by OptionSage - December 2nd, 2007 9:40 pm
The bull call strategy can be used to profit in uptrending markets with relatively low risk and involves purchasing a call option while simultaneously selling a call option at a higher strike price and typically in the same month. For example, if you liked POT stock at $120 per share but couldn’t afford to purchase the stock you might decide to purchase a long call option.
With time-decay so potent during the first month and with a preference to take a less active role in your trading you may wish to purchase a March strike 120 long call. To your disappointment you find the long calls in March at strike 120 cost $16.10 at the current Ask price. So what could you do?
Perhaps enter a cheaper trade, a bull call spread, using the same long call at strike 120 but also incorporating a short call at strike 130, which generates a credit of $11.60. Now the overall cost of entering the spread is $4.50, a substantial cost reduction from simply purchasing a long call alone. The maximum reward is limited to the difference in the strike prices of the options minus the debit spent.
Maximum Reward = $10 – $4.50 = $5.50
Maximum Risk = Cost Basis = $16.10 – $11.60 = $4.50
These trades might appear attractive on first viewing. After all if the stock goes up a potential 100%+ profit is on the cards. But new traders can often be shocked that the trade is often nowhere near as attractive as initially expected when the stock rises after trade entry.
Associated with each option is a delta figure which tells the trader how much the options will move as the stock moves $1. For example, the long call delta for strike 120 March options on POT is 0.58 while the short call delta at strike 130 is -0.48. This means that combining the two deltas together for the spread yields a delta of of 0.10 (0.58 – 0.48). This tells the trader that as the stock rises $1, the bull call increases in value by just $0.10.
Suddenly, the trade seems a whole lot less attractive because in practice you will also find commissions and slippage have an impact. So is there any way to take advantage of these bull calls?
by phil - December 2nd, 2007 5:43 am
Wow, what a day!
The Dow flew up right at the open 169 points to 13,570 and fell all the way to 13,225 (345 points) by 3:10 bouncing back to up 59 for the day.
Earlier this week I reminded you guys to reread my article from August (back when 300-point intraday moves were considered rare!) called "Don't Just Do Something, Stand There" and today was such a good example I thought I'd hammer the point home.
At the time I said: " When you think about all the effort (and cost) that is involved in changing course, it is no wonder that we should be willing to sacrifice, to take a few blows, to let the FEAR pass over us, before we commit to a new action. If we are properly hedged, a few moves against us may sting, but they shouldn’t wound. This gives us time to calmly assess the changing market, understand the new paradigm and gage our own preparedness (our investment mix) to deal with it and to choose the course that will best get us to our goals."
Since I happened to post the $25KP in the morning I thought it would be a good idea to run the updated numbers on the untouched set. It is very easy to panic and rush to buy out your callers into a spike but, as I often say, a spike at the open in either direction carries little weight and it's the last thing you should be reacting to. If your virtual portfolio is decently balanced, you should be able to ignore the individual losses (PAPER LOSSES) on a few callers and focus on the fact that, on the whole, you're even for the day so THERE IS NOTHING TO PANIC OVER.
Rule #1 is: Always sell into the initial excitement. Anyone who reads me regularly knows I am no fan of absolutes, YET THIS IS MY #1 (of 2!) RULE. There is NOT a rule 1.a that says "Never buy into the initial excitement" even though it would seem to follow rule #1 but that's because I would not say never. Sometimes a stock is going higher and higher so perhaps buying Google at $120 on IPO day makes sense or perhaps buying out an XMSR caller when they announce a deal with SIRI is prudent,…
by phil - November 30th, 2007 6:39 pm
The easiest way to short oil is DUG calls (Jul $39s for $9.50) or DIG puts (Mar $118 puts at $22)but it’s oil AND gas, not pute. Shorting SU is great too and you can buy the Mar $110 puts for $16.20 ($4 premium) and sell the Dec $90 puts when they get to $2+ or sell the $95 puts for $2 if it goes the wrong way on you. XXX
Integrated oil holding up better than they should, SU leading the way down so far but it’s the weekend, who knows which way oil will end today.
FXI – not for the $10KP or $25KP, too pricey and dangerous.
Rev Shark – thanks Joe. If you are a member, best tell his guy I’d love to chat, see if they’re interested and give I’ll send them a note. Maybe some synergies there – I here some people like trading these stock thingies…
XLF – I’m not jumping all over calls here as I don’t trust a big up move on the last day of the month when hedge funds are desperate to show profits. While I wish I had been more bullishly positioned, I’m not going to let that force me into making a mistake by trying to “catch up” and overpaying.
