I have been watching U.S. Steel (X) for a while now and it’s been going down since Sept 2014. It hit it’s low of around $6 in February of this year (last month). Since March 1st. it’s been on a tear and it moved from $7 up to over $16. It looks like it leveled off and might move sideways for a little bit. To me it looks like in might have hit resistance at the $16 area. Also, the market has been on a big run and there is speculation it might run out of gas. With X at $15.65 I sold a Naked Call. I sold 50 contracts of X 4/1/16 $16.50 Naked Calls at $.30. 50 contracts represents 5000 shares. I received a premium of $.30, on 5000 shares the total premium is $1500. If you do a little math you will see $.30 is 1.8% of $15.65 (the stock price). In theory if I buy a stock for $15.65 per share and sell a Call for $.30 my Rate of Return would be 1.8%. I say “in theory” because I didn’t buy the U.S. Steel stock, I sold a Naked Call. This is selling a Call on a stock I do not own. The bottom line is, I’m bringing in 1.8% on no investment. This is truly a “Money for nothing and your chicks for free” situation. I am making money with no investment. This does not mean there is no risk! This is a high risk trade! You must understand Naked Calls before you make this kind of trade.
What I like most about this trade is it fits into my 1 Week/1% philosophy. The price of the stock is $15.65 and the return is $.30. Thats 1.8% in a 1 week trade. This option expires this Friday April 1st. 1% in 1 week is a great return! This is a 1.8% return. If you did this every week your return would be 93% annually. Here’s the Sell order:
Sell to Open 50 X 4/1/16 $16.50 C @ $.30 (+$1500)
I give this trade a Risk Factor of 4. This is a Naked Call which is high risk. If this stock goes above the Strike Price of $16.50 I’ll have to deliver the stock to the Call buyer. If I don’t own the stock this could present a problem. If the stock goes up to, say, $18, I would have to buy the stock at $18 and sell it for the $16.50. I would loose money on this deal. To solve this problem I must watch U.S. Steel closely. If the stock approaches the Strike Price of $16.50 I will buy the stock before it goes over my Strike Price to cover my Call. I am not looking to make money on the stock. I’m only looking to keep my premium for the sale of the Call Option. Let’s watch and see how this plays out. It will be over this Friday.
Make sure you understand what a Naked Call is. Read the links below:
Steve
The Options Coach