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$101,674 Virtual Portfolio Update – Week 3

Slow and steady wins the race! 

We had a big run and capped our gains a little early for the week by doubling up on our PSQ (short Nasdaq) calls on Thursday's mad run.  This did the job of locking in our profits but that hedge is now making up $450 of losses, which is 1/3 of all our losses for the month.  Still we managed to gain $396 for the week with still just $28,537 in positions so that's another 1% for the week, a pretty good clip

I am happy to say that our $100K Virtual Portfolio is now live and available on at:

We're actually well ahead of our cash goal as we also have $86,101 in cash along with our $28,537 in positions with $13,768 in margin devoted to some of the longer hedges we've sold.  That leaves us with $147,935 in margin buying power and we're going to use it to do a few "stupid option tricks" into expirations that should pick us up a little extra cash over the next 5 days and Wednesday or Friday we must expect to make our rolling moves for the current month and I'll be sending out Alerts to Members later in the week.  For now, we are very happy with all of our current positions as we have 16 winners and just 7 losers – that's very good for a well-hedged virtual portfolio
There are only 6 September contracts for us to worry about and Wednesday would be the earliest day we need to make adjustments on those so we'll concentrate today on things we can make money on tomorrow.  The easiest was to start is to look at some stocks we may want to own for October and take a stab at selling some naked puts on them as we won't be too upset if they get put to us or we'll be happy to pocket the cash if they aren't.  We already sold the MHP October puts from last week's Watch List but we haven't filled the others.  As with those plays, we're not interested if we don't get our prices:
  • AMZN has a great premium and selling 5 $85 calls for $1.25 and 5 $85 puts for $1.75 (any net $3 combo) will either put $1,500 in our pockets or become a trade we will roll out to October. 
  • BAC is one we already have in the virtual portfolio and we can double up on the Sept $17 puts sold to add 5 naked sales at .50 as they are already offset by Oct $17 calls we sold and we have no problem owning more BAC for net $16.50.
  • ERY really hasn't moved much since the drop in oil and we're not expecting it to come back too much next week so selling 5 Sept $15 puts for .60 is another $300 in the bank against $3,750 in margin.  While selling against and ultra is a bit risky – we're being paid 8% a week to take that risk (416% annualized) and, should energy fly up again, we can turn this into a hedge against a long like VLO or SUN that we wouldn't mind owning long-term. 
  • FITB came down sharply last week on rumors they are close to failing.  These rumors don't seem to be true and, with the stock at $9.75 the Sept $9 puts are .15, if we can sell 5 naked for .25 ($125) then it's worth the $2,250 margin requirement for the week.
  • GE has a fun opportunity to sell 10 $14 calls for .80 and sell 10 $15 puts for .60 as that's collecting $1.40. which means GE has to move lower than $13.60 or higher than $15.40 (now $14.70) before the trade hits trouble.  This short strangle trade generates $1,400 in cash and requires $2,900 in net margin.  Of course, we only aim to make $400 on the trade.  On the put side, we really don't mind owning GE at $13.60 net but it will be annoying if they take off.   
  • HIG $24 puts are a good naked sale at .75 (5 contracts), which brings in $375 on $6,000 in margin. 
  • RF is another bank we have our eye on and if we can sell 5 naked Sept $5 puts for .25 on a move down that's another $125 in the bank against a possible cheap entry. 
  • TWM Sept $29 puts are a good naked sell (5) at .60, that's $300 on $7,250 in margin.  I like these because you can roll them down to the Oct $26 puts and it would take another 5% move in the Russell to get there and, at 595, they are having enough problems getting over 600 at the moment.
  • XLF is another one we don't expect to zoom one way or the other so another short strangle is in order.  Selling 10 of the Sept $14 calls for .65 and 10 of the Sept $15 puts for .65 gives us a profit target between $13.70 and $15.30.   
Those are the simple naked put sales.  If we get one or two, that will be great.  A few more complex trades also can make us some good money next week but these are NOT for the $100KP as we have yet to get the spread entry system working properly at Wall Street Survivor so I won't be able to track them but they are fairly low-risk trades:
BBY makes a nice offset to our PSQ calls and earnings are Tuesday so the premiums are high.  We can do a double diagonal spread on the hopes that $40 is about the right price, buying 5 Oct $41 calls for $1.60 and buying 5 Oct $38 puts for $1.60, Selling 4 Sept $39 calls for $1.90 and 4 Sept $40 puts for $1.65 for a net cost of .36 but anything better than .60 per contract ($300 debit) or better would be great on the spread.  Ideally, we want BBY to finish between $38.75 and $40.25 where we would owe net $1 back and we can assume our puts and calls would hold more than $2 in value.  
RIMM is like AMZN with a very nice payoff on the short straddle, selling the Sept $80 puts and calls for $3.30 total.  Those can be offset with the purchase of the Sept $75 puts for .35 and the Sept $85 calls for .20 for a net credit of $2.85.  Again, we plan on rolling out losses but having this buffer lowers our margin requirement considerably and that allows us to buy 10 of these spreads for a credit of $2,850 and net margin (after collecting the cash) is just $2,150, which is the max loss on the trade. 

