Teva Pharmaceutical Industries Limited (TEVA) recently offers interesting premiums and 60% chance that it will expire OTM. The trade setup is positive too. I decided to take this trade and sell one December contract to collect nice premium.
I would love to trade shorter time frame, but with a small account as mine I need to take longer terms to collect higher premiums and use options time ladder to spread my options trades among more months.
Also there is a good chance that the option becomes worthless earlier than in December.
Trade Detail
STO 1 TEVA DEC14 50 PUT @ $2.39
| Max Profit | $239 | When selling puts, the hope is that they will expire worthless, so the max profit is equal to your execution price. Max profit occurs if TEVA is above 50 on expiration day, which is December 19 for this option. |
| Max Loss | $4750 | In theory, TEVA could keep going down all the way to zero, and since you are giving someone else the right to sell it at 50, your max loss is very high. However, remember that this trade has a time limit on it. On expiration day, December 19 for this option, if TEVA is below 50 you will either need to buy back (cover), roll the put, or you will be assigned -100 shares of TEVA as a long position, with an entry of 50. |
At this point this will be a waiting game. Waiting for expiration, or action in case rolling of the put will be needed.
In case you are not familiar how rolling the put option works, here is a quick explanation. Rolling the put basically means that if the underlying stock (TEVA) price falls below strike price of the option (50) then at expiration day or earlier you want to buy this contract back and sell a new contract with lower strike (45 for example) and longer expiration time (January 2015, for example). When rolling a put, you want to sell a new contract so that you again receive a credit. If it is not possible, you may want to sell two or more contracts to offset the buyback of the original contract.
Have agreat day and happy trading and investing!
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