This spread worked out very nicely for me.
As you recall, I spent $1550.10 buying 5 Calls and 5 Puts for ADBE at the Jan 29 strike. When earnings came out after the bell on December 20th, I sold my 5 puts for a total of $189.99, because earnings were positive. This means that I needed my calls to provide me with $1361.11 (1550.1 - 189.99) for me to break even.
I sold my Calls before expiration for a total proceeds of $2459.77. This brought me a profit of $1098.66, or 71% profit. not bad.
Monday, January 24, 2011
Sunday, December 19, 2010
First Spread
Just got the ability to do long calls and puts, meaning I can now to straddles. To practice, I'm going to first attempt a trade on my virtual account.
I did some research and found that Adobe is releasing earning tomorrow. Adobe beat by .01 in March, but fell for about the next month. Adobe beat by .05 in September, but fell a large amount overnight. The volatility after earnings announcements makes Abode a good candidate for this strategy.
In total, this strategy will cost us about $1,500 upfront to execute. First, 5 contracts of ABDE of the at the money call strike are bought for the month of January. In this case, the strike will be $29. Then, 5 contracts of ADBE of the at the money put strike are bought for the month of January. In this case, the strike will be $28.
To make money off of this strategy, we need a large swing after earnings. We will look to sell the losing option directly after earnings are released so that we can capture any value that remains. The winning option will be held until it has maximized value. We need to be sure not to let the time value of the option decay faster than the intrinsic value of the option increases. The option should not necessarily be held until expiration.
I'm not exactly sure what I will do if there is no significant movement after earnings. One of the options should be sold, but it will take a few days to determine which one.
On another note, I currently hold MON and XOM because I saw them at the buy point in an obvious cup and handle pattern.(MON was actually in a double bottom with a handle).
I am keeping my eye on PFE, BAC, and AA, because they seem to be in cup and handle patterns. BAC looks very promising.
I did some research and found that Adobe is releasing earning tomorrow. Adobe beat by .01 in March, but fell for about the next month. Adobe beat by .05 in September, but fell a large amount overnight. The volatility after earnings announcements makes Abode a good candidate for this strategy.
In total, this strategy will cost us about $1,500 upfront to execute. First, 5 contracts of ABDE of the at the money call strike are bought for the month of January. In this case, the strike will be $29. Then, 5 contracts of ADBE of the at the money put strike are bought for the month of January. In this case, the strike will be $28.
To make money off of this strategy, we need a large swing after earnings. We will look to sell the losing option directly after earnings are released so that we can capture any value that remains. The winning option will be held until it has maximized value. We need to be sure not to let the time value of the option decay faster than the intrinsic value of the option increases. The option should not necessarily be held until expiration.
I'm not exactly sure what I will do if there is no significant movement after earnings. One of the options should be sold, but it will take a few days to determine which one.
On another note, I currently hold MON and XOM because I saw them at the buy point in an obvious cup and handle pattern.(MON was actually in a double bottom with a handle).
I am keeping my eye on PFE, BAC, and AA, because they seem to be in cup and handle patterns. BAC looks very promising.
Thursday, June 24, 2010
Loose Strings
I left a few loose strings in the last post, so let me clarify.
The put stread will gain value as FTR reaches the $5 strike price, with the breakeven point being at 7.30. (7.50 strike - .20 per share).
It is very interesting that this very large Put order came out the day before the patent was awarded and the suit was filed. Someone obviously thinks FTR is going to lose this case.
I suggest the covered calls option because I think this case will not be resolved in 22 days (Thats the number of days to expiration) and I think FTR will remain fairly flat until then.
The put stread will gain value as FTR reaches the $5 strike price, with the breakeven point being at 7.30. (7.50 strike - .20 per share).
It is very interesting that this very large Put order came out the day before the patent was awarded and the suit was filed. Someone obviously thinks FTR is going to lose this case.
I suggest the covered calls option because I think this case will not be resolved in 22 days (Thats the number of days to expiration) and I think FTR will remain fairly flat until then.
