What an exciting 6 weeks these trades have had!
The most important thing to take away from these hedged play reviews is how important it is NOT TO TOUCH THEM. We orginated this group on June 11th and the Dow was at 10,200 and it ran up to 10,600 and down to 9,600 and is now back to 10,400. We could have made some good adjustments and we could have made some bad adjustments but the best move is to do nothing with long-term, hedged positions while the market gyrates UNLESS something fundamentally changes in your outlook.
The VIX was at 30 back then and that, in part, determines the nature of the plays we take. The higher the VIX, the more we want to sell premium as we simply profit from the declining VIX (now 23.5). The idea of these picks was to find $10,000 worth of small plays that we thought could gain 500% by Jan 21st as part of a larger virtual portfolio. If you can do this with just 10% of a $100K virtual portfolio or 5% of a $200K virtual portfolio, that’s plenty of risk for these uncertain times and it’s a nice 25-50% bonus on the entire virtual portfolio if it works out. Risk can be a component of a conservative virtual portfolio if we wall it off safely.
Our first play was a fundamentals play on YRCW, assuming they wouldn’t go bankrupt. 10,000 shares at .21 was the original entry ($2,100) and I called an audible on this one on 7/7 to add 2x at .11 rather than stop out. That brought the net down to 0.143 on 30,000 or $4,290 so a bit more than a DD overall and we took 1/2 off the table this week at .29 ($5,850), turning this one into a free play ($1,560 profits in pocket) with 15,000 shares to ride out for our hopeful $1 target. We still want to sell the $1 calls for .10 – as was the original plan. Why not lock in another $1,500 that we can’t possibly lose on?
20 C Dec $3/4 bull call spreads were .62 each ($1,240) and paired with the sale of 10 2012 $4 puts at $1.08 ($1,080) for net $160 investment in the artificial buy/write. The $3/4s are now .70 ($1,400) and the $4 puts have dropped to .88 ($880) so now net $520 (up 225%), slow but steady progress. This one is a fine example of Theta decay woking on your favor: The 2012 puts do their job by getting cheaper while the spread more or less holds value. It’s like taking out a loan that asks you for less and lesson money back as time goes on!
Do we take this play off the table, up 225%? Well, our goal is to make a clean $2,000 on the $3/4 spread and we’re nowhere near that but the trade is clearly on target and we got past earnings so no reason not to hang on as long was we hold our major levels (10,200, 1,000 etc.). Just keep in mind that the focus is on the shorter-term bull call spread and there we have $1,400 to lose if things go badly so pretty much we move a stop up to $1,200 now and push it up another $200, each time we gain $200 more.
TASR is going nowhere fast. 20 Jan $5/7.50 bull call spreads were .35 each ($700) and are now .30 ($600) so our first loss in the group. Selling 10 Jan $5 puts to cover at $1.30 ($1,300), on the other hand, is working out well at $1.20 so there’s our $100 back already. TASR is at $4.20 so on track to expire our putter for a loss but we’ll have to wait until earning on the 27th to find out if we blew this one or not.
BP was the riskiest trade we looked at. 10 Jan $17.50 puts sold for $2 ($2,000) are already down to .72 ($720) and looking much safer for a 69% profit and, at this point, we do have an itchy trigger finger if BP can’t hold $35 as our risk/reward is now flipped and we risk the $1,380 profit to make another $720 (52%). It’s nothing to sneeze at but you have to compare it to putting $1,380 in to something that can make $5,000 instead…
The othe half of that BP trade was the Jan $30/34 bull call spread at $2.20 (10 were $2,400) and those are now $2.70 ($2,700) so a very dull 12.5% profit on this leg but up a net $1,680 on $400 committed on the paired trade (320%) is right on tract for our goal. Our max profit is, of course, $3,600 at $34+ in Jan so we have more than 1/2 of our gains still to collect but what is our rule? If you are up more than 50% with more than 1/3 of the time left to expiration (from where you started) you need to protect that gain so really we will have little tolerance for a pullback in BP. Keep in mind that these are our gains in 6 weeks out of 6 months – there is no need to be greedy, if we are forced to cash then we can find another set to play.
