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Do You Know “Moneyness” in Options Trading

Moneyness: Option Strike Prices

Stock option strike prices fall into the three categories, depending on their relationship to the stock’s price (known as the “money”). This relationship to the “money” is known as moneyness.

  • In the money (ITM)

 

    • At the money (ATM) – this is used to refer to options near but not exactly at the money
  • Out of the money (OTM)

 

CALLS Strike Price PUTS
Strike below stock price ITM Strike above stock price
Strike same as stock price ATM Strike same as stock price
Strike above stock OTM Strike below stock

 

The purpose of the two tables below is to illustrate the relationship of different call and put strikes to the money and how these relationships change as the stock price moves. Notice how strike price “intrinsic” refers to the amount of the premium is in the money.

Moneyness – Stock Price is $20.78
CALLS PUTS
Relative to Strike Amount ITM Strike Amount ITM Relative to Strike
ITM $3.28 17.50 $0.00 OTM
ITM $0.78 20.00 $0.00 OTM
20.78
OTM $0.00 22.50 $1.72 ITM
OTM $0.00 25.00 $4.22 ITM

 

At $20.78, two of the call strikes are ITM and two are OTM. Same for the puts; two are ITM and two are OTM. But notice when the price drops to $17, all four call strikes become OTM and all four put strikes are ITM. This is based solely on the movement of the strike price.

Moneyness – Stock Price is $17.00
CALLS PUTS
Relative to Strike Amount ITM Strike Amount ITM Relative to Strike
OTM $0.00 17.50 $0.50 ITM
OTM $0.00 20.00 $3.00 ITM
20.78
OTM $0.00 22.50 $5.50 ITM
OTM $0.00 25.00 $8.00 ITM

Options that are $0.50 or so of the stock price and thus slightly ITM or OTM, frequently are referred to as near the money (or NTM) options. The term “at the money” also is used to refer to NTM options.

Understanding the moneyness of the call option is important, because then you only need to remember that the moneyness of the put is the opposite, ITM and OTM.

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How to Create 60 Paycheck Every Month

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Covered Call Trades of the Month

Investors have been bracing for anything that could reverse at the last minute the market’s year-long rally, which saw the Dow and S&P 500 hit record highs again this week. The S&P 500 is up 26 percent this year and registered a sixth week of gains on Friday.  However, income investors seeking to trade covered call investments have been performing well too.

Below are two successful trades from the past month listed in the Monthly Income Plan at getrichinvestments.com .  Each month, income investors are creating income streams from selling covered call options against high quality stocks.  Here are some winning trades from the current newsletter:

Covered Call on USG Corp (USG)

STRATEGY: Look at the Nov 27 covered call. For each 100 shares of USG stock you buy, sell one Nov 27 covered call option for a $25.50 ($26.65 – $1.15) debit or better.

Actions: USG is currently trading at $27.66 at the close on 11/15 so the 27 call we sold is ITM.  These shares and call options will be called away.

This is a 5.88% return for one month and an estimated 70% annualized return.

 

Covered Call on Flour Corp (FLR)

 

STRATEGY: Look at the November 2013 77.5 covered call. For each 100 shares of FLR stock you buy, sell one Nov 2013 77.5 covered call option for a $74.89 (77.19 – 2.30) debit or better.  That’s potentially a 3.49% assigned return.

Actions: FLR is currently trading at $79.36 so the 77.5 call we sold is ITM.  These shares and call options will be called away on Friday (11/15).

This is a 3.49% return for one month and an estimated 42% annualized return.

September 2012 Monthly Income Plan Update

As we approach the end of the September option expiration cycle, the Get Rich Monthly Income Plan had a great month for investors.

In January, we kicked off the perpetual covered call strategy. For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium. In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.

We will be adding one new perpetual covered call each month to keep fresh ideas on the table. We will follow the progress of the perpetual covered calls each month the year. I will email premium members with trading directions when an action is required. Here are some of the results for 2012:

Perpetual Covered Call Returns:

Stock 1 – Oil Company has an YTD total return of 153% including dividends and special dividends.

Stock 2 – Drug Store Company with an YTD total return of 68.1% including dividends.

Stock 3 – Technology Company with an YTD total return of 27.3% including dividends.