FTR Lawsuit. Puts or Calls?
Yesterday, FTR received a patent on a new phone idea that would allow them to assign multiple phone numbers to one phone number. Sounds kind of confusing at first, but let me explain. Basically the idea is that you would have one phone number. You would be able to direct incoming calls to this number to multiple devices that all have their own number, such as to your cell phone, home phone, fax, computer, what have you.
Enter Google Voice. Google Voice essentially does this, but FTR got the patent. On the same day that they received the patent, Frontier sued Google. Looks to me like someone had some inside information, because the day before a complex Put Spread was ordered against FTR
Let me explain this Debit Put Spread. The way a spread works is you essentially limit your gains, but in return you reduce your upfront costs. You still have close to unlimited losses. First we will look at the two parts of the spread seperately, then we will put them together:
At the 7.50 strike 20,000 put options were bought for .22 each. As FTR drops in price, these Puts gain value. Fairly straight forward.
At the 5 strike, 20,000 puts were sold for .02 each. As FTR gains value, these expire worthless.
When you put(no pun intended) the two together, 20,000 Puts were bought for .20 each, instead of .22
Another Debit Put Spread, of the same amount and strike prices, was placed for the August expiration. These Puts are very bearish and drove the options demand way up.
Sounds like time for 2 protective put contracts? Possibly, but what about selling an in the money covered call? While a protective put will cost you money upfront, an in the money covered call will gain you liquidity up front. The risk of the covered call isbeing called to sell FTR at 7.50, which would be at a loss.
If you have been holding FTR, then you are already on record for the dividend. Dividend included, I would sell 2 calls at the 7.50 strike price in July. The price is currently .35/share, so proceeds of $70 less commission for 2 contracts. FTR needs to reach 7.85 before it will be called.
Again, we are betting bearish on FTR. If you have a few more contracts and can lower the marginal cost of commission, I'd go for the August or farther off expiration. If FTR drops very low and the call becomes fairly worthless, buy it back.
Enter Google Voice. Google Voice essentially does this, but FTR got the patent. On the same day that they received the patent, Frontier sued Google. Looks to me like someone had some inside information, because the day before a complex Put Spread was ordered against FTR
Let me explain this Debit Put Spread. The way a spread works is you essentially limit your gains, but in return you reduce your upfront costs. You still have close to unlimited losses. First we will look at the two parts of the spread seperately, then we will put them together:
At the 7.50 strike 20,000 put options were bought for .22 each. As FTR drops in price, these Puts gain value. Fairly straight forward.
At the 5 strike, 20,000 puts were sold for .02 each. As FTR gains value, these expire worthless.
When you put(no pun intended) the two together, 20,000 Puts were bought for .20 each, instead of .22
Another Debit Put Spread, of the same amount and strike prices, was placed for the August expiration. These Puts are very bearish and drove the options demand way up.
Sounds like time for 2 protective put contracts? Possibly, but what about selling an in the money covered call? While a protective put will cost you money upfront, an in the money covered call will gain you liquidity up front. The risk of the covered call isbeing called to sell FTR at 7.50, which would be at a loss.
If you have been holding FTR, then you are already on record for the dividend. Dividend included, I would sell 2 calls at the 7.50 strike price in July. The price is currently .35/share, so proceeds of $70 less commission for 2 contracts. FTR needs to reach 7.85 before it will be called.
Again, we are betting bearish on FTR. If you have a few more contracts and can lower the marginal cost of commission, I'd go for the August or farther off expiration. If FTR drops very low and the call becomes fairly worthless, buy it back.
Wednesday, June 16, 2010
June 16, 2010
The bears have won so far this morning, but it seems that the bulls are rallying, atleast in my stocks.
TICC and FTR are down the most, with LYG, CIM, and BGS coming back towards zero.
