Option Strategy Workshop: Rolling Contracts
by Phil - February 21st, 2010 8:04 am
OptionSage submits:
“Markets can remain irrational longer than you can remain solvent” - John Maynard Keynes
Much like
At the beach, many people stake out spots near the water but, as the day goes on, the tide gets higher and the people move to higher ground. Some people go much higher and some people move just a little but there’s a certain point where the water crests up onto the beach and sends everyone scurrying for higher ground in a mad dash.
Then it goes the other way!
Just when it seems that the water is going to go higher than it ever went before (and, thanks to global warming it does!) and just when you start to think the next wave will wash over the top and soak everyone, it suddenly stops and an hour later you can’t believe you ever thought the water would get that high as it seems so impossible as you watch it pull away from the beach, exposing sand that hadn’t been seen since the morning .
“The markets are like that. Frothy highs and "impossible" lows and lots of investors scurrying back an forth trying to guess where the next wave will stop (day traders) while others stake out medium-term positions (deck chair people) and still others make substantial long-term plays (beach house owners) and are willing to ride out even the harshest storms. While I have fun playing in the waves I guess I have to think of myself as a shell collector, looking for the opportunities that are uncovered once all the excitement dies down. Let the other people get soaked trying to guess the waves - we can do very well renting deck chairs in any market!
Rolling Options to Ride the Waves
In the stock market, renting deck chairs is akin to selling options (in this case call options). Always a buyer is on the prowl for the next great deal (the long call purchaser) and we can happily settle on terms (strike price and timeframe), content in knowing that nobody can take the premium we receive away from us (upon assignment or at expiration,…
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Weekend Trend Spotting and Portfolio Management
by Phil - February 20th, 2010 8:27 am
What a wild last 30 day’s we’ve had!
I’m going to do a little bit of charting today so we don’t miss out on the next potential Meatball Market (where bad news "just doesn’t matter") as we get past earnings season without any serious dings. Of course, like Icarus, they higher we go, the further we have to fall, especially when we’re getting there on wax wings but part of our fundamental outlook is looking at market sentiment along with the motives, means and opportunity of the manipulators.
The Fed threw a little monkey-wrench into the works Thursday with a surprise rate move but the market was amazingly unphased and, as you’ll notice on the chart below, we are neatly repeating the same move we saw in early November, when we waited 400 points for the correction that never came - until January 20th of course! This week, we took a few pokes at short plays and got burned and we went into the weekend a little bearish but mostly neutral. Our Buy List is off to the races, of course and only 2 of our 42 trade ideas there (AGNC and DF) are off course - I had meant to do an update this week but there’s no point!
We don’t pay much attention to the Buy List in our daily posts or even in chat because those trades do their job with very little fuss. Ideally, the bulk of your portfolio should be made up of boring, low-touch trades that make nice, consistent returns and THAT allows us to have fun with our more aggressive short-term plays that do demand our regular attention. Someone asked me about allocation the other day and I said that, generally, I feel 75% should be in long-term, well-hedged positions like the ones on our Buy List while the other 25% should be used for more opportunistic trading and, generally, we rarely stray from keeping 1/2 of that in cash to remain flexible.
Of our aggressive portfolio, we try to keep our allocations to no more than 10% of our cash on new positions (which means the more trades you make, the less you put into the next trade) and limit our losses to 20% of a full position or 2% of that portfolio MAX. 2% of 25% is 0.5% of the total portfolio. If our Buy/Write Portfolio is on track, then 75% of our capital is making at least 2% a month in a nice,…
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Alert, Alert - How to Make 68% in 4 Hours with ETF Options
by Phil - February 12th, 2010 3:21 am
A lot of people ask us how our Alerts work.
There’s not much to it actually. Alerts are free to Premium Members but they are just Emails that come from our normal daily Member Chat from myself, Optrade or the Oxen Group. Opt and Oxen usually send out trade alerts but I tend to concentrate on things I consider important enough to send out in case someone is away from their computers or (Heaven forbid!) on some other site. One Alert I send out almost every morning are our daily level watches and then, if something big changes, I’ll send out another one but I don’t do it often as I don’t like to bother people with Emails. We have special feeds for members who want to have every comment sent to them anyway.
