Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Turning $10K into $50K by Jan 21st – Week 12 Update (Members Only)

What an exciting 10 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, back to 10,700, down to 9,800 again 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 range outlook. 

Rather than panic out of positions like these examples, a simple disaster hedge was used in the July 26th update to ride out the dip, while letting time (theta) decay contine to do it’s work on the premiums we sold…

The VIX was at 30 back on June 11th and that, in part, determines the nature of the trade ideas we decide to use.  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 but we lost our nerve at .41 because we couldn’t get .10 for the Jan $1s so we gave up (and rightly so it turns out) and cashed out for another $6,150 in profits for a total profit of $7,710.  YRCW is once again tempting at .25 but let’s see how next week goes first. 

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 .73 ($1,460) and the $4 puts have dropped to .84 ($840) so now net $620 (up 300%), slow but steady progress.  This one is a fine example of Theta decay working 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 less money back as time goes on! 

Do we take this play off the table, up 300%?  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, 1,070 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 .20 ($500) 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 $100 back already and a net $100 loss to date.  TASR is at $3.99 so on track to expire our putter for a loss of .20 more so let’s say this is one to give up if they fail $4 again as we’d be better off taking a $300 loss and moving on to something more productive but I do love TASR at $4 as a long-term play

BP was the riskiest trade we looked at but became a very nice winner. 10 Jan $17.50 puts sold for $2 ($2,000) are already down to .20 ($200) and looking like they will certainly expire worthless, up $1,800 so far.

The other half of that BP trade was the Jan $30/34 bull call spread at $2.20 (10 were $2,400) and those are now $3 ($3,000) so a very dull $800, 36% profit on this leg but up a net $2,600 on $400 committed on the paired trade (650%) is over target for our 500% goal already.  Our max profit is, of course, $3,600 at $34+ in Jan so we have "just" $1,000 more 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 3 out of 7 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 (but what a ride!) yet Theta, as always, is our friend and the $15 puts dropped to $1.32 ($1,320) so a quck $680 profit there even though the puts are .49 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

In the July 26th update I said: "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."  We didn’t make it so the spead was ditched with a .20 profit, up $200.  The vertical spread is still $2 and still interesting but we’ll look at new combinations next week – the important lesson here is take stops seriously!

So far, In this example, we have laid out net $4,250 on these 5 trades and collected back $5,850 last time on YRCW which left us letting ride a $1,600 cash credit as of July 26th.  We since decided to cash out $7,710 on the YRCW and $200 from the XLF.  That’s a net $9,510 profit and our liquidation value on what remains is $620 on C, - $100 on TASR, $2,600 on BP and $680 on XLF (but, of course, if you do liquidate – it would be less) for a total gain of $13,310 (up 313% from the original allocation) in round one so far.  This is not bad but a long way from $40,000!  Since we had our entire first $4,250 back plus a cash profit was off the virtual table.  On July 26th we initiated a second round of trades despite our less bullish outlook at the time when I said: 

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!

We ended up falling EXACTLY 5% to EXACTLY the 1,045 line and, sadly, rather than picking more bullish plays for this virtual portfolio, I spent a lot of time (in a tight week, for me) arguing with people who said we were doomed and that I was a fool for daring to be bullish etc., etc.  I have learned my lesson and will focus more on coming up with the trade ideas I feel will work in the future – these are just ideas, and people can choose to follow them or not but I can’t spend my whole day trying to "prove" that we’re at a bottom.  In the end, we all have to go with our gut, right?  Keeping track of virtual portfolios once in a while is the best way to determine whether or not the ideas were good or bad – not who "wins" an economic debate.  That’s not to say I don’t think it’s valid to discuss the economic situation and share ideas or even to debate them - but let’s try to keep it out of market hours, where I’m sure we would all rather concentrate of finding better trade ideas – thanks!

Our first new trade did not work out well as I thought UNG is still very cheap at $7.66 and hurricane season was predicted to be a big one.  Hurricane season runs through November so I chose 30 Jan $7/9 bull call spreads at .85 ($2,550), which are now .40 and down $1,350.  Offsetting that was the sale of 10 2012 $7 puts for $1.35 ($1,350), now $1.65 and down $300.  This is a disastrous loss of 400% on the net $400 play so far but, keep in mind that loss is still mostly premium as the $1,350 loss on the bull call spread can be completely offset if the puts expire worthless in 17 months. 

Still, this is not at all satisfying, is it?  Like YRCW, which fell to .11 before we pulled the trigger and doubled down, we have been waiting for Nat gas to finally finish falling but now comes the very difficult part.  It’s a small virtual portfolio allocation and this is a big loss, despite the offsetting profits.  The conservative play is to just kill the spread and take the $1,350 loss and then hope things work out next year to get us back to even.  I prefer taking advantage of the dip by rolling the 30 $7 calls down to the $6 calls ($1.05) for .47 ($1,410) and paying for most of that by selling 10 Jan $7 puts for $1 ($1,000) so net $400 cash added to the trade and the possibility of getting stuck with 1,000 shares of UNG at $7 at January expiration ($7,000). 

