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AMAT
I presently hold 500 shares of AMAT and presently have no calls sold, so am looking to collect revenue in the form of premium.
AMAT is presently trading below my paper break-even level. This suggests that the further I move away from that level, the cheaper calls become, and this means I collect less as the stock drops. It also means that if I sell a call against my holdings that there is a non-zero chance that the stock could be called away below my basis, e.g., at a loss.
As a result of this possibility, I tend to wait for new short-term trends to materialize before selling calls or puts. Right now, with yesterday's action, a new short-term signal down has triggered, which means that the stock is moving away from my break even and that selling out of the money (OTM) calls most likely will expire worthless.
AMAT is quality stock but is in an industry that is getting hammered. On a year-over-year (YOY), quarter-over-quarter (QoQ), and trailing 12-month (TTM) basis it is doing well:
Click on the image to enlarge.
Based on these values (all positive), I am continuing to hold the underlying and sell premium. If any of these measures were to turn negative I'd look to unload the underlying.
To select the correct calls, I typically plot the bids across various option expirations (OEs):
Click on the image to enlarge.
The rows of this table are various strikes and the columns are the OE dates. The colored portion of the table shows the annualized return on option (AROO) that is possible if the premium received is at the indicated level.
You can see that option premium peaks on 11/16, relative to today, and then falls off. Hence, to capture the maximum amount of premium, I look to see which OE peaks for a given strike. I've circled the 11/16 AROOs to show specifically where I'm looking in terms of maximizing my return. As it turns out all of the strikes peak in 11/16, but others also dip in the 11/23 week then start trending upwards.
Another consideration is that the closer I get to the present value, which is around $33, the greater the probability that the stock will rise to that strike value. Because my basis is above the strike levels shown, I simply want to collect the call premium and have the option expire worthless.
I did not show this but the $37 strike has a delta of +0.17 and a Probability of OTM of 86%, reflecting a low chance that AMAT will be called away. This is the balance of selling premium below your breakeven.
I entered a trade to sell five AMAT 181116C37 and received $0.30, just under the desired $0.31. If held to OE my AROO would be 13.3%. Due to my practice of placing buy-to-close (BTC) orders, I'll most likely close the position earlier than OE and should return more than what is shown.
I entered a trade to sell five AMAT 181116C37 and received $0.30, just under the desired $0.31. If held to OE my AROO would be 13.3%. Due to my practice of placing buy-to-close (BTC) orders, I'll most likely close the position earlier than OE and should return more than what is shown.
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That's all for now. If you have questions -- ask.
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As with all my ramblings, you are responsible for your own actions and I am not. Nothing I've written here is advice to buy or sell any security, so don't do it unless you absolutely take ownership for your actions.
Regards,
Paul
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