Hi Ray, There are two problems here that intertwine: Duration of the option and amount you sell for. Then add in the issue of it going well above the option strike price but the buyer, who is not obligated to take the assignment, doesn't exercise their right.
To answer the second one first, chose an option price for a position that has sufficient activity that there would be someone who would buy it and then turn around and sell it. Using AMD with the strike price of $12 and say it went to $17, the buyer would get it for $1,200 and then could turn around and sell it for $1,700. I wouldn't promise that would happen but it seems unlikely that anyone would pass up $500, especially since there are about 20,000 open contracts at the moment, but if they didn't you'd still have the $325 when the option expired and then you could sell it yourself. Yeah, it's a long wait but if the stock doesn't hit the AIM buy or sell points while you're waiting what would you do, twiddle your thumbs - no, I'd guess you'd use one of those new gadgets that everyone seems to be buying, right? Then, of course, one could also use the remaining stocks to do the AIM trade regardless of whether the option was assigned. Double your bang for the buck.
The other resolution that is possible is to buy back the call. Using AMD again, currently the call buying premium at $17 is about $1.80 or $180. This would close the contract and diminish your return on the option to $145, but then you could sell the stocks for $1,700 for a gain of $556 so your total gain would be $701, nothing to sneeze at and still better than AIM's $556.
The likelihood of that extreme range happening is beyond belief for me given that the people who talk about options trading talk in terms of $100-$500 gain per contract so if it was to move above the strike price a dollar or so the odds are someone would take it.
Now looking at the sorter contracts there are two problems, the shorter the term the fewer contracts are there. You have to go to the August 18th, 2017 to get sufficient open call contracts but the price is only about $97/contract. Is that amount worth it? Combining it with the $56 you'd get for the stock itself you'd get $153, more than the $88 if you just waited for the $12.32 AIM sale point but is it enough to warrant doing this? I'm not sure.
For the put it is even worse with only $56/contract so you'd be getting the 100 shares $944, only $32 less than the AIM calculator suggests.
This all suggests that one should do more than one contract to make it truly worthwhile but that violates the basic AIM standard. As it is we are trading more than the 5% and to go to two contracts we'd be going to almost 15% stock sale, triple the basic amount. I'm not opposed to that given that for the put we'd need double the reserve money, but with 20% cash we have $4,000 so that would be no problem.
Best,
Allen