Since selling covered calls on my stocks is not yield very much revenue, I've looked into selling in-the-money covered calls. This simply means that you would sell a call on your stock at a strike price lower than the current market price of the stock. This can be a risky transaction, because if the stock prices goes up, your stock WILL be called away. I would only suggest this strategy for strike prices that are above what you initally invested in the stock.
I looked at some theoretical numbers for doing this with FTR. I own 200 shares of FTR, thus 2 options contracts. I decided that I'd be willing to sell a covered call at the 7.50 strike price in July for .65 per share, when the market rate of the stock was around 8.09. Thus:
200*.65 = $130 - commission = $119.55
Now, we should keep in mind that I bought FTR at 7.80, so I risk selling my stock at a .30 loss.
(7.80 - 7.50) * 200 = 60
119.55 - 60 = $59.45 profit. This is about 4% return, and it raises to about 6% total return when you count the .25 dividend that I am on record to recieve. I would classify this as a Bearish Strategy, because I want the stock to go down so I can keep the $119.55 and not sell the stock.
That's it for now.
TICC and FTR are down the most, with LYG, CIM, and BGS coming back towards zero.
Since selling covered calls on my stocks is not yield very much revenue, I've looked into selling in-the-money covered calls. This simply means that you would sell a call on your stock at a strike price lower than the current market price of the stock. This can be a risky transaction, because if the stock prices goes up, your stock WILL be called away. I would only suggest this strategy for strike prices that are above what you initally invested in the stock.
I looked at some theoretical numbers for doing this with FTR. I own 200 shares of FTR, thus 2 options contracts. I decided that I'd be willing to sell a covered call at the 7.50 strike price in July for .65 per share, when the market rate of the stock was around 8.09. Thus:
200*.65 = $130 - commission = $119.55
Now, we should keep in mind that I bought FTR at 7.80, so I risk selling my stock at a .30 loss.
(7.80 - 7.50) * 200 = 60
119.55 - 60 = $59.45 profit. This is about 4% return, and it raises to about 6% total return when you count the .25 dividend that I am on record to recieve. I would classify this as a Bearish Strategy, because I want the stock to go down so I can keep the $119.55 and not sell the stock.
That's it for now.
Tuesday, June 15, 2010
June 15, 2010
Today the market is up close to 1% across the board. My stocks are mainly follinwg this with TICC more towards the downside. Obama is currently making a talk about BP and the oil spill. I'll have to keep an eye on the market this afternoon to see what's happening.
I need to look more into covered calls. The issue is since I am only sell 1 or 2 contracts, commission greatly eats away my gains. This being said, 1% is better than 0%, but I cannot sell in the money calls, atleast not if I want to make money.
Most of my stocks are momentum stocks with high RS combined with a high dividend yield. One exception is CIM. CIM is a Real-Estate Investment Trust(REIT) that mainly deals with residental mortgages and real-estate. This is a fairly risky play, but being Bullish by nature, I feel that in the next 5-10 years, CIM will be a very worthwhile investment. This will require that the market recovers. CIM also has a 16% dividend yield. My broker will allow to to reinvest dividends with no commission cost, so I will be participating in this for CIM.
The reason a bring up CIM is that fact that it is NOT a momentum stock. this present an interesting opportunity that I worked the numbers on yesterday. All of the numbers I use for options will be from optionsxpress. Though I do not trade through them, their education resources are very insightful. And this brings me to protective puts.
Protective puts require the bare minimum options access granted by brokerage institutions. A protective puts is when you buy a put option on a stock you already own. The idea is that as that stock you own decreases in value, the put increases in value, hedging your investment. Protective puts are used by Funds as an insurance policy. Yesterday I did the math on a protective put on CIM.
I haven't quite learned how to input math effectively into a blog, but:
Buying a put on June 15, 2010 for the July 5 Strike:
.95 X 100 shares = $95 + commission = $104.70 up front
Now, if CIM falls to $3.80 per share(Which it did 2 weeks or so ago), then the Put will sell for:
1.20 x 100 shares = $120 - commission = $110.30
Profit:
$110.30 - 104.60 = 5.60 profit. Doesn't sound like much but:
5.60/initial investment = 5.60/104.70 = .053 * 100 = 5.3% return. Not Bad.