Usually I send out my first alert just after the bell so we can see what the market looks like at the open. Sometimes we see a good play, sometimes we don’t. Today looked uncertain so posted two possible DIA plays at 9:33 in Chat that were sent out on our Alert system (it’s just an Email!):
So that’s it. This comment from Member Chat gets converted into an Email and ends up in your in-box a few minutes later. On top are my normal level selections for the day with comments about what to look for. As I had mentioned in the morning post, I didn’t even feel it was possible to make it to our 10,300 levels so I didn’t even bother cluttering this post with them this morning. We looked a little weak so I was more concerned about the downside but we held our downsides like a champ and bounced back nicely.
In chat, we took quick profits on the $99 puts and my follow-up comments were:
9:37: "Boy, we can almost count on these morning sell-offs lately. EU funds I think so I still want that upside play."
9:56: ".95 was plenty for the puts. For me, that’s a .15 buffer to enter the longs, now .75 but I don’t want them unless they either get back to .70, (where I’ll risk 1x with 1x at .60 and 2x at .50) or back over 10,020 with a stop right there."
11:19: "Let’s watch that 10,058 line, we either get through it or it’s a good place to buy the DIA $99 puts again."
11:48: "We’re moving now!!! Too much, too fast I think but maybe we get to…
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Dean’s Guide For Beginning Options Investors
by Phil - December 12th, 2009 1:26 pm
At the beginning proceed with caution – or – FOR GOD”S SAKE DON”T DO WHAT I DID!
If you’re reading this article, understand that I’ve walked in your shoes. Like you I was a new member to Phil’s Stock World, arriving on the site looking for companionship and education on my options journey. Probably like you, I had read a few books on options, dabbled in some trades, made and lost some money, but I was still looking for a system, as well as a teacher.
Having read Phil’s daily posts on Seeking Alpha, I was both amused and intrigued, here was someone who spoke plain English, obviously had some education, a passion for the markets, and an opinion on most everything! He also wrote on the importance of “being the house” – of being the on the side of the odds, and being consistent in an approach to investing. All these things appealed and made sense to me, and after reading the article Phil wrote on “How to Buy Stock for a 15-20% Discount” I decided to jump in with both feet. Being a quick study, I took the plunge in late 2008, just in time to have a single, very successful month in December.
Wow – 10-15% gains in my first month! It was a great Christmas Season! I was going to retire early! Obama took office with great promise, and I was keenly optimistic for 2009. I invested heavily, in a variety of sectors, across the board. I sold lots of premium, and things were looking good.
Well, you know what happened next, things went bad, then worse, and then downright scary! I had a number of sleepless nights, and the more I read, both on Phil’s favorites as well as the main street media, the worse things looked. I did my best, but on a number of issues, I pulled the plug and panicked. Not understanding how to roll down, I just sold, generally exactly when I should have been buying. In my first three months of trading, I probably lost 30% of my holdings.
Fortunately, I have some background (martial arts training) that taught perseverance, and I didn’t bail out on my new education altogether. I don’t expect you to understand from a martial arts perspective – but there’s a great summary on lifelong learning called “Mastery” by George Leonard – a former editor at Esquire. If you’d read…
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Educational Videos
by Phil - August 28th, 2009 5:52 pm
The following is a collection of podcasts and videos from the Options Clearing Corporation and selected others.
The cover a lot of ground and new ones are occasionally added to their site. They are not as good as the coursework from MarketTamer, who are Option Sage’s excellent group but these are free (as opposed to $99 a month with Sage’s PSW special) so take a peek at the subjects that interest you:
First up is a very good introduction to options basics from Adam Lass, a very good overview. His next episode is the basics of call options - hopefully he’ll do more. Then we have the podcasts from OCC:
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7 Steps To 40% Annual Returns
by Phil - June 21st, 2009 8:26 am
Just a couple of decades ago it would have been almost unfathomable for the retail investor to consider generating consistent returns above 20% per year. Indeed, those who competed in arguably the most competitive financial market place, the stock market, were considered gurus when they beat the S&P 500 year in and year out.
Others, such as Jerome Kohlberg, Henry Kravis and George Roberts made a name for themselves in private equity as did Peter Peterson and Stephen Schwarzman with the Blackstone Group. Gains in the stock market for Joe Public were subjected to a limiting factor - the inability to leverage substantially. Joe Public was also limited in participating in private equity investments; they were the domain of the rich - the insiders. These days, private equity still remains the domain of the rich, but leveraging is possible through the purchase of equity derivatives. And the sale of those same equity derivatives can be highly profitable too.
Whereas it would have been unthinkable years ago to consider making big profits year in and year out on a stock that doesn’t move much - because the only source of income, dividends, tended to be in the low single digits in percentage terms - these days options afford us the opportunity to sit tight and profit while holding stock positions. This can easily be achieved through the sale of short call options against stock holdings, otherwise known as the Covered Call strategy. While the Covered Call strategy may appear straightforward when first encountered, many applications may be employed. In this article, we will consider the application that Stock and Option Trades labels: 7 Steps to 40% per year!
Ok, so you want to skip this step and move on to Step 2. Wait!
One of the great quotes in investing comes from Jesse Livermore and pertains to this concept of patience. In Reminiscences of a Stock Operator, it is stated:
"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably…
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Vacation-Proof Your Portfolio
by Phil - May 23rd, 2009 3:30 pm
A couple of years ago, Option Sage (Gareth) and I put up a very popular article titled "Vacation-Proof Your Portfolio."
In it we discussed several strategies for hedging existing positions, moving them into neutral positions ahead of a time when you would be going away and not able to keep your eye on the markets. As we cashed out last week, it hasn’t been much of an issue coming into this long weekend but some of you still have long postiions that need protecting and Sage has been kind enough to provide us with access to a free on-line seminar on the subject through his educational platform at www.MarketTamer.com.
I don’t recommend many services but Sage was an original member who went on to write many of our educational posts over the years and went on to develop an on-line trading education system that is very, very good for learning stock and options trading. PSW members get a special offer of $99/month, which is 1/3 the going rate AND he will give you that $99 back if you are not satisfied after the first month! So check out the link above, there are 3 free lessons there and read through the article. If you plan on going away with positions open this summer in this crazy market - I think it will be time well spent…
Those of you who know Sage have probably already linked over but for those of you who didn’t get a chance to meet him when he was on-line with us all the time, here’s a copy of Market Tamer’s recent press release, which tells you a bit about Gareth and the company he’s been building:
Taming The Market
A shockingly simple yet amazingly powerful concept has been ignored by major hedge funds, mutual funds, and retail traders alike. On their quest to outperform the market, Wall Street’s best often get sucked into a single style of investing or trading: long only, long/short, distressed, diversified and the list goes on. They use a single approach to exploit a changing market. And often a single approach works - for a while. Bill Miller of Legg Mason was regarded as one of the stars on Wall Street until his portfolio suffered substantial losses during the crisis of 2008. Victor Niederhoffer was once acclaimed as the number one hedge fund investor in the world until his fund blew up. And in the past year countless others have…
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$100K Hedged Portfolio Update
by Phil - May 6th, 2009 4:48 am
Well, there was no reason to adjust the portfolio this weekend but now I’m a little concerned (as I went short-term bearish yesterday morning) and it’s a good time to review our positions.
