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.
Phil wrote: "Speaking of packing gear. Can Shadow or someone please make a laptop that has a main 17" screen that has two more 17" screens on hinges that open out when you use it? That would make me VERY happy when I travel."
Phil, have you seen the Thinkpad W701ds laptop? It has a 17" main screen plus a second 10" screen.
Plan/Redlog – Totally reasonable. Remind me on the weekend or even during chat and we can look at a few simple, income-producing plays. Selling front-month puts is an excellent way to enter any position. As I often say, as long as you REALLY want to own the stock long-term, then you hold all the cards when you sell the put.
Also, I was thinking 2012 calendar with TBT but noted you told Lionel Friday they don’t make good calendar candidate and was interested to know why that is. Thanks
Mauldin wrote a good piece regarding inflation/deflation. It would appear that TBT is not necessarily a good long play in the short to mediul term..
re update 1 on 10k to 50k— since i just became a member when and how would i play this–or get into the various positions
Good evening all! Well, Kansas is nice n’ hot/humid, but a little shower just wiped the slate clean and now it is comfortable out. While I was at the airport and reading this evening, I thought I would put something together about JnJ. Here is the link and Phil may have some other play that could work out better on the options side, so feel free to ask! Have a great weekend.
Hia – deflation – zhat’s vhat I am talkin’ bout!!!
Phil, (or anyone else)
In my self directed 401k account at Schwab, I can do covered calls or purchase protective puts but they don’t allow selling of puts/calls. Would you still recommend buying a stock and selling calls against it? or since that isn’t the buy/write strategy discussed here should I just do what everyone else does and buy stock/etf’s in an asset allocation strategy? any opinions are welcome…thx
sundevils…..How to trade in an IRA. A good question with no simple answer. Here’s my own take on the subject.
.A progressive brokerage house, like TOS for instance, will let you buy puts and calls, and sell puts with 100% margin. None of them that I know of will let you sell naked calls. Exceptions are sometimes made (I’ve heard) if you have a huge portfolio. So you are certainly restricted in what you can do in the IRA, no matter who the broker.
I’ve used all sorts of strategies in IRAs in order to maximize profits. That which has worked the best for me is buying calls, and puts, and holding them for profits, whether that be days, weeks or months. Something that might astonish many is that my greatest profits in my IRAs have come from holding calls or puts for less than a day. But you need to be very experienced to daytrade an IRA, and I would not recommend it for most. In all IRA trades tight stops are necessary unless you are at the computer screen all day. These stops protect you from losses while you are at your ‘other job’ and something unexpected occurs relative to your investment.
I’ve used stock purchases and selling covered calls. It works fine but is not my trading style. I’ve just been able to make more money with swing trading calls and puts. Important considerations are your lifestyle, your experience and knowledge, and your interest. Example: My good friend (call him Gary) has another job, little interest in the markets, and little experience with options. He buys stock and sells covered calls. Fine for him, but not for me. I’m not seeking profits of 10 to 20% per year in my IRA, but rather 30% plus. And this is a reasonable goal, even with IRA restrictions, trading calls and puts in an intelligent way.
And that is where this site comes in. Phil and others here are very knowledgeable about options strategies and how to maximize profits. Optrader, particularly, has a strategy which I believe is particularly adaptable to IRAs. Good luck.
Here’s an interesting article talking about the loss of the middle class, with primarily the rich and the poor remaining. It gives multiple interesting facts. finance.yahoo.com/tech-ticker/the-u.s.-middle-class-is-being-wiped-out-here%27s-the-stats-to-prove-it-520657.html
Phil (and others),
I’ve been a member for about a month and a half. First of all, let me just say a big thank you to all, for all that I’ve been able to learn, and for the confidence that I’ve been able to build in just the short time I’ve been part of this community. Phil, your vision of a powerful, evolved, diverse trading community has clearly come true, and I commend you (and your members) for that. It’s been worth every penny to date, not even counting the winning trades that I wouldn’t otherwise have made.