Year to date, the SPY (S&P 500) is up 16.1% and the Powershares S&P 500 Buy-Write (PBP) is up 8.16%.

We also provide a list of stocks for monthly covered calls. Here we change the list each month based on investing in the right stock for monthly income. For the September option cycle, this was a great month for our Monthly covered call trades.

We made monthly returns of:

7.83% on GME,

6.91% on LAD,

3.8% on COH, and

3.4% on PSX,

We have added the covered put trades as an additional way to sell premium and to enter stock positions. I frequently sell puts to enter a new stock position because (1) I get the stock at a lower price than it is trading at the market. (2) I get to produce income from the premium I receive when selling the puts. If the stock is above the put strike price at expiration, I keep the premium and have the opportunity to sell more outs or just purchase the stock cheaper because I have the put premium to cover partial costs. I have used this technique for several months on the same stock before I get the stock put to me. This creates enough income to really lower the total cost of the stock. Then, when the stock is put to me, I sell calls (covered) to earn more income until the stock is called away. Then – rinse and repeat.

For investors wanting to create monthly income, the Get Rich Monthly Income Plan is right for you. Click here to learn more.

August 2012 Monthly Income Plan Update

As we approach the end of the August option expiration cycle, the Get Rich Monthly Income Plan had a great month for investors.

In January, we kicked off the perpetual covered call strategy. For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium.  In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.  We will follow the progress of the perpetual covered calls each month throughout 2012 and I will email premium members with trading directions when an action is required.  Here are some of the results for 2012:

Perpetual Covered Call Returns:

Stock 1 – Oil Company has a YTD total return of 96.1% including dividends and special dividends.

Stock 2 – Drug Store Company with a YTD total return of 36.4% including dividends.

Stock 3 – Technology Company with a YTD total return of 25% including dividends.

We also provide a list of stocks for monthly covered calls.  Here we change the list each month based on investing in the right stock for monthly income.  For the August option cycle, this was a great month for our Monthly covered call trades.  We made monthly returns of 7.55% on UA, 4.33% on LVS, 4.0% on HP, 3.73% on VIAB and 3.58% on CERN.

We have added the covered put trades as an additional way to sell premium and to enter stock positions.  I frequently sell puts to enter a new stock position because (1) I get the stock at a lower price than it is trading at the market. (2) I get to produce income from the premium I receive when selling the puts.  If the stock is above the put strike price at expiration, I keep the premium and have the opportunity to sell more outs or just purchase the stock cheaper because I have the put premium to cover partial costs.  I have used this technique for several months on the same stock before I get the stock put to me.  This creates enough income to really lower the total cost of the stock.  Then, when the stock is put to me, I sell calls (covered) to earn more income until the stock is called away.  Then – rinse and repeat.

For August options, the covered put trades were great this month as all recommendations were winners.  Returns ranged from 2.2% to 3.93% in one month.

For investors wanting to create monthly income, the Get Rich Monthly Income Plan is right for you.  Click here to learn more.

Covered Call Trade Recommendation on Celgene (CELG)

This is a covered call trade for monthly income on Celgene (CELG) using stock and call option with optional protective put.

Covered Call TRADE: Look at the November 2011 65 covered call.  For each 100 shares of Celgene (CELG) stock you buy, sell one November 2011 65 covered call option for a $61.05 (63.35 – 2.30) debit or better.  This is potentially a 6.5% assigned return.

Blanket Put:  If you are looking for a blanket put for protection, look to buy the Apr 2012 60 Put for $5.00.  You will sell the Blanket Put when the covered call position is closed.
Stock Trend: The technicals for CELG are bullish with a weak upward trend.  The stock is under accumulation with support at 61.63. S&P rates this stock 5 STARS (out of five) – strong buy.

S&P research notes:

S&P maintains strong buy opinion on shares of Celgene (CELG) . CELG updates information related to Article 20 European review of Revlimid that resulted in a positive risk/benefit ruling in September. CELG cites secondary malignancy rate of 3.98 per 100 patient years (vs. 1.38 in control group) in prior treated multiple myeloma patients, and 7% rate in newly diagnosed patients (vs 1.8% in control). While higher than we anticipated, we expect drug’s label to reflect these risks, and still see the positive bias on Revlimid’s survival benefits positioning the drug for approval in earlier treatment stages, which we view as a key share catalyst.

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