more about this risk, and related concepts in Brian’s Blog on the topic here.
Brian’s Paper Trade - Fig Leaf
- Sell 1 Sep 20 2014 SLB 114 Call
- Buy 1 Jan 17 2014 SLB 97.50 Call
- 25 Days to expiration for the September 20th, 144 days for the January 17th.
- Net Bid 13.62, Mid 14.17, Ask 14.72 for the Spread
- Net Debit is $14.17, if we execute at the Mid (might not be possible).
- Maximum potential loss: $14.17
- Maximum potential gain is limited to the premium received for the sale of the September call plus the performance of the January call.
*NOTE: You can’t precisely calculate potential profit at initiation of this strategy, because it depends on how the January call performs at the expiration of the September contract.
Total commission to enter this trade is $6.25
Brian’s Paper Trade - Long Call
- Buy 1 Sep 20 2014 SLB 109.00
- 25 Days to expiration
- Bid 2.96, Ask 3.10 for the call
- Debit is $3.10
- Maximum potential loss: $3.10
- Maximum potential gain is unlimited if the stock goes to infinity (not likely to happen)
Total commission to enter this trade is $5.60
**NOTE: option prices are given as a per contract amount. Multiply loss and gain figures by 100 shares and by the number of contracts traded to determine the amount of the full potential loss or full potential gain. No additional calculations are needed to determine commission costs.
TradeKing Options Tools used:
- Detailed Quote
- TradeKing Options Pricing Calculator
- TradeKing P&L Calculator
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