As much as I’ve enjoyed deploying some of the key strategies in my TOS accounts, I have another problem that I have yet to see discussed here. In my day job, I have a 401(k) that is very limited in the choices that it offers: a basic blend of mutual funds, corporate and government bond funds, and a "guaranteed" fund that’s somewhat like a CD (albeit with a somewhat better rate). It also has rules that limit how often you can move into and out of funds. The more I learn about options and strategies like buy/writes and hedging, the more disgusted I get with the 401(k), which doesn’t allow me to do anything except "go long," unhedged, and keep my fingers crossed. Yet my day job isn’t going anywhere for the time being, and the tax advantage of maxing the 401(k) out is still enticing.
Granted, I realize that the focus here is on options — and I’d dearly love to "jailbreak" that 401(k) into my TOS IRA, where I could do what I want with it! — but, in the meantime, what’s a good strategy for the 401(k)? Right now, the strategy is to be 35% "in" with buy/writes and hedges, because we’re "range-ish." But what does that translate into for an unhedged 401(k)? I’m currently sitting in the guaranteed fund because I’m not seeing the probability of explosive market gains from here, and the potential gains haven’t seemed worth the risks, given that I can’t sell options or hedge. Bond funds seem toppy. Am I off-base here? What would you all do in my situation?
I have an Oct AAPL Put credit spread 240/250 which I set up for 4.57 and currently is at 3.4 so am making money on it, which will be the best way to capture the maximum profit?, can I keep my short put (obviously making a lot of money) and roll the long? where to? down or up, out or in? Secondly, is this a good set-up to make profits or it can be improved or replace for something similar? (meaning no margin requirements). Many thanks and let me tell you that I am having a lot of fun and finding your site a golden mine for learning!! Keep on!!
Phil- Pharm’s JNJ play is:
I favor buying the January 2012 $57.50 calls and selling September 2010 $57.50 calls in a 2:1 ratio for a net debit of ~ $8.50. If one has the margin for it, selling an equal amount of January 2012 $50 Leaps as the 2012 Calls for $4 makes the entry a net $0.50.
I am also looking at a shorter term play- Jan11 50/52.50 spread w/ Jan 11 50 Putter- pays $152 on $.98 net and $400 initial margin.
July 24th, 2010 at 4:17 pm | Permalink
amatta / Sig rune
Look at the Stoch at 12:12 and 12:49; those formations are the clearest.
I was checking out the times you posted yesterday on Street. First off, I figured out that SS pro’s 1 min chart don’t work with this method. The web based charts on Schwab work better.
With that said, I’m still having some difficulty with the sig rune pattern you describe. When I watch the Stoch, it looks to me like there are constantly Sig Rune patters being formed. See attached chart from Friday: chart.ly/weszx9
How do you distinguish between a sig that is meaningfull and one that is not.
I was also curious about your strategy regarding positions that go against you. These triples move so fast that it is not uncommon to buy a postion then have it go against you a dime a more in a less than a minute, then turn and reverse to the positive, then visa versa. How low do you allow it to go before you bail?
I have the old insurance play TZA 2012 5c-12c vertical at $4. but I havesold the 2012 5 Puts at $1, and I am worried about this position. Per an earlier observation, I have sold the 2012 TNA Jan 20 puts at $4.3. My chief concern about these overall positions is price deterioration TZA-TNA combos on trades that still has18 months to run. Is there something else that I can do here to protect myself from a possible double whammy?
JNJ/pstas – sounds fine to me. Phil may have other ideas….
exec / Sig
10:00 is even better; it’s usually when the Stoch is below 20, you get a 20 point vertical, a slight fall-back, then another 20 point or better vertical, that tells me someone just triggered a program. It remains to be seen how strong a program, and I have bought into fake-outs before but it’s something I am used to watching so it works for me, specially at one of my lines; but if in the middle of a range, I may take a partial position and wait for confirmation to commit all funds.
Thinkpad/Jvest – See I knew that Shadow was ripping me off with his $40M price quote! I knew Taiwan or Korea would be the answer for me – just another example of why we outsource! 😎
TBT/Redlog – TBT is a hedge against cash. If you are not sitting on a lot of cash who’s value you need to protect then you are simply gambling that reates will go higher and betting against the Fed, which is dangerous at the best of times. The simplest way to produce a monthly income on a position is to pick and ETF that has $1 incriments and appears to be fairly stable. Here’s a couple of examples:
Playing/Savitri – Well, it’s best to do your reading first. We make new plays every day and if you follow our Strategy and go through the New Member’s guide you don’t need the hand-holding of these once-in-a-while posts. They are here to act as an example of how to play these trades over time. Read the 5% Rule post today. We are at an in-between spot where it’s much more dangerous to trade so it’s best to wait for the next proper opportunity than try to force your way into long-term positions from old posts. There will be at least $5,000 worth of new trades added to the above this week and then you have plays like the ones I just listed – it depends on your own portfolio mix and goals how you want to build it.