Monday gave us a lot if cushion but that doesn’t mean we have to squander it. Our last review was on the 25th and we had made adjustments on the 21st in member chat, triggering the plays we had decided to wait for the previous weekend. Notice we haven’t really had a down day since so there has been no reason to adjust what has essentially been a bullish set. Yesterday, in comments, I called for covering our UNG play but that’s the only move we’ve had to make in 2 weeks. Sadly, vacation time is over so let’s look over our positions and see where action will be required:
Our original positions were:
- 500 UYG at $3.48, selling 5 May $3 calls for .72 and 5 May $3 puts for .28, net $2.48/2.74
- UYG now $3.91, May put and call combo now $1.05 = net $2.86 ($190 profit on $1,240 = 15.3%)
- We are fine being called away on this position
- UYG now $3.91, May put and call combo now $1.05 = net $2.86 ($190 profit on $1,240 = 15.3%)
- Selling 2 FAS $7.50 puts for .45 naked
- FAS closed at $9.40 so 100% profit of $90
- 500 C at $3.04, selling May $3 puts and calls for $1.11, net $1.93/2.47
- C now $3.31, We took out the callers for .30 on 4/21 and the May $3 puts are .20 = net $3.11 ($590 profit on $965 = 61.1%)
- We should close this position, it is above our profit expectations
- C now $3.31, We took out the callers for .30 on 4/21 and the May $3 puts are .20 = net $3.11 ($590 profit on $965 = 61.1%)
- Selling 2 IYF May $36 puts for $2 naked
- IYF closed at $41.80, May $36 puts $.35 ($330 profit on $400 =82%)
- Because of the stress tests, I would rather close these out
- IYF closed at $41.80, May $36 puts $.35 ($330 profit on $400 =82%)
- 4/21 Sold 2 IYF May $34 puts for $2.10 naked
- IYF closed at $41.80, May $34 puts $.20 ($380 profit on $420 =90%)
- Because of the stress tests, I would rather close these out
- IYF closed at $41.80, May $34 puts $.20 ($380 profit on $420 =90%)
- Selling 2 JPM May $29 puts for $1.95 naked
- JPM closed at $34.77, May $29 puts $.23 ($344 profit on $390 = 88%)
- Because of the stress tests, I would rather close these out
- JPM closed at $34.77, May $29 puts $.23 ($344 profit on $390 = 88%)
- 4/21 Sold 2 JPM $28 puts for $2 naked
- JPM closed at $34.77, May $28 puts $.16 ($368 profit on $390 = 92%)
- Because of the stress tests, I would rather close these out
- JPM closed at $34.77, May $28 puts $.16 ($368 profit on $390 = 92%)
- Selling 7 FAZ May $10 puts for $2.40 naked (adjusted to reflect Monday’s gap down open)
- Stopped out on 4/21 at $1.60 ($560 profit on $1,680 = 33.3%)
- 5 FAZ Oct $12.50 calls…
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$100K Hedged Portfolio Update
by Phil - April 25th, 2009 9:18 am
This week we made several $100KP Adjustments, which triggered during Tuesday’s chat.
However, only the entries on the new trades will be adjusted as the intention of the portfolio is to do weekly adjustments only on trades once we hit our entries. We don’t trust the markets enough this week to add any sectors so we’re still just messing around with the financials at the moment but we did add our DBC and UNG plays with mixed results.
On Tuesday I did suggest a couple of changes to the existing positions:
- Taking out the C $3 calls for .30 (now .44 - up 46%)
- Selling 2 IYF $34 puts for 2.10 (now .80 - up 62%) and rolling the $36 puts down to more $34 puts.
- Not big deal if you missed it as the $36 puts are still on track to expire worthless.
- Selling 2 more JPM $28 puts for $2 (now .73 - up 63%)
- Stopping out the FAZ puts at $1.60 as that was a 50% gain - they are now back to $2.83 (up 77%) and THAT is why we take profits off the table!
It is a very choppy market and we can make fantastic gains like this making mid-week adjustments. If you are following this portfolio - make sure you are signed up for Alerts (this one came Tuesday at 10:37) and our upgraded system will be able to put titles on the Alerts so future mailings should get your attention quickly when they are about the Sample Portflio.
Whether you made the adjustments or not, there are no changes to be made this weekend as we’re drifting into next week pretty much where we were at the end of last week and the puts and calls we sold are losing their premiums right on schedule. Our new trades are going well so far off the Tuesday entries and it really paid to wait:
- Selling 10 FAS May $6 puts at $1.20
- Now .57 (up 52%), need a stop at .65
- 200 GE at $11.28, selling June $10 puts and calls for $2.95, net $8.33/9.17
- GE is now $12.11 and the June $10s are $3.06 so very good so far.
- Selling 10 URE June $3 puts for .70 naked
- Now .43 (up 38%)
- 300 PGF at $10.23, selling May $10 puts and calls for $1.25, net $8.98/9.49
- PGF is now $11.22 and the May $10s are $1.90, also going well - don’t forget, this one is a dividend play.
- 10 DBC 2011 $15 calls for $6.30, selling 5 May $20s for $1, Now .45 so waiting…
- The 2011…
- The 2011…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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