I was not brave enough to pull the trigger on this strategy, but it shows you how to make money using protective puts. The more I learn about options, the more I like them.
I need to look more into covered calls. The issue is since I am only sell 1 or 2 contracts, commission greatly eats away my gains. This being said, 1% is better than 0%, but I cannot sell in the money calls, atleast not if I want to make money.
Most of my stocks are momentum stocks with high RS combined with a high dividend yield. One exception is CIM. CIM is a Real-Estate Investment Trust(REIT) that mainly deals with residental mortgages and real-estate. This is a fairly risky play, but being Bullish by nature, I feel that in the next 5-10 years, CIM will be a very worthwhile investment. This will require that the market recovers. CIM also has a 16% dividend yield. My broker will allow to to reinvest dividends with no commission cost, so I will be participating in this for CIM.
The reason a bring up CIM is that fact that it is NOT a momentum stock. this present an interesting opportunity that I worked the numbers on yesterday. All of the numbers I use for options will be from optionsxpress. Though I do not trade through them, their education resources are very insightful. And this brings me to protective puts.
Protective puts require the bare minimum options access granted by brokerage institutions. A protective puts is when you buy a put option on a stock you already own. The idea is that as that stock you own decreases in value, the put increases in value, hedging your investment. Protective puts are used by Funds as an insurance policy. Yesterday I did the math on a protective put on CIM.
I haven't quite learned how to input math effectively into a blog, but:
Buying a put on June 15, 2010 for the July 5 Strike:
.95 X 100 shares = $95 + commission = $104.70 up front
Now, if CIM falls to $3.80 per share(Which it did 2 weeks or so ago), then the Put will sell for:
1.20 x 100 shares = $120 - commission = $110.30
Profit:
$110.30 - 104.60 = 5.60 profit. Doesn't sound like much but:
5.60/initial investment = 5.60/104.70 = .053 * 100 = 5.3% return. Not Bad.
I was not brave enough to pull the trigger on this strategy, but it shows you how to make money using protective puts. The more I learn about options, the more I like them.
Monday, June 14, 2010
June 14 2010
Today was a fairly boring day in the market. I mainly look at the SP, but it seemed like most of the indexes were up a slight amount. My stocks pretty much followed this trend, up about a percent or two. BGS turned sour at the end of the day and finished negative.
My strategy is still being employed as normal. All of my stocks (save LYG) are above their 200 and 50 day Moving Average, so they are still buys. They are performing well in their specific industries, so their Relative Strength is still high. These all point to more momentum in the long term. I want to sell covered calls but this is not worthwhile right now. I put in a limit order for a covered call on CIM 5 Sept for .10, 2 contracts. Ill make like 1% on this transaction, but it's better than 0%.
Today I looked into protective puts on CIM. Ill talk more about this tomorrow and show some math on the subject.
The euro has recovered fairly well. I was shorting it using an ETF named EUO, and made about $300 on 93 shares. I may want to get back into shorting the euro, but would need to raise capital some how. Right now, since my stocks are all doing well, there is not much pressure to switch back to the euro.
My strategy is still being employed as normal. All of my stocks (save LYG) are above their 200 and 50 day Moving Average, so they are still buys. They are performing well in their specific industries, so their Relative Strength is still high. These all point to more momentum in the long term. I want to sell covered calls but this is not worthwhile right now. I put in a limit order for a covered call on CIM 5 Sept for .10, 2 contracts. Ill make like 1% on this transaction, but it's better than 0%.
Today I looked into protective puts on CIM. Ill talk more about this tomorrow and show some math on the subject.
The euro has recovered fairly well. I was shorting it using an ETF named EUO, and made about $300 on 93 shares. I may want to get back into shorting the euro, but would need to raise capital some how. Right now, since my stocks are all doing well, there is not much pressure to switch back to the euro.
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