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.

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.

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.

Introduction

This blog is meant to be a record of my investing thoughts, strategies, and transactions. Though it is not written to inform any would-be investors, feel free to learn from my gains and losses or to borrow any strategies I use. Comments are also welcomed.

To start, I am going to be a Junior in college, where I am studying Economics and Chemistry. I have been actively trading in the stock market for 1 year now. I've been looking at options trading for about 6 months and have never traded commodities.

Currently, I own a brokerage account that I pay $8.95 per trade on. Options are 8.95 + .75 per contract. I also have a Roth IRA that I actively manage. My Roth does not trade options (though I wish I could do some covered calls on it) and normal transactions cost 11.95.

In my Brokerage Account (B.A.) I own 200 shares of LYG. I've owned LYG for close to a year now and I have lost about 40% on it. That's what I get for not using a stop loss. I am currently holding it, as it is too low to sell. LYG is also paying an extremely high dividend yield. May be worth buying more to lower average cost per share.

I also own 200 shares of CIM and 100 shares of FTR. Both are dividend plays until the market stabilizes and decides if it wants to go up or down.

My IRA is a much safer play. 200 shares of BGS(Div. Play) and 200 shares of TICC (Div. also). As you can see, most of my portfolio at this point is in High yielding stocks. This is to allow me to sell covered calls and collect dividends. this strategy allows me to withstand minor to moderate deterioration of these stocks, which in this market is a necessity.