OK, now Esignal has just gotten strange, it’s not showing me many of my symbols…
GOOG/APPL rolls – there is no great time when they pull this sort of move but it’s a step back and take a deep breath kind of thing. Obviously the last thing we want to do is buy out hyperinflated callers.
Everyone is turning back down uniformly and I think we’ll at least test 13,400 but probably 13,300 if we break through there so I hope you’ve all rolled your puts up!
Construction spending is down, big recession sign.
DRYS popping as CEO just siad good things on CNBC. Mar $105s are worth a gamble at $15 but we absolutely want to sell against them on loss of mo. XXX
X taking a dip. $90 puts very cheap at $1.50 XXX (notice I am playing it both ways for next week).
by Option Review - November 30th, 2007 11:02 am
Today’s tickers: ETFC, ASCA, SHLD, CVS, EP, THC, COV, DELL
ETFC – Shares in parched brokerage E*Trade found temporary relief in news of a $2.5 billion cash infusion from Citadel Investment Group, gaining 1.52% to register $5.36 this afternoon. The 148,000 contracts circulating this afternoon have made E*Trade the day’s most liquid option family by a long shot. Traders are showing a propensity to sell risk reversals in the January contract between the 5 and 7.50 strikes, writing the puts at around $0.75 apiece while buying into upside price exposure at the $7.50 for about $0.35 per contract. These contracts traded on a volume of more than 30,000 lots, 3 times the existing open interest. Premiums on both calls and puts are sharply lower than was the case yesterday, as implied volatility in E*Trade options plummeted nearly 22% overnight on news of the cash infusion. Front-month action has indicated willingness to buy December calls at the 5.0 strike, while the 6.0 calls have traded actively to buyers and sellers.
ASCA – Ameristar Casinos Inc. Options activity in Ameristar flew onto the Interactive Brokers scanners Thursday with unusual volume trading in its call options in the March series. The activity looks pretty bullish and is accompanied by a 5.6% jump in the share price to $31.70 on no notable news on the company. However, it’s the second such jump in activity in the shares in under a month. There is uncertainty surrounding the outcome of a 55% majority stake in the gaming company, which is controlled by the estate of deceased founder, Craig Neilsen. Since his November 2006 demise speculation has surrounded the prospects for the company and the estate has floated the notion that it may sell some or part of its holding or indeed merge with another entity. The prospect was also filed with the SEC in October. While existing management has no comment on the activities of the estate, investors reacted in October with a 14% surge in the share price. Management has also noted that it intends to continue a recent strategy of acquiring other companies such that its size might double. Most recently the company bought an Indiana riverboat casino and reported a 3.5% contribution to quarterly revenues thanks to just 12 days of operations at the riverboat. Today’s option trading in the company stuck out like a sore thumb. The number of current…
by phil - November 30th, 2007 7:57 am
Bernanke made all the right bullish noises last night but what's really got the markets in a tizzy is that the banks are going with my plan to freeze interest rates on sub-prime loans in order to give things time to work out. I proposed this way back in the spring but I guess that's the speed these things work but it was a very simple suggestion that the lenders simply forego jacking up the teaser rates on the loans they have outstanding. This allows people to stay in their homes and continue making payments while the bank suffers perhaps a 4% loss of 2 years' worth of interest on the home, rather than the massive loss they would take if they repossess and write-down homes.
I know – DUH!
So I can now fully endorse this rally as they've just done the smartest thing possible but it does remain to be seen how sweeping these reforms will be as banks are inherently greedy BUT, if C is willing to pay 11% for money and ETFC is willing to pay 12.5% for money then letting their borrowers pay them 3% interest instead of 8% interest doesn't look all too bad to the banks if it means they don't have to become borrowers themselves. This is infinitely more effective than a Fed cut in righting the mortgage issue and I am downright excited about it. Kudos to SuperBanker Paulson who was certainly the right guy for this job as he was able to lay it on the table and muscle the big boys in a way no other government official could and a shout out to the Governator, who got the ball rolling on this last month.
It all comes down to greed now as the plan being bandied about will have 3 tiers of borrowers and some sort of vauge needs test to determine eligablity with only those borrowers who A: Can't afford the new rate and B: Can demonstrate the ability to maintain payments at the current rate will qualify. I would prefer that the extension be given to anyone who is a primary homeowner with perhaps a scale-up over 5 years for people above a certain income/mortgage level but I am very proud of…
by phil - November 30th, 2007 7:21 am
Please see extensive comments on Apple and Dell position in $10KP Review as I feel silly cutting and pasting it but it’s all the same except for the number of shares.
I’m going to attempt copying in a different format, more like the weekly spreadsheets and we’ll see if it makes a mess or not. The same thing goes for GOOG as goes for Apple in the $10KP. I can’t do the minutia of every trade, when I say get out of a position, I don’t mean that second, I mean set a very tight stop and often I forget to emphasize that and I’m sorry as I see many people are still jumping in and out of things right when I say. I’m just trying to convey these trades literally as quickly as I’m making them for myself and short of linking virtual portfolios or making the trades for you (this is why we’re starting a club and a fund) I just try to tell you what I’m doing, generally before I do it.
So Google is another good example as we had the $710 calls and at 10:18 I said: "take the money and run on the GOOG $710s in the $25KP" and I should have said, "take the money and run on this run by setting trailing stops as we discuss ad nauseum in the strategy and K1 sections." I’m sorry if I don’t make clearer comments sometimes but you have to realize I am also manageing several virtual portfolios and repositioning dozens of spreads and, when I see one I REALLY like the look of, I tell you and give it an XXX. At the time of the post the $710s were $16.25 and the rule there is (as it was up from $9) set a 20% of the profit ($7.25) trailing stop ($1.50), NOT get out that second.
Since I wanted to get out I actually was watching for a $1 drop, which didn’t come until around noon, when I got the rejection I was looking for at $700 where I took $20.10 and ran. There is a HUGE difference between following the rules (and Optrader has made excellent comments on this subject) and simply executing trades.and if you LEARN to trade instead of asking for trades you can double your returns.
http://www.stockandoptiontrades.com/ is an excellent site (run by Sage) if you want to concentrate on a…
by phil - November 30th, 2007 6:26 am
Well there was a lot of activity yesterday and we need to have a clinic on entering and exiting positon because I see a lot of miscommunication here.
It’s very hard for me to go into great detail during the trading day but when we roll a position, like we did with Apple at 10:05 today, we should follow the same rules as when we enter a new one, which is to buy the calls first and set a sell-stop on the calls you want to sell. I apologize to new members but please, if you don’t read back a month of posts and comments as is srongly recommended, at least read the entire K1 section as it’s not possible for me to go over strategy every time we make a trade, I have to assume you have done some homework…
So when we closed out the painful $165/180 spread (even if you are "rolling" you are still buying to close your caller and selling to close your own position) we effectively picked up a new position from scratch. In my case, I ended up grabbing the $190s for $3.15 as I really didn’t think Apple would break $185. There was no reason at all to sell the $180s right then as my timing was perfect and Apple flew up about 10 minutes later (and those of you who keep asking for Email alerts need to be aware that the typical delivery lag would kill these trades).
I added more calls at 11:03 (the $185s at $5.90) and called the top at 12:01 (a little early) and that’s where I capped the new trade as well as the "roll" with a sell of the $180s at $9.75. We are doing these plays to teach but, as I keep warning, they are very complex and not for everyone but if you can learn to manage a 4-part trade on a wild stock like this, your regular spreads will start looking very simple.
As to DELL – If we can get out with a small loss we should consider ourselves lucky at the open. Our total risk (if completely wiped out) is $540 (net of 10 long calls and 8 short calls) so if we can get out for -$200 we should be thrilled as clearly this trade is not working! At $300+ it’s a judgment call as the odds of improving ourselves…
by phil - November 29th, 2007 9:15 am
OK, now that we’ve discussed what BS the rally is, let’s try to accentuate the positive this morning.
ETFC is getting a Citadel investment of $2.5Bn and we will pretend we don’t know that Citadel is up to their eyeballs in sub-prime investments and has been running around the planet propping up various institutions in order to protect their wider virtual portfolio. ETrade is selling Citadel their entire $3Bn virtual portfolio of asset-backed securities for $800M and Citidel will give them a $1.75Bn, 10-year note at 12.5% interest. Citadel will then pick up 17% of ETrade’s stock and take a seat on the board, kicking CEO Mitch Caplan out the door as the company takes a $2.2Bn write-off in addition to the $400M they have already set aside for Q4 losses.
Woo-hoo! Party time, excellent, woo-hoo!!! ARE YOU PEOPLE FREAKING NUTS?!?
I was banging the table to buy ETrade at $4 and I’m sure glad we covered at $5 because THIS DEAL SUCKS! If ETrade’s virtual portfolio was so worthless that they had to pay Citadel to take it off their hands with a 70% loss, then what the heck are the other financials hiding? This deal makes CitiBank’s 11% note look like a bargain but no one is projecting the kind of wholesale dumping of mortgage-backed securities. The big question that remains is: Did Citadel buy the worst or the best of ETFC’s $29.3Bn mortgage virtual portfolio, $12.4Bn of which were mortgage-backed securities. Supposedly, these were the loans ETrade was worried about and the company believes it can work out the remainder on their own. Gee, I hope they’re not wrong!
Asia had the usual rally based on our silly rally even though I don’t see the logic in exporters rallying over a Fed cut when they were just tanking on weak dollar concerns. I suppose this whole high finance thing is just over my head of something… Hong Kong and Shanghai jumped 4% on the day. We could mention that this is just a 20% correction off the 20% drop they’ve had and is exactly what we expected anyway but I promised to be positive this morning so goooooooooooooooo Asia! Going TO Asia are 3,000 PRU jobs in a $1.5Bn outsourcing deal while, over in the Philippines, an attempted military coup was quickly crushed so all is well I guess.
by phil - November 28th, 2007 11:54 pm
What, us worry?
Thank goodness all those silly issues that RELENTLESSLY dropped the market 1,200 points for the first 26 days of November all vanished in a puff of fairy dust at 9:30 yesterday morning! While I do believe in fairies, I do, I do, I also believe in fundamentals and none of them changed in the last 48 hours. Yes I do realize that I just said we were oversold at 12,800 but that doesn't mean we can't be overbought at 13,300 – who the heck expects it to happen within 13 hours of trading?
Of course we have the Fed comments but we just had a Fed meeting on Oct 31st, where they DID lower rates a quarter point to 4.5% AND THE MARKET DROPPED 1,200 POINTS. Leading up to that meeting the market ran up from 13,400 to 14,000 in anticipation of that move and now we've jumped 500 points already in anticipation of the December 11th meeting. With no new meeting until Jan 30th, this one better be a doozy to undo all the damage to the financial markets as we prepare to say goodbye to 2007.
One definition of insanity is to repeat the same behavior while expecting different results. Investors seem to fall for this all the time and our President is so proud of this tactic that he calls himself "The Decider," like it's some kind of super hero thing. His Treasury Secretary flies around the world saying "strong dollar" while sneaking home at the end of each trip to print more. Our Fed pursues their own version of madness by lowering rates a bit at a time like some kind of Chinese water torture and the bulls run the market up on every move as if THIS time a rate cut will fix everything.
How will a 0.25% cut, a 0.50% cut or a 1% cut help the 2M people who are ALREADY IN THE PROCESS OF LOSING THEIR HOMES? How will it help the 2M people whose mortgages will reset next year and very likely cost them their homes. A bank bailout is nothing but welfare for the top 1% (and this is you and me my friend if you have $100K or more in the market) in order to salvage the paper profits the financial institutions booked…
by phil - November 28th, 2007 6:47 pm
GS – gosh I wouldn’t be putting them… I guess you could take the opportunity to roll them higher but I think you are better off selling someone else the $200 puts and using that $6 (guess) to put yourself in the Jan $210 or $220 puts. If GS comes down soon, you can always adjust and, if they don’t, you’ll be damn glad you hedged.
It’s always good to sell calls into the initial excitemnent. Just remember, you can always sell 1/3 or 1/2 of 3/4, you don’t have to make all or none decisions all the time and I think 13,150 will be very tough to break without a firm test of 13,000 again.
AMZN – I’m having trouble getting good data on the Kindle. It was really a stealth product for them and could be quite the game changer. We know they are capable of mid $90s and the premiums are pretty good so I like the Jan ‘10 $70s for $35, selling $90s for $2+ but no hurry. This is a grind-out slow play but I think AMZN is safe up here and will make a nice income producer. Rolls down are $5 so every 2 sales buys you a bracket if you need it. XXX
BIDU – too dangerous to play with lately.
C is flying!
FXI looking like it’s taking off (so much for shorting BIDU!)
OIH – I wonder if that’s a defect we can buy into? Energy in general very weak but I wonder how many sell programs OIH just tripped? Yes, I have the Debit spread of the $170s and the $180s but there’s no price advantage to me taking him out right now but I will set a stop on my $180 caller at $9 in case it breaks back up.
Lots of profit taking so far into this rally, almost tempted to short GOOG back to $666 but I’m more in watch and wait mode right now.
I’m catching that MRVL knife today! I saw nothing bad in their report. May $12.50s are $3.50 ($1.20 premium) and the Dec $15s are .65 but I’ll wait to sell and maybe get .50 for the $17.50s if I’m right about this being…