JNJ/Pharm – That is a nice one.
401K/Sun – As Iflan says, you need to shop brokers first. As you can see from the above examples, you can do very well simply buying stocks or leaps and selling calls against those. The trick is to pick ones that give you good bang for the buck. I mentioned WFR last week at $10.60 and they are now $11.68 but you can still sell the 1021 $10 call for $3.70 to drop the basis on a new entry down to $7.98 with a 25% profit if called away in 18 months as long as the stock doesn’t fall over 10% – that’s a nice little trade. VLO is $17.09 and you can sell 2012 $17.50 calls for $3.10, which drops your basis to $14 and a 25% profit if called. If those are stocks you are comfortable buying as long-term holds – why wouldn’t you want the free insurance?
It is Sunday and the coast is totally fogged in this morning, so I am working on some long term currency plays. I have a very powerful platform that allows me to draw lines on the charts in any manner I wish. I use this for the support and resistance historical values, as well as projections. Currencies move at a snails pace compared to the ultras you trade. I therefore can trade (usually) three or four max currency pairs simultaneously, and with my stops in place and the limits established I can "set and forget" and let nature take its course. Now to my question – does your program allow you to draw the lines you follow and to make adjustments as needed? Is it proprietary and exclusive to your trading style?
To all those that are wondering if we will have a tax increase in January…. Sec Geithner, today, made this statement " there will be no new US recession (ie double dip), and we should let the tax cuts expire" This is music to the ears of all democrats…. so LOOK OUT!
The possibility of a "double dip" recession appears to be doubtful. The preponderance of evidence that might support this occurance is just not there for the following reasons:
1. The corporate balance sheets are trending to the upside very robustly – up 52% in first quarter, and projected for a 34% increase the second quarter.
2. Almost all of the economic indicators are up.
3. Historicially, DD recessions are EXTREMELY rare – only one in the last 80 years ( (1980 – 1982 )
4. The bond yield curve ( 90 day T Bill compared to 10 yr. T Bonds ) points to the direction of a recovery.
5. Warren Buffet says weare definitely in recovery mode, and headed back up.
6. See Geithners comments above.
7. I feel it in my bones,,,, and Phil is recommending buy/writes again
Iflan and Phil,
Thanks for the info. I have an IRA at TOS where I can follow the buy/writes with no problem. I was just concerned about my 401k which is company sponsored with a fairly generous match so leaving that broker(schwab) is not really an option.
However being that we can write covered calls and buy calls/puts it sounds less restrictive than what Boobears describes so I will move into that area with the 401k….thanks again
Good morning, fog has burned off here, so I’m off for 18. As to my software, yes I can adjust any existing line a draw any type of line I want, in cluding those of a parabolic nature !!
Phil: when next JAN MY TNA CALLS30/CALLERS50/PUTTERS35 at OPEX : if TNA is then between 35 and 50, callers and putters expire at 0, calls will be fine and I close the spread with profit,
what about if TNA is either above 50 or below 30 ? what should be the move ?
Wipeout/Iflan – Very true and very sad.
401k/Boobs – If it’s not possible to move it to a broker that lets you at least sell covered calls yourself, try to stick to funds that sell calls for you or at least collect dividends (and reinvest them). Even if you get just a 3% buffer, at least you’ll do about 50% better each decade than someone just riding out stocks. I think a mix that includes some emerging markets is a good idea but mainly US Tech companies are the principal beneficiaries of outsourcing and that’s a rapidly growing global market that’s likely to survive almost any downturn.