This is not such a terrible thing.  In a $100K virtual portfolio, the fallback of an unsuccessful short-term trade is to turn it into a long-term hold.  Currently, the 2012 $6 puts and calls can be sold for $2.65 so that $7,000 assignment can be reduced to a $4.35/5.18 buy/write.  If you don’t REALLY WANT to own 2,000 shares of UNG at $5.18 plus the possibility of another 1,000 shares at $7 in Jan 2012 ($17,360) for an average of $5.79 on 3,000 shares – then take the $1,350 loss now and be done with it.  Of course, if that is how you feel, it would have been better to get out with a $350 loss because this was the inevitable conclusion to riding it out

If you look ahead on these trades and plan out your next 3 or 4 possible moves, you will get a much better idea of where to stop out.  Of course, that’s a worst-case scenario and not likely to happen but, what if it does?  Well, at $5.79 (and UNG is $6.54 now), even if we can sell $6 calls for JUST .10 JUST 6 times a year, that’s a 10% ROI.  Since the Jan $8 calls are $1.50 out of the money and selling for .30, there’s .30 in 5 months right there which means the premise is sound, probably down to $4.50.  We still believe in our premise and we will pull the plug if we’re wrong but $3.75 has been a strong floor on natural gas and we’re coming to the end of the Summer storage cycle.  So doing the roll and setting a $700 stop loss on the new set, keeps this trade alive ratther than taking a loss on something we feel is way oversold.  Last year, Nat gas flew from $9 to $12 after bottoming on Sept 3rd – if we don’t get a good pop by the 17th, it might be time to pack it in. 

VLO was too close to our $16.50 buy-in to ignore at $17.09.  We liked selling 10 Jan $16 puts for $1.50 ($1,500) and those are now $1.18 ($1,180) despite the fact that VLO is LOWER at $16.94.  This is why we ALWAYS sell into the initial excitement.  The putter who bought the $16 puts for $1.50 was betting VLO would keep falling to $14.50 or less by January 21st.  Since VLO has stopped falling, those puts look less and less attractive every day and the bet loses it’s value.  Keep in mind that even IF VLO falls to $14.50 by Jan 21, all that happens is the putter gets his money back and you had a free loan for 6 months!  That loan was used to partially fund 20 Jan $15/17.50 bull call spreads at $1.45 ($2,900) and that spread is still $1.45 so a a net $320 profit (22%) on the $1,400 cash outlay so far DESPITE VLO GOING LOWER! 

I really liked 10 XLF Jan $13/15 bull call spreads at $1.22 ($1,220) and XLF has gone nowhere, but buying a spread that’s in the money is SMART and we’re still $1.52  and the spread is now $1.27 (up $50) and looking good.  We paired that with the sale of 10 Jan $14 puts for $1.12 ($1,120) and, again, despite XLF losing ground, the puts dropped all the way to .85 for another $270 gain so $320 gained off a net $100 cash commitment there so far but we’re still $1.52 in the money so no reason to give up on this one just yet

The most brilliant thing I did on July 26th was to add a disaster hedge to this set.  We went with 15 FAZ Sept $11/14 bull call spreads at $1.70 ($2,550), selling 10 Oct $12 puts for $1.15 ($1,150) for net $1,400 for $4,500 in downside protection.  The Oct $12 puts bottomed out at .19 when we flipped bullish last week but let’s call it the 50% stop I set when we made the trade for .30 as an exit (up $850) and the spread was interesting as the $11s topped out at $6.60 on the 25th while the $14s were $3.95 so that’s $2.65 realized on a $3 spread and, even though I was away, I certainly hope Members do follow our core strategy and TAKE THE MONEY AND RUN when you go up 50% on the vertical and you are now risking $2.65 just to make .35 more with 3 weeks to go

Of course, my favorite way to play these is to sell the calls (the Sept $11s) into the excitement and leave the naked callers (the Sept $14s) for a retrace but that’s more dangerous.  Even if you rode this vertical out, it’s still $2.15 so we’ll split the difference and call this exit at $2.45, which would be up $1,125.

So, not a total disaster in the second set (down $1,650 on UNG, up $320 on VLO, up $320 on XLF and up $1,975 on FAZ for net up $965 and a grand total of up $14,275 overall).  This is all the more reason to kill the UNG trade if you don’t REALLY like the potential risk of ownership.  We WILL find more trades for this virtual portfolio next week but I want to see what happens when the volume comes back first.  While we set out to make $40,000 and are currently "behind schedule" that’s no reason to take more risk – $14,000 is still a 140% profit on the allocated cash and is 14% of a $100K virtual portfolio – that is not something to be taken lighly and CERTAINLY not something you want to be giving back! 

 


Tags: , , , , , , , , ,

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!



Comments (reverse order)


    You must be logged in to make a comment.
    You can sign up for a membership or log in

    Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

    Click here to see some testimonials from our members!


  1. Phil, I do quite a bit of work with FAS and FAZ.  I have done some calculations and the degradation from the 3X ETF issue that I came up with was a little less than you stated here.  I showed about $0.75 per month since inception, about $0.33 per month over the last year, and about $0.42 per month over the last 6 months.  I’m just wondering if I am doing an incorrect calculation.  Under any circumstances, it is very important to understand this issue as we are using options on these leveraged ETFs.


  2. Phil
    I’m in the middle of a lake attempting to type on a cell phone so please excuse any typos. 

    I was studying you comment from yesterday and previous postings regarding covered call and buy write strategies and I have a few questions. 

    First off it occurred to me that I don’t fully understand your buy write strategy.  Is there anywhere on the site that explains the concept? 

    The covered call strategy is pretty straightforward, you buy a security and sell calls.  If the stock is taken away, you profit from the premium plus or minus the intrinsic value, or the option expires and you keep the stock and make the premium.