Our last play on June 11th was selling (we love to sell) 10 XLF Jan $15 puts for $2 ($2,000) and XLF has gone absolutely nowhere yet Theta, as always, is our friend and the $15 puts dropped to $1.58 ($1,580) so a quck $420 there even though the puts are .44 in the money. This is a good place to note how totally great it is to sell puts against stocks or ETFs that you REALLY want to buy. In a $100K+ virtual portfolio, we have no problem owning 1,000 shares of XLF at net $13 ($13,000) – it’s a little heavy but, hey, it’s the financials and they’re all on sale!
Leg #2 of the XLF play was 10 FAS Jan $21.67/27 bull call spread at $2 ($2,000). So the worst thing that can happen to us on this whole trade is we own XLF at $15 and we started the trade at $14.60. If you are a value investor and you don’t mind owning XLF long-term for $15, then selling puts to finance more aggressive spreads has very little downside to a long-term player. This is not rocket science, folks, just basic common sense buying stocks and selling options.
Now XLF has gone nowhere but FAS has dropped from $22.82 on June 11th to $21.98 on July 23rd. That’s important to take note of, we lose about $1 per month on FAS in a flatlining XLF. Fortunately, the Jan $21/27 bull call spread is still $2.20 (up 10% at $2,200) despite the decay. Why? Theta is our friend – as the VIX goes down both our $21.67 calls and the $27 callers lose value but our $21.67 calls are still .31 in the money and that helps a lot but not enough to make us very comfortable so we need to see XLF over $15 by the end of the month or we ditch this trade as an underperformer with too much risk.
So, so far we have laid out net $4,250 on these 5 trades and collected back $5,850 on the YRCW that was sold and we plan to get another $1,500 for the sale of the YRCW Jan $1 calls. That’s a net $1,600 credit and hopefully soon to be a net $3,100 credit and our liquidation value on what remains is $5,100 for YRCW, $520 on C, - $600 on TASR, $1,980 on BP and $620 on XLF/FAS (but, of course, if you do liquidate, it would be less) for a total gain of $9,220 in round one so far. Since we have our entire first $4,250 back plus a cash profit, now is as good a time as any for round 2.
As I noted in our 5% Rule Update, we are now annoyingly right in the middle of our range, which will limit our betting at this stage as we could go either way. Of course, we could always go either way but, as I explained in that post, it was much easier to take bullish chances coming off a 5% rule floor than it is when we’re back at S&P 1,100, where we could go either way 5% – especially during earnings season!
Speaking of seasons, UNG is still very cheap at $7.66 and hurricane season is shaping up as advertised (strong) already so I am still loving bullish combos here. Hurricane season runs through November and we can go for 30 Jan $7/9 bull call spreads at .85, selling 10 2012 $7 puts for $1.35, which is net .40 per $2 spread ($1,200). With this kind of play, if nat gas takes off and UNG hits $9 we can expect the 2012 $7 puts to drop to about .70 so, realistically, we’ll be thrilled to make 40% there and take them off the table, which would drop our bais to .65 and we pick up a $4,050 profit "best" case.
VLO is too close to our $16.50 buy-in to ignore at $17.09. I don’t know why you can sell the Jan $16 puts for $1.50 but you can so we can sell 10 of those for $1,500 and that buys us half of 20 Jan $15/17.50 bull call spreads at $1.45 for a net $1,400 cash outlay to make $5,000 at $17.50.
I’m surprised XLF is still laying around, maybe a pop now that the EU stress tests are over and I really like the Jan $13/15 bull call spread at $1.22 that’s currently $1.56 in the money and we can take 10 of those for $1,220 and offset by selling 10 $14 puts for $1.12 ($1,120) which is net $100 to hopefully make $2,000 and, don’t forget – we’re already $1,560 in the money so they have to come and take it from you!
Since we have several financial plays, it’s prudent to take some protection. Even a high-risk virtual portfolio should have some sensible hedging! Our uncertainty is short-term, if we survive earnings we will be much less worried so we go for a near-term hedge 15 FAZ Sept $11/14 bull call spreads at $1.70 ($2,550), selling 10 Oct $12 puts for $1.15 ($1,150) is net $1,400 for $4,500 in downside protection. Figure we stop out with a 50% loss and it’s pretty cheap insurance.
That’s plenty for now, we’ll have to see which way the wind blows as earnings season progresses.