Monday, December 27, 2010

Sold calls on Amazon (AMZN)

I will be posting some of the short term trading ideas that I occasionally put on to pick up a few bucks here and there. One of my ideas that I put on today is that Amazon has a tendency to rise into Christmas and then fall after the holiday. This makes sense from the perspective of traders wanting to play the retail trade during the biggest shopping season of the year. The stock rises as Christmas approaches and then once everyone is onboard there is a tendency for a pullback on profit taking after the holiday. I do not short the stock or buy puts. I write naked calls on the stock, in this case the Feb 2011 185's. What I have basically done is sold the right to the call buyer to have me deliver to him 100 shares of Amazon stock at $185 per share anytime between now and expiration of the call option during the third week in February. If the stock closes below $185 then the option will expire worthless and I will keep the option premium, in this case around $875. If the stock trades above $185 the option buyer can exercise his right to have me deliver him the shares at $185. I do not own the shares so I would have to buy them at the market and then sell them to him at $185. However as I said earlier I believe the stock will go down in the short term so I am not worried. Nevertheless this is high risk as the stock go theoretically go up to infinity, I monitor the position and if the stock moves up to a level that puts me past my threshold for loss I will pull the plug and close out the option by buying back at a higher price. This is not advice this is just something I am doing and I am relating to folks as an educational tool of what is possible. Here is a link to a site that explains how options work. I like using options for various trades and I especially like writing options as most expire worthless. So as long as one uses proper risk management it is possible to generate some nice income from option writing.

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