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  1. Phil:
    Lower profit target on XLF short strangle should be $13.70, right?

  2. Yes, thanks – I fixed it.

  3. Phil:
    BBY: Don’t you owe back more than $1 if BBY finishes Sept expiration anywhere outside the $39-40 spread? For instance, you owe $1.25 for a finish at $38.75 or $40.25.

  4. BBY/Chaps – Yes but you have 25% more longs so it’s a per long calculation. 

  5. Phil, the TOS prices say:
    Buy 5 Oct 41 call and 38 Put,
    Sell 4 Sept 39 Call and 39 Put
    is a debit of $2.43 on that custom combination ..
    I am not sure what you mean with the above trade outline.  Did you mean 5 Oct and 5 sept contracts?  Even so, then it’s a 0.22 debit.  Something does not make sense and I am not sure what trade you mean.

  6. Phil – "AMZN has a great premium and selling 5 $85 calls for $1.25": so we are going with naked calls on the 100KP?  I want to confirm that before I actually enter that. 

  7. Hey javabean,
    I interpret Phil’s trade to be a sale on both a call and a put at the $85 strike.  So this is a short straddle on AMZN at $85.  If you can enter it as one trade with two legs, for a net of $3.00 for the combo, this is best.  I thin the WallStreetSurvivor, for a third week, cannot get combo orders to work….
    Best outcome is if AMZN is exactly $85 at expiration and the end of the week.

  8.  javaben
    "AMZN has a great premium and selling 5 $85 calls for $1.25 and 5 $85 puts for $1.75 (any net $3 combo) will either put $1,500 in our pockets or become a trade we will roll out to October."
    If you sell the $85 calls you also need to sell an equal number of $85 puts to complete the strategy. Executing only one half of the trade can leave you more exposed than Phil is advocating.


  9. Phil, I got you, my mistake.

  10. No, actually, Phil, read my comment again.  Your trade is not working, according to TOS, namely,
    Buy 5 each of Oct 41 calls and 38 Puts,
    Sell 4 each of Sept 39 Calls and 40 Puts
    is a debit of $2.43 on that custom combination ..

  11. Good morning!

    BBY/Jordan (and now I remember why I don’t do these trades, we end up discussing them to death):

    • Buying 5 Oct $41 calls for $1.60 (debit $800, net $800)
    • Buying 5 Oct $38 puts for $1.60 (debit $800, net $1,600)
    • Selling 4 Sept $39 calls for $1.90 (credit $760, net $840)
    • Selling 4 Sept $40 puts for $1.65 (credit $660, net $180)

    Net debit of $180 divided by 500 contracts = .36 per long contract.  You are really, in effect, collecting $2.55 (since your caller/putter WILL get $1 back no matter what) against $3.20 in longs.  The hope is that the Oct puts and calls hold more value than the Sept combo. 

    General comment on multi-leg trades:  If you do not understand the trade and how it may need to be adjusted or if you do not get the price we’re looking for – DO NOT MAKE THE TRADE.  These trades are not simple and are not for all traders.  Discussing them and you paper-trading them is fine but don’t ever enter any positiion if you do not understand the goals and possible outcomes and that takes practice, practice, practice on the more complex spreads

    AMZN/Java – Yes but you MUST sell the puts too or not enough buffer. 

    WSS/Jordan – They have a whole major system update to do to get combo orders in which, of course, is a big problem.

  12. AMZN:  Given the restrictions on WSS and the fact that I’m too busy to mess around during the day, my current entry on the AMZN trade is to sell the $80 puts for $1.40 and the $85 calls for $1.  That’s because I can’t enter the original combo and I’m hoping AMZN shoots down to $82 on a market pullback and gives me a good price on the $80 puts, which would make for a much better spread

  13. Morning Phil, thanks for the clarification.  I remember these uneven trades were discussed before.  I recall they can’t place them as is on the exchange to get better execution.

  14. Did you guys notice Gold is not displayed on the CNBC price ticker this morning (the one on top of the page that shows the fair value, futures, etc)?

  15. Where did you find that info for why FITB was down big on Friday. Rumoring it’s failing possibly being false? Where do you find that?

  16. Phil, I sold YRCW 5 calls awhile back and am seriously underwater now – any suggestions or should I just get out?

  17. Jordan – yes on the AMZN short straddle, but it still leaves me with a a naked call, so I wanted to confirm Phil’s suggestion.  Usually we seem to either have a long stock or long LEAP cover.  I agree selling the puts enlarges the buffer as Phil mentions and rolling gives us a way out.
    But that’s why I’m here!  This is a different approach then I’ve seen in any of the books (they never seem to address rolling, and I think that’s where a lot of the power is with selling options) or web sites.
    Thanks everyone for speaking up!

  18. PhiL :Last month I bought  LYG at $7.05 and sold Jan,10 calls for $.80. Not much change since then. I’m thinking of selling Jan. $7.50 puts for $1.30. What’s your opinion.Thank you