caputo.philip

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caputo.philip Updated   
NASDAQ:NVAX   Novavax, Inc.
NVAX is currently expecting some volatility in the near future given by the prices of these options. Here is one with 43 days to expiry with a 46% margin or error! These incredible numbers translates into 15% cash on cash return in 43 days if not assigned! The delta of this option is at 16.44 which means for the writer or seller of this option, you have a 83.56% chance of keeping that entire premium! Great odds!
Comment:
The CBOE has published some time ago a study that showed that short option premium is more than enough margin or error to cover the adverse movement about 85% of the time. We knew there was a movement eminent with the recent price of the options here. This is one of the potential outcomes of selling options. We are obligated to purchase the stock at the strike price of the options that we sold. This is not such a bad deal after all. Let's analyze to see what is going on.
We received $75/contract on this trade and must purchase the stock at the strike price of $5 if assigned. At this point there is a pretty good chance that we may get assigned on this one. If we do, we are in at $4.25 because of the credit. The stock just got some really disappointing news in which the market felt that the stock was overvalued by about 85%. Does that sound rational to anyone?
If you were at the supermarket instead of the stock market and noticed a buy for 85% what feelings would you be experiencing?
Are those the same feelings anyone has for this stock?
Why not?
I believe this is a great bargain because without knowing any other details about this stock other than the fact that the stock has just been reduced by 85% sounds like a great deal!
Trade management is very important topic. For example, with less than 5% in any one trade we are not tying up a lot of trading capital. If as in this case of getting assigned, we can hold the security and sell a call option every week or month until we collect enough premium income or profit from the appreciation of the stock to get out with a profit. Either way we intend to come out ahead in the end. Stay tuned.
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