Placing the Protective Conditional "Buy" Order
Selling the out-of-the-money call options would give me a certain profit if the stock price were to fall over the next ten days. Even if the stock price rose by 75 cents per share, I would make the same profit.
My risk would be in the possibility of the stock rising by more than $1.10 cents per share. This was my break-even. Here's the calculation:
| Stock price (at time of trade): $19.75 Strike price of option: $20.00 Selling price of option: $0.85 (20.00 + 0.85) - $19.73 = $1.10. |
In this case I wanted to make sure I at least broke even. So I entered a limit order to buy ZGEN stock if the price rose above $21.10 per share. This would give me a "covered call" position if the stock rose.
The remaining risk here was that the stock could spike suddenly - like in the first minutes of trading on the day after an after-hours press release by the company. This was a risk I was wiling to bear, given the overall attractive potential return and my relative confidence in a downward or flat stock price movement.