AAPL/Cmsosa – Well, you sold it for $4.57, risking $5.43 and now it’s $3.40 and you risk $6.60. The only way you max out profit is to ride it to the bitter end and your risk/reward is flipped 2:1 now. The $240s (which is what I assume you own) are $8.90 and you sold the $250 puts, now $12.40. If you want to improve your chances on the spread, I would not put more money on the table without getting something in return, like rolling to the Jan $220 puts for $11.10 (+$2.20), which cuts your Theta (time) decay in half but costs you $20 in margin to do it. If AAPL heads down, you should be able to roll the caller down in strike and out in time and if AAPL flatlines or goes higher, the Jan $220s have a .23 delta vs. .29 on the Oct $240s so between that and the lower Theta, you should hold more value. That’s about it for adjusting – it was a good call for a spread and you can probably just sit on it and make 50% more off your CAR but, if the indexes can’t hold their levels – our 2 step process of 1) Taking the Money and 2) Running comes into play.
JNJ/Pstas – I’m a much simpler guy. If we think JNJ is going up to stay strong than it seems to me that the 2012 $52.50/60 spread for $3.90 pays a nice $3.60 (92%) in 18 months if JNJ goes up less than 5% and that it’s already starting 139% in the money so pretty much you start out with a winner and they have to take it from you. That can be left alone with no margin at all but let’s look at some logic here. The only way you lose on this trade is if JNJ finishes 2012 below $56.40 so no action at all is required on your part above that line. Currently the Jan (2011) $52.50 calls are $1.65 so ONLY IF JNJ trades down $1 AND we think it’s overdone, THEN we can sell the Jan $52.50s for $2+ and that cuts the net on the spread down to $1.90. If JNJ bounces back or at least holds $52.50 through Jan, then it’s a clean $1.90 on the $7.50 spread for the next year. If JNJ falls lower, then the 2012 $40s are $1.70 so that would be the roll on the put side and, if we still like JNJ we could spend a few bucks to roll down the 2012 $52.50s as well. So, if you REALLY would like to own JNJ for net $42ish in 2012 – this is a very, very nice play to be in.
TZA/Drum – Well TZA is effectively at $6.40 so that vertical is ugly all around. I would say that you have nothing to lose by selling (oops, I see you HAVE SOLD) the TNA 2012 $20 puts for $6.30 as that’s 50% down and 50% up on TZA would put you at about $10, less maybe $2-3 in decay so figure $7, which means you would keep 2 and not owe the $1 and end up being possibly in TNA at $20, which isn’t too bad for a bounce (and you can buy/write them much lower). So I like the logic of your position, you are very unlikely to lose on both ends and you are playing it smart. You should montior the decay and make sure you are not losing more than $1 per 6 months. Don’t forget it’s all rollable to 2013 – you just can’t see them yet! Meanwhile, you can also consider selling 5 2012 $5s for $3.50 ($17.50) and buying a 2012 $25 ($17.70) and buying back 5 2012 $12s for $2.40 ($12) and selling the $35 calls for $15.20 so you still have a $10 spread but you cut your net down to about $3.40 on it with about the same break-even price.
Double dipping/Gel – Oh sure, when Geithner says it, you believe HIM! 😎
TNA/RMM – You don’t care about over, you simply collect the net $20 between your calls and the caller no matter how high it goes. As to below $30, you become the proud owner of X amount of shares of TNA but you can always roll them to 2013 by then if you don’t really want them for $30.
Double Dip…. I forgot to mention that all of these values are weighted – Geithners’s comments are at only 1% of the total…. your input is weighted near the upperr percentage quotient. Total it all up and you get a much better than 70% probability of no double dip. I know you realize this stastical data is not totally scientific, and is subjectively biased, and has no relevance to any correlation relating to accepted principals which apply to standard deviation Therefore one must assume this data is nothing more than opinion, and reliance upon it is at ones own risk, and no further disclaimers will be noted.
Here is a nice short for you… UIS (unisys)… They report on Tuesday, and their revenue and earnings should disappoint. The stock went up Friday, and weakness should prevail throughout the week. I sold the August 22.5 calls naked for an income play.
"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)."
If I understand you correctly, you’re suggesting to sell one 2012 put for every three bull call spreads; in that case, the spreads would cost .85 * 3 = $2.55, from which one would subtract $1.35, for a net of $1.20, and not $0.40. Am I missing something here?
Here’s the calculation: $0.85 – ($1.35/3) = $.40 for each bull call spread.