I have never traded options before. However, can you tell me if the following is a correct analysis of the situation for Agnico-Eagle Mines, a gold miner traded on the NYSE.
Therefore, if I buy the shares at $5045 and sell the options at $390 + $850 = $1240, I will have an initial cost of $3805.
If the shares are above $65 in May, the call option that I sold will force me to sell the shares at $6500 - a 71% profit on my $3805 investment.
If the shares are between $50 and $65, I keep the shares at a cost of $38.05 each - a 25% discount from todays market price.
If the shares are below $50, the put option that I sold will force me to buy an additional 100 shares at $50 each. This would mean that the 200 shares will have cost me $5000 + $3805 = $8805 or $44.02 each - a 13% discount on todays price.
All of the above would then mean that, the only way I could lose money is if Agnico-Eagle Mines drops more than 13% between now and May.
Am I reading into the above correctly?
- The shares are trading at $50.45 so I can buy 100 for $5045
- May 09 $65 call options are trading at $3.90 so I can sell 1 for $390 (as each option represents 100 shares)
- May 09 $50 put options are trading at $8.50 so I can sell 1 for $850 (as each option represents 100 shares)
Therefore, if I buy the shares at $5045 and sell the options at $390 + $850 = $1240, I will have an initial cost of $3805.
If the shares are above $65 in May, the call option that I sold will force me to sell the shares at $6500 - a 71% profit on my $3805 investment.
If the shares are between $50 and $65, I keep the shares at a cost of $38.05 each - a 25% discount from todays market price.
If the shares are below $50, the put option that I sold will force me to buy an additional 100 shares at $50 each. This would mean that the 200 shares will have cost me $5000 + $3805 = $8805 or $44.02 each - a 13% discount on todays price.
All of the above would then mean that, the only way I could lose money is if Agnico-Eagle Mines drops more than 13% between now and May.
Am I reading into the above correctly?