    Now, your post yesterday indicated the it’s rare that everything goes perfect. I thought the worst case scenario would be that the security tanked, and your stuck holding a stock that is worth less than your basis, and you could potentially have it called away for a negative net profit if you sell another round of calls.  Is there any other downside risk that you are aware of?  Having not sold covered calls before, is it common to have the worst case scenario play out when implementing this strategy?

    Getting to your buy write strategy, from what I can decipher, you buy less stock than you would if using the CC strategy, then sell calls and naked puts. The questions are:   What percentage of the security would you buy?  I’m assuming half. So then you sell the calls and sell puts. Again, I’m assuming that you would sell enough puts that it would double your position if the security was put to you. So is this the general premise of the call write strategy?  If so, then the best case scenario would have both options expire worthless and the worst case would have the market dropping and being stuck with double the security. Correct?

    Do you always use leaps with this strategy?

    What is the next step in this strategy after the security is put to you?

    Please explain what your talking about when you refer to having to roll.  I see a lot of comments on the member chat about rolling but don’t understand the concept. 

    Finally if you could lay out a typical buy write example using one of your dividend recommendations with the current option prices, I’ll try and developed a spreadsheet that makes it easy to follow the strategy and track the profitability of the trades. 

    I just read you morning post and it raised another question:  I’m tired of day trading and sitting cash at the moment. I’m ready to start building a long term, relatively maintenance friendly portfolio. What is the foundation of your portfolio, buy/writes? 

    I’m sure you’re tired of these newbie questions but any information would be appreciated. 


  3. Phil,
    If you have a chance, could you elaborate on how you would "fix" a vertical? As you know, an IRA account is limited on what we could do (no buy/write there or artificials) and verticals are an attractive way to spice up returns.  The Rev is working on covered calls, but it would be nice to add another strategy and outline the plan as much as we can. For example, to go back to one of PSW favorites – VLO. I could buy a very mellow Jan 2012 10/12.5 bull call vertical. My cost, $1900 (as of Friday) and I stand to make $600 as long as VLO stays above $12.5 by Jan 2012 (a nice 25% cushion). 5 trades like this one in a $100,000 portfolio add 3% to your returns. Not bad for risking 10%. On the other hand, suppose that VLO decides to tank and approaches the b/e point with let’s say 6 months to go. Fixing a naked put, easy, just keep on rolling if you don’t want to be assigned, but a vertical, I am not "smart enough" yet to know how to limit the damages in an efficient way. Remember, this is an IRA account, so no selling puts to fix the problem! And I am not mentioning other hedges that I would have taken. Just that specific type of trade. Rolling out could be an option, for example, I see that you could roll the Jan 2011 10/12.5 to the Jan 2012 7.5/10. That is obviously not the ideal situation. Thanks.


  4. Phil, Re: learning your lesson. Yes it’s time to let that go and move on because so many of the uber-bears here are  Obama haters. They are so wrapped up in their antipathy towards the guy that they cannot imagine any economic scenario with him in office that does not end up in the collapse of the market.  So you can expend time and frustration trying to convert the Yipcarls of the world and their Dow 5,000 world view. They O-haters will never let go of the notion of a economic collapse while Obama is on office. So let them buy their Jan 12 TZA naked 100 calls or whatever if that’s what they are insistent on believing.  Then they’ll all go broke, can’t contribute to any more Republican campaigns, more Democrats win, they will be forced to move into Revtodd’s shelter, but it will be OK because the donations we give the shelter from all the profits we made in the market will help to buy them a nice, hot bowl of soup. It’s a win/win/win right?? ;) :)


  5. Pahurik

    Thanks for the link.

    I wish I had seen it sooner.


  6. Phil--I am long some xom shares and would like to generate some income . Could you comment on a buy- write overwrite strategy, and pitfalls please?


  7. Kururi, what is you problem? I do not see uber-bears on this site and if peoples have own opinion about politics and  economy, its normal in normal world.


  8. Phil,
      As a newbie here in Apr I sold 10  2012 TNA 20 Ps,  & I’m OK with that, but it ties up margin & is an outsized position
    for my portfolio, & has made me gun shy of selling more.  I do see the advantages of selling premium & am looking at selling call spreads, but you’ve said adjusting spreads is difficult / less than optimal.  Could you elaborate, or link me to more information.
      Also, half of my total is in IRA so all ideas within those constaints is appreciated.
    Thanks & have a good holiday.


  9.  pahurik 
    What` your problem? Someone elect you the moderator?


  10. pahurik… hey – go for it!.. I love your posts, and you offer some "terrific" insight.


  11. Nice portfolio progress so far phil! As an interest aside, I spoke with several people today who are in hiring, and looking to fill positions. All 3 said that they had open positions that they were unable to fill….one has been inundated with resumes (mostly worthless, and the couple good ones were already taken), another was a hi-tech position and then people who applied were considered unqualified (others were felt to be out of work for too long and this was concerning), and the third said they were just having trouble finding the right candidate. Now most of these were middle management positions and/or computer engineer / security. But, I found it interesting. We of course, have trouble hiring in health care, but it has always been this way. I was encouraged to hear that these 3 companies were now looking to hire….


  12. Phil,
      I think what I’m looking at here is a variation of your mattress plays, selling $3 (2 1/2%) SSO & SDS call spreads, & adjusting with their money.  Not as clean as selling naked  Ps & Cs,  but doable in a IRA.
      Wish I’d understood it earlier.  Is S&P 1100  a good place to start ?


  13. Good morning!

    Decay/Johnie – The calculation won’t be steady because of the high premium and the changing VIX so it’s always going to be just an estimate.  We do take that decay into account on our plays though, it’s just important to know the pressure is always down on the ultra-ETF’s.

    Buy/writes/Exec – Hopefully you read the linked post and that helped.  More than anything else, a buy/write enforces a discipline of commitment to the position.  As I pointed out in the numbers in the earlier comment, no, there is no particular danger to selling a covered call and it is infinitely better to sell them, on the average, than not to – I was merely attempting to point out the disadavantage of the covered call to the buy/write.  Of course it’s rare that everything goes perfectly – I would hope that is a given… 

    As to the percentatges, see the Strategy Section notes on scaling in.  The trick is to allocate a percentage of your portfolio to a postion and then work your way backwards to an entry.  Of course, you may be more confident with some than others like if my allocations are $20,000 each, I may choose to commit $2,500 or less to HOV, which is inherently risky but $10,000 to PFE because I want to get my dividend and I don’t mind A) ending up with $20,000 at a 20% discount or B) ending up with $40,000 at a 40% discount if push comes to shove. 

    The most important thing about a buy/write strategy is (if you stick to blue chips that follow the S&P) that you KNOW how much you will make at what index strike (obviously with minor variations).  This makes it VERY easy to hedge and, more importantly, not to over-hedge.  Since we hit our buy/writes at about 1,045, 9,600 with 20% entry discounts we KNOW we make 20% at about those levels and we KNOW we don’t lose money until 836, 7,680 (20% lower) so we don’t really even have to worry about any major hedging until we are halfway down and just a light Disaster Hedge when we fear going below those lines is sufficient to cover us. 

    Don’t foget, NOT LOSING MONEY when the whole market goes down 20% is as good as winning in the long haul.  If I buy $10,000 worth of PFE at $16.50 (600 shares) and sell the 2012 $15 puts and calls for $4.70 then I’m in for net $11.80/13.40 with a 27% gain if called away at $15 (10% down) or I end up with 1,200 shares at an average of $13.40 ($16.080).  So my commitment is to own 1,200 shares of PFE in Jan 2012 IF they drop 10%, below $15 but I don’t LOSE anything until fall below $13.40, which is 18.5% below the current price. 

    So, if the market drops back to 836, 7,680 and PFE falls 20% along with the rest of the stocks (and we’re ignoring the dividend) and let’s say it’s at $13, which is around where it bottomed in ’09, other than the spike down, then I’m down 1,200 x .40 or $480 – EVEN WITHOUT A HEDGE (and ignoring the dividend).  While it sucks not to have made any money for 17 months, what’s the reality?  I still have 1,200 shares of PFE which I can sell for $13 and that’s $15,600 cash when EVERYTHING is on sale for 20% off.  Maybe I stick with PFE or maybe I flip to AAPL at $85 – who knows but if you can keep a portfolio EVERY YEAR that can withstand a 20% market drop without losing money – you will be beating the markets over time.

    Keep in mind the big difference with a buy/write, aside from the fact that you don’t need to mess around with it, it that you make 20% EVEN IF THE STOCK IS FLAT.  How HUGE of an advantage is that in your investing?  While that is also the case with covered calls, you are simply not as well protected to the downside on a month to month basis and you do not lock in the 20% gain if the stock jumps 10% in a certain month and stays higher or gyrates up and down outside of your covered range.

    Answering other questions in the multi-part essay:  No, we don’t always use leaps, sometimes we feel we are adeqately covered with shorter-term play.  With PFE, perhaps I would sell the Jan $16 puts and calls for $2.20 because I REALLY don’t mind owning 2x PFE at net $14.26/15.13 in 5 months or making a quick 10% if called away.  It’s riskier but I would say that, if put to me at net $15.13 THEN I would sell the 2012 $15s for maybe $3.50 to drop me to a potential 4x entry at net $11.63/13.32. 

    So that anwsers both the next step and the rolling question.  The next step is deciding what you want to do if the stock is put to you.  You won’t know the answer to that until you know the actual price of the stock at the time it’s put to you although having a plan with expectations means you have an early warning system when you are "off track" so far in advance that you shouldn’t get caught in a poor outcome too often.   Rolling is just shorthand for taking one option you sold and cancelling it and replacing it with another, usually longer-dated contract.  Rather than saying "If PFE is at $15.50 we would owe the $15 caller .50 and the $15 putter would expire worthless so we would then buy back the $15 caller for .50 and then sell the 2012 puts and calls for $3.50" it is much easier to say "If PFE is at $15.50 we can roll the caller to the 2012 $15 puts and calls for net +$3."  Like any profession, option trading has some "lingo" that experienced trades can use to communicate concepts efficiently. 

    Yes the foundation of a portflio is buy/writes.  Look at the market and imagine that every year for the past 10 years you had simply allocated 50% of your portfolio to trades that made 20% if the market was flat or up and you compounded that every year.  That’s why if you look back at our Buy Lists in the Portfolio section, you’ll see them dominated with this strategy.  Since the strategy forces you to hold a good deal of cash, there is plenty of money to day trade when you WANT to but you don’t NEED to because half your money is working for you every single day, driving towards a conservative, obtainable goal.  

    That takes a lot of pressure off!


  14. Phil,

    Thanks for taking the time to respond in detail to my questions. It helped a lot and I now pretty much understand the system.

    I didn’t follow this comment though: you do not lock in the 20% gain if the stock jumps 10% in a certain month and stays higher or gyrates up and down outside of your covered range.

    What were you referring to?

    So the next question becomes whether or not to wait for the market to dip closer to the bottom of our ranges. What’s your feel for September?


  15. Fixing a vertical/Stjean – Well, as you can see from the disaster hedges, those verticals can hold their value pretty well if you pick the right spots.  In the case of the $10/12.50s, your biggest issue would be that, as the stock drops, the $12.50s will add premium faster than the $10s and that will make it hard to escape.  There are, however, so many possible ways to fix it depending on the situation – you can roll the calls lower, or out in time or both, you could roll the callers lower as well, you can short the stock to cover, you can buy a put or you can just get the hell out when the stock passes a certain threshold.  It all depends on what you are willing to risk long-term and what your goals are. 

    As you say, you can roll the Jan $10/12.50s out to the 2012 $7.50/10s about even and that makes you 31% in17 months if VLO drops less than 40% – you say that’s not ideal but I say that you are greedy if you belive that.  Your fallback is to make 31% in 17 months with a 40% cushion and you are not satisfied and would rather put your capital at greater risk chasing less likely returns????  Why?  Because you are impatient?  Because you think you would be "missing out" on something?  

    There will always be a stock that makes 100% or 200% or 1,000% while you sit on a boring, old 20% trade.  There will also be stocks that lose the same amount but you will never look at tham as it’s human nature to always want more but if you plug 20% into a compound interest rate calculator $100,000 becomes $3.8M in 20 years.  THAT IS A LOT OF MONEY!  Let your friend brag about his 100% gain on this stock or that stock because he won’t brag about his losses and if someone day trades in and out with $100K and makes $100,000 (100%) every single year – they still will have less money than you after 20 years! 

    When you make a lot, you risk a lot and the more often you risk a lot, the more likely it is that you will hit a bad streak that wipes out your gains.  A little risk here and there is fun and can be very proftitable but if you are such a genius and will do better than $3.8M in 20 years with your day-trading – then what is the harm of committing 1/2 your capital to a sensible 20% annual target and gambling with the rest.  So if you have $100,000 and you invest $50K and  make your 20% a year, that’s $1.9M in 20 years and even if you blow the other $50K, it’s not so bad.  Anything you do make with your more exciting strategies would be gravy but try this:  Use the rate calculator on $50K at 20% over 20 years and lets say you make $50K a year on the gambling side and take 1/2 your winnings ($25K a year) and add it to the conservative side - plugging in a $25K Annual Addition gives you $7.5M in 20 years. 

    If that is still not rewarding enough for you?  I would have to suggest playing the lottery because even Las Vegas doesn’t have payouts that high! 

    Win/Win/Kururi – A lot of people (maybe you too) can’t divorce their feelings about politics/economics from their view of the markets and that’s a big problem.  Fox and CNBC bash the administration and the economy 24/7 and then they wonder why investors are leaving the markets.  If you are watching those channels – why on earth would you be in them at all?  Sadly, we have a nation of children who want a "quick fix" to everything with no concept whatsoever of sacrifice or long-term planning and those children elect childish leaders who promise them free candy with no cavities or calories - it doesn’t matter whether it’s true or not, it’s just an excuse to have free candy.  Maybe having children makes me more sensitive to this but I see it in my girls all the time – they WANT to do whatever’s quick and easy, they WANT instant pleasure, the WANT to avoid work – it’s my job as a parent to teach them the values of hard work and discipline, which I was lucky enough to get from my parents.  Government is supposed to do that too – it’s not supposed to be a popularity contest, it’s supposed to be about doing the right thing for the greater good of the nation.  Great leaders make unpopular decisions – this country has been run on polls since 1980, it’s very sad… 

    XOM/Lpjb – Well you own it and it’s $61.32.  I think $57.50 is the bottom of the range and maybe $70 is a bit too much.  The Oct $60 calls are $2.45 so they protect you well but offer just $1.13 of upside.  On the other hand, the Oct $62.50s at $1 offer less protection and less upside so the $60s are a way better choice if you don’t mind being called away.  $1 a month on XOM is a respectable 20% a year back so not a bad plan.  If you are more bullish and want to lean towards keeping XOM, then the Jan $62.50s do the job at $2.50.  They offer the same protection as the Oct $60s but have $2.50 more upside (if XOM cooperates) and there’s your $1 per month is one shot if all goes well.  On the other hand, you can pocket 20% right now by selling the 2012 $62.50 calls for $6.20 and the $57.50 puts for $6.60 which is fine as long as you don’t mind committing to owning another round of XOM for net $44.70, which is 27% off the current price.  Always there is risk and reward - do the work whenever you are selecting a stock and think through the repercussions of your decision, knowing what you intend to do if the stock goes up or down 20%.  If you are comfortable with your next move in either outcome – then go ahead!  You can’t guard against every contingency and having a plan for 20% should give you a chance, somewhere in between, to make adjustments. 

    TNA/Ekor – Nothing wrong with selling the puts.  As long as you REALLY want to own TNA at $20 or less (don’t we all now?) then selling naked puts is a great strategy.  Adjusting verticals is very difficult because you don’t really make money until near the end – until then your call and the caller tend to move in tandem.  The fact that you are asking the question indicates you aren’t experienced enough to go into spreads with the expectation of making adjustments on the fly so it’s important to take positions that you would be comfortable with at exirationl.  This is not all that complicated, VLO $12.50/15 bull call spread is $1.85 and you make 35% in 5 months if VLO holds $15.  That’s a vertical.  The net delta on the two calls is .15 and you will lose .15 more than the caller (10%) for each $1 VLO drops and you will gain .15 more than the caller for each dollar VLO rises so NOTHING will happen for you in this posiiton until time decays the premium on the caller. 

    Since no one NEEDS to adjust a winner, it’s always about the losing positions, right?  So VLO is down $2 and your vertical is down 20% – OF COURSE YOU ARE "STUCK" IN IT!  That’s why the reward is 35% in 5 months – friggin’ 7% a month!  You are getting that reward for commiting to that risk – it’s very simple!  There is no magic bullet that will remove all risk but still give you some fantastic reward which is why I stress, over and over and over again FUNDAMENTALS.  I see people taking trades on any random BS stocks and applying risk leverage and then, when the stock drops – they don’t want it anymore.  How can you invest like that?  DON’T BUY STOCKS YOU DON’T WANT TO OWN.  How’s that for a new rule? 

    So I’ve got a $100,000 portfolio and I want to buy VLO and I allocate $10,000 to the position.  Do I buy $10,000 worth of the Jan $12.50/15 bull call spread?  No, that would be INSANE.  If VLO hits $12.50 I lose the whole $10,000, which is as much as I would lose if I bought 2,500 shares of VLO for $42,000.  The purpose of a vertical is to limit risk, not quadruple it.  With $10,000 I would have bought about 600 shares of VLO but making .65 on $600 is $390, just 4% of $10,000 in 5 months.  If that is not satisfying to you then perhaps it’s a bad trade for you.  You can buy 12 verticals but then you have $2,220 comitted to make $780 and you simply have to decide you will stop out with a $1,000 loss to limit your loss on the allocation to 10%.

    Since there is a 10% cushion to the position and about 15% before your b/e point, you have a pretty good chance of winning and that makes the negative risk/reward ratio not so terrible.  However, when you make plays like this for leverage you always run the risk of being wiped out and having nothing to show from it but expired options – that’s why you’d better be damned sure of your targets and USE A STOPPING DISCIPLINE.  First of all, if VLO is at $16.94 now and I’m taking a Jan $12.50/15 bull call spread then what am I betting on?  I’m betting VLO will fall LESS than .40 per month over 5 months.  So if VLO falls .40 – I DON’T CARE.  If VLO falls .80 though, I become a little concerned if it’s in the first month.  Basically, just like the guidlines for taking winners off the table, if you are more than a month off track it’s time to do something about your position. 

    Looking over the strikes, with IRA restrictions I probably wouldn’t even play VLO if I can’t sell puts.  That’s true of many positions, you need to be careful in your selections and find trades that work within what you can do.  In an IRA, looking for leverage, I’d be more inclined to take a $10,000 allocation on VLO and buy 10 2012 $10 calls for $7.50 ($7,500) and sell 10 Jan $16s for $2.10 ($2,100) for net $5,400.  If called away, the profit is at least $600, which is 11% in 5 months.  If VLO falls to $12 (30%), obviously the caller would be wiped out and I’m in the 2012 $7.50s for net $5.40, which is .90 of premium.  Do I think I can sell .90 more of premium over 12 months to make up for it?  Sure I do so I like the positon and I don’t mind a bigger allocation.  If VLO falls to $10 (down 40%) and I’m down about $2K (estimate) what will I do?  I’ll probably be very happy to roll to 2x the 2013 or 2014 $7.50 calls and sell 1/2 x whatever calls fetch me another $1. 

    Plan, plan, plan and then plan some more and all these questions will go away and so will much of your worries.  Pick stocks that you are EXCITED about doubling down on if they drop 40% and you will have very few worried at all. 

    Dividends/QC – Hmm, no I didn’t but no time this morning.  I’ll try to get around to it.

    Hiring/Hanna – That is encouraging.  People expect miracles but a slow grind forward is about all we can realistically expect with jobs without government intervention.

    Mattress/Ekor – There’s a reson we don’t do mattress plays with DXD, the volatility is not your friend in those.  You say selling call spreads and IRA in the same sentence but isn’t that naked selling then?  The fact that you are asking questions strongly indicates that you would be far better off following the normal DIA mattress plays that we discuss constantly than making up your own special leveraged plays that will lurch you from crisis to crisis, don’t you think?  Maybe I misunderstand what you are saying when you say "selling $3 (2 1/2%) SSO & SDS call spreads, & adjusting with their money" but it sounds to me like you want to somehow play them off against each other and bet both ways or something – not a strategy I’m too fond of as it’s much more proftitable to pick a damn direction and be right about it. 

    Locking/Exec – I mean if you buy IBM at $125 and sell Oct $125 calls for $4 then you are called away at $129 even if IBM rockets to $140.  Now you must buy back IBM for $140 if you want to get back in and you’ve missed a 10% move in the stock, which is no longer a "bargain."  Then what do you do?  If your allocation on IBM was $25K and you used 1/2 of it for the 100 shares and the cover, now you have $25,400 and you need to spend $14,000 to buy IBM again and sell another $400 worth of calls so you are already out of whack for a DD and if IBM moves up another 10% and you make another $400, then it’s $155 a share and you have $25,800 and it will cost you $15,500 to buy it back again so you are out of IBM (because it’s not realistic to chase it) with a $800 gain whereas taking the buy/write at $125, would have put $3,000 back in your pocket and now IBM is $155 and your buy/write is $95/107.50 and you are 50% in the money so you don’t even need to protect what is very likely a $2,500 gain and you still have $15,500 to move onto another trade with and make money over there. 

    Yes, we wait for the bottom of a range to do major buy-ins.  Look over the Portfolio section and look at the dates where I make the posts (the original ones, anyway) – generally I try to time them to the top and bottom of the channel.  Of course we find individual bargains every single day – when a stock goes on sale, we like to buy them.  As to September, I still think we’re on dangerous ground and 10,700 would be very nice and 11,200 would be a surprise (but possible if we get some stimulus).  When the market is dangerous it’s best to stay in lots of cash and take opportunities when they come but don’t try to force things.


  16. Phil, thanks for getting back to me and setting me straight. I see in you answer to Ekor that you don’t think VLO is a good choice for an IRA since you can’t sell puts. Would you have criteria for inclusion in an IRA? Fundamentals, market leaders, volatility expectations? It’s probably a bit topic to begin with and maybe another buy list. The Rev has some ideas for this IRA portfolio but his goals are pretty ambitious (3%/month with covered calls). A more mellow approach could offer some different options. 
    On a different subject, on the S&P, we have been stuck in a range between 1010 and 1130 since June. We are approaching the top of that range. We are making lower lows which is good, but until we punch through 1130, I would be cautious adding to long term positions. The economic numbers are improving steadily but as you say above, everyone is looking for instant gratification and politicians who promise them that (although it’s not specific to this country – it’s a byproduct of the flow of information).  And politically, I am not sure we can expect news next week that would change the outlook much. Looks like the plan for the GOP now is to make sure nothing helpful passes before the election no matter what.


  17. Phil/locking

    Just when I thought I had it, you bombard me with a bunch of figures that confused me. 

    Ok let’s walk through this:
    If I have 25k allocated to IBM wouldn’t I be purchasing 200 shares and selling 20 calls for a net $800?  If so, I’m confused when you say:  ”If your allocation on IBM was $25K and you used 1/2 of it for the 100 shares and the cover”  So are saying that even though I have allotted 25k to IBM, that I should only invest half and save half for a double down?  I get the rest of you point regarding missing the run up and not chasing, 

    Now the buy write, I’m sure this stuff is second nature to you and other seasoned option traders  but I’m not following this: “whereas taking the buy/write at $125, would have put $3,000 back in your pocket and now IBM is $155 and your buy/write is $95/107.50 and you are 50% in the money so you don’t even need to protect what is very likely a $2,500 gain and you still have $15,500 to move onto another trade with and make money over there.”  

    I assume the 3k in your example is the premium from selling the puts and calls.  If the calls are paying 4 bucks, then are you saying the puts are paying 26 or are you talking about leaps that pay a different premium than you CC example?  I’m still stuck on an island without a computer so I can’t check.

    Ok so IBM runs up to $155 if we are selling leaps, are the puts dead?  What happens to leaps that are way out of the money but far from expiration?  

    Part of the confusion is because you didn’t indicate the premiums for the calls and puts in the buy/write scenario.   How did you get to $95/107.50 and what do you mean that it’s 50% in the money?

    Sorry for being such a pain in the ass.  I promise once I’ve mastered this strategy you won’t hear a peep out of me!!!


  18. Phil--thanks,I value your input


  19. Phil,
    Re your very helpful response (below) to fellow newbie Exec regarding VLO, I didn’t follow a few points:
    1." If VLO falls to 12 (assuming before expiration), for net $5.40 which is .90 premium"; how do you arrive at the premium of . 90)? Also if VLO is @12 at expiration there would be a loss of $3.40, correct (5.40 cost – 2 profit on $10 call)?
    2. "If VLO falls to $10, I’m down about $2K". this again would be with time remaining or else if at expiry the loss would be 5.40, correct?
    3. You’re referencing the Jan 2012s (2nd para) but do you mean the 2011s that you referenced to gains in previous para mentioning 5, 7 mth gains?.
     First of all, if VLO is at $16.94 now and I’m taking a Jan $12.50/15 bull call spread then what am I betting on?  I’m betting VLO will fall LESS than .40 per month over 5 months.  So if VLO falls .40 – I DON’T CARE.  If VLO falls .80 though, I become a little concerned if it’s in the first month.  Basically, just like the guidlines for taking winners off the table, if you are more than a month off track it’s time to do something about your position. 
    Looking over the strikes, with IRA restrictions I probably wouldn’t even play VLO if I can’t sell puts.  That’s true of many positions, you need to be careful in your selections and find trades that work within what you can do.  In an IRA, looking for leverage, I’d be more inclined to take a $10,000 allocation on VLO and buy 10 2012 $10 calls for $7.50 ($7,500) and sell 10 Jan $16s for $2.10 ($2,100) for net $5,400.  If called away, the profit is at least $600, which is 11% in 5 months.  If VLO falls to $12 (30%), obviously the caller would be wiped out and I’m in the 2012 $7.50s for net $5.40, which is .90 of premium.  Do I think I can sell .90 more of premium over 12 months to make up for it?  Sure I do so I like the positon and I don’t mind a bigger allocation.  If VLO falls to $10 (down 40%) and I’m down about $2K (estimate) what will I do?  I’ll probably be very happy to roll to 2x the 2013 or 2014 $7.50 calls and sell 1/2 x whatever calls fetch me another $1.
    Thanks again,
    Ken


  20. exec
    First you buy 200 shares of IBM which cost you @ 125.00 25,000$ Selling 1/2 the calls means you sell 1 call (20 calls are 2000 shares 100 shares = 1 call) If the 125 caller pays you for 4$ and the stock goes over 125.00 you will be called away 100 shares and you left with 400$ and in Phils example the other 100 shares now up to 140.00 capital gain 140-125 = 15$ x 100 1500.00 plus the 400.00 plus you receive 12,500$ from the 125$ called away. So you now have relative stock increased value of 1500 plus 12,500 plus 400. Now you can play with the 12900 and buy 100 shares and adding 1100 to buy 100 stk at 140: alternative you can use the remaining 100 stk and do the same play at 140 selling a 140 caller. Your upward profit is always limited to the caller you sell so if the stk goes over 140 you will gain nothing on the increase of the stock you will be just left with the original money of the sale of the caller. Now the 95/107.5 I can not explain sorry. But in general it will take time to understand Phil;s lengua and it helps to read three times over it. As well if you have TOS play with the positions on papertade and you can see how they fall in to place. Many times I am not sure that I should pay high margins even in PM and I set up the trad in paper trade just to see what will happen,  so in the end I can kick my back if Phil as mostly is right!!! Good luck


  21. exec
     
    OK after reading three time over I think I got it. If you would have left the 100 stock running and they now up 155 you actually in the stock for 95$ profit 30$ on your base price of 125$ so you hold your stock at 95 net and sell ONE 107 caller even that your stock get called away you still remain with the credit of the caller. The rest is just math.


  22. 95/107.5 means, that you buy stock 125 and sell calls and puts for 30.  Best you have stock 95 ,  worst case stock put to you 107.5


  23. IRA plot – Risk Management article
     
    I ran into some trouble posting on the main site this weekend, but you can see my article on safety and risk management with monthly covered calls at my website.  We will get it on the main site Tuesday.  (I think it has to do with moving from Word Press to Typepad.)  Just click on my user ID.


  24. pahurik
    Thanks that is an other way of looking at it . But the man aparently can not sell puts in his IRA acc. Sorry as a non American I do not got in to this.


  25. Yodi, you are from?


  26. exec
    Another method Plil talks about  is going artificial which has worked for me 60% or more of the time. A 3 way and not buy the stock buy a call, sell a higher strike call, and sell a lower strike put. Example IBM, buy 125 call, sell 130 call net $2.50 on the $5.00 spread, sell $120 put for $2.50 net $0 on $5.00spread. Over $130 you must pay for called away stock, you can call away the stock @ $125 and still keep the $2.50 for the expireing put minus transaction costs for an investment of only the transaction costs worst and if the stock drops below $120 put to you, @ that price, that is when you roll down before expiration or out for more time, same if over $130. The best case is the options expires stock between $120 to $130 and your paid $5.00 for the spread, fun play and pay when stock goes nowhere which IBM offten does, you don’t get any dividends because you don’t own the stock. The putter uses up margin that you have to have.


  27. pahurik
    Hi from Germany


  28. Holy shit guys…..reading your comments after 3 cocktails and I’m thinking mutual funds might be the way to go!!!


  29. exec
    The problem with mutual funds is in stagnent markets, which I expect to continue they charge fees and the free ones charge the most. I also promise they will drive you crazy about never sell when up hold till they go down and hold again and all the while the representatives are paid commissions on your dime. After a few years 3 coctails will only be a primer and the funds won’t be paying for them!


  30. VLO/StJean – Don’t get hung up on VLO in particular.  It’s more a matter of the return calculated on the vertiical spread isn’t worth the risk.  If I havd to ballpak it, I’d say I want to see no more than $3.50 for a $5 spread (pays 1:2) with at least a 10% discount to the top of the spread (the caller).  VLO simply doesn’t meet the criteria and is a volatlie stock and so makes for an unattractive vertical spread, especially if not accompanied by a naked puts. 

    In VLO I can take the March $13/16 bull call spread at $2.13 but that’s not very sexy as VLO is at $16.94 so I only have .94 leeway before it begins cutting into our expected .87 profit.   Even adding a naked put here doesn’t really save it as the $15 puts are just $1.13 and that puts you in VLO for net $16 and, if that’s the case, why not just go for the March $15 ($3)/Oct $17 (.75) spread at $2.25 as you are no more screwed if VLO drops $1 and you potentially have more upside?  See how my brain works….  I look at all these things every time someone askes me a question along with the other 100+ other possible combinations and I pick the strategy that I like best re. chance of success and my expected movement of the stock over the timeframe so don’t go looking for a "rule" that works every time – every stock is different and every option chain is different and changes every day – all we can ever do is make our best guess at the time.

    For comparison, a "good" one is SUN, also a refiner at $35.95 and the Jan $28/32 bull call spread is $3.10 and you can sell the $29 puts for $1.05 for net $2.05 on the $4 spread that’s 100% in the money with a worst-case of owning SUN at net $31.05, more than 10% below the current price.  Even without the sale of the put, there’s the same .95 upside but with an 11% cushion vs a 5.6% cushion on VLO – always take an extra 5% and you’ll perform 5% better, right? 

    IBM/Exec – Well if you ignore all of our advice on scaling into positions and just jump into a full commitment on day one then, yes, you would be buying 200 shares – good luck with that…  The whole point of using options for leverage and hedging is to stay flexible – not to box yourself into a corner.  Don’t forget that when you sell a call you pretty much "trap" yourself in the positon because you can’t stop out without taking out the caller, who will lose less money than you do on the way down (your delta is 100 on the stock) or, on a move up, he will prevent you from making most of your gains and, even if IBM looks toppy and makes for a good exit – you can’t without dealing with the caller.  On the buy/write – the disconnect is no one seems to get that this conversation started Friday and we were talking about selling the 2012 $120 puts and calls for $30.  I’m sorry I didn’t repeat the whole thing from scratch but since I was talking to the same people