@MustacheAndaHalf @Buffaloski Boris By request, a primer on how to profit when options are "expensive".
I'm going to outline a favorite options strategy of mine. But first a word of warning. A lot of novice traders have blown up their accounts by using options the wrong way. You can gain an enormous amount of leverage with options. That leverage cuts both ways and is enormously harmful if the underlying moves against you. Options were not designed to be used that way. If you want to generate reliable income from options, you need to keep something in mind: you must ALWAYS design your trades to REDUCE risk.
One of my favorite strategies, and it is THE strategy for a beginner, is the "covered call". This is an income generating tactic that profits from the passage of time. (The passage of time so far has been a part of the laws of physics we can rely upon). As a quick tutorial, options premium prices have two components Intrinsic Value (IV), which is equal to amount the option is "in the money"; and Time Value, which is a variable amount determined by how much the market currently values the 'optionality' of a contract. For covered calls, we are interested in TV. When it is "large", like today when fear is rampant in the market and volatility is high, we can make an outstanding annualized return while REDUCING the risk of simply of holding shares.
Picking somewhat randomly, I'm going to give an example with Comcast (CMCSA). A hated company that is pretty good about hitting managements guidance, no matter how many customers they have to piss off to do it. I choose it partly because the share price is nominally "small" and thus represents a smaller initial cash outlay for new options investors who might have smaller accounts. Shares closed Friday at $39.10.
Each options contract controls 100 shares. Thus, you will be operating in 100 share lots. For CMCSA at 39.10, you initial outlay is thus $3,910 (less the premium you sell) to get into the trade. TV decays over time and is always zero after expiry. Decay is not linear over time and accelerates with 6-8 weeks remaining till expiry, thus we are going to target about 6-8 weeks holding period. Thus, for the example, I will use the 31JUL2020 expiry and assume you enter the trade on (tomorrow) Monday 22JUN2020.
Now a call option gives the buyer the right, but not the obligation to buy 100 shares of the underlying security for the strike price at any time up to and including expiry. As options sellers, we become the counter party and have the obligation to sell shares at the strike price. Thus, we want to already own the shares. In this case, we would open a "combo order" that simultaneously instructs our broker to buy 100 shares of CMCSA while selling one contract of a call at our directed strike and expiry. I'll use a near the money strike of 40, for simplicity's sake. CMCSA200731C00040000 closed on Friday with a most recent trade at 1.33 per share. Thus, assuming the market doesn't move on open, we would pay about $3,910 for shares while receiving proceeds of $133 for the sold call contract. Total outlay is 3,910 - 133 = 3,777 and that is the most you can conceivably lose on the trade if shares go to zero. Note that anyone who simply bought the underlying at 3,910 has 133 dollars more risk than you do; you have lowered your risk with options!
Now the 133 is yours to keep win, lose, or draw. Let's say 40 days from now, CMCSA hasn't moved a penny and still trades for 3,910. You will retain your shares with no unrealized capital gain or loss. You will also retain the 133 dollars as profit. Your yield is thus about 133/3910/40*365 or 31.04% annualized. You have trounced the long term average of the index while taking less risk. If shares fall, you still keep the 133 and 31.04% yield but also have an unrealized capital loss that reduces your return. However, you can write a covered call again for additional income! Now lets look at what happens if shares rise to 41 dollars before expiry. Your counterparty will have the right to buy your shares at 40 and immediately sell them in the market for 41 for a profit. Your shares will certainly be called away. You will sell 100 shares at 40, bringing in 4,000 in proceeds. You will also keep the 133 dollars in options premium. Your 90 cents per share short term capital gain, plus your 1.33 per share in premium represents a total of 2.23 per share in profits. Your annualized return is thus 223/3910/40*365 = 52.04%. Wow!
Now this example is typical of the market (right now). Because volatility and fear is high, you can earn outsized returns with options. In normal markets when volatility is low, I usually target a minimum expected return of 12% annualized. This gives me sufficient return to cover inevitable losses from shares that decline plus some profit. It usually makes about what the market index does over the same period but provides short term cash flow and importantly, REDUCES risk.
What is the trade off? You saw it in the example where shares were called away. You had to sell at 40 when the underlying was at 41. You gave up any additional upside above 40 buy selling time value.
Hope this helps.
