Are you familiar with the "expense ratio policy" of the ETF "SLV"?
SLV for every dollar ,.50% goes to them. I know a person who bought
41 Jan '12 long/call contracts for 4.50 per share & then, it goes from
the strike price of 37, to 39.. ( a 2 dollar gain).. He's made $3,649.00
So, if I do my math with physical... 4,100 bought at 37, goes to 39.. that's
a gain of $8,200. Yet with SLV, $3,649 is earned. That's a difference of $4,551.
Really like the idea of being able to leverage, but this expense ratio policy...
...and whatever other components are taking a piece of the opportunity; seems
to create a raw deal (but it's one of the only games in town). Or is it? Considering
the downside risk of options it doesn't seem like much of an opportunity.
Either way, the ETF seems to win.
Thoughts, reflections? Words of wisdom?
Using your numbers, isn't the math as follows:
Cost of options is 41x100x4.5=18450
% gain on options is 3649/18450= 19.8%
Ounces of physical he could have bought is 18450/37=498 (rounded down)
Gain in physical is 2x498=996 or 5.4%
Or maybe I'm missing something?
You're correct in your math (and appreciate you taking the time to respond).
I suppose, What I'm saying though... is that (in theory) 41 contracts are supposed
to represent the right to execute 4,100 shares. Granted, the leverage is helpful.
So, doing the math with 4,100 shares of SLV... If it was to go... from 37 to 39,
that's a $2 jump. So, in theory my friend thought it should be 4,100 x $2. It doesn't
come out to that... I assume, because of the expense ratio (+ other things being deducted?).
It's still good... but, not as good as my friend would of thought, it would be.
lets talk about how my Oct 45 calls are barely budging
hmmmmm I could be wrong here.. but i don't think any option price goes up penny for penny with the share price... I've got options with slv kgc svm and gld... they have never went up like that.... I sure wish that they did....
By no means am I an options pro, but I can take a crack at this. Your friend bought out of the money calls at $41. If he had bought in the money calls at $37 and the price raised to $39 you would see the full $8,200 gain, but when buying at $41 you won't see the same gains until it is in the money, but only a percentage that changes based on all the other variables options have.
yeah, you're right.
imperfect knowledge results of being self taught.
s/he figured out the formula (referenced below).
buy to open 41 SLV Jan37 (at the money) call for $4.50 per contract.
SLV rises to $39.33. Delta value of Jan37Call is 0.95.
Profit = [(Rise in underlying stock) x delta value] / price of call options
then... include a 28% tax on that (I believe), in the states.
I write this above, while having read Turd's reference link from earlier
I really appreciated that Turd referenced that article; the guy has a point.
It's the leverage though.. B/c of the leverage it's challenging to walk away from options,
when feeling bullish on a commodity, knowing you're able to leverage resources on an ETF instrument.
I like the excitement of the option... b/c you can step away and live life.
Compared to futures trading; where you have to become one w/ your
monitor(s), etc.. plugging into the system; like the matrix or something.
Though, futures.. is sort of like a stick shift car w/ a clutch.. enabling you to
increase/ decrease leverage.. it's almost too much control. One wrong.. overleveraged
move and you're history.. though you're able to switch gears on the fly.. more so... than w/ options.
There are clearly autonomous & financial benefits to physical. Like 1:1 realized gains
for every $ made in the actual commodity. Are there any people out there.. that
can speak to their love/hate options vs physical commodity relationship?
Specifically: Only using options etf's sparingly in what you've felt as
bullish-trend-times, then going back to the stable and converting to physical?
Or.. once you started w/ the ETF options... you couldn't go back?
Or... that you started doing "at the money" and moved to the "out the money" practice?
Thoughts? Appreciate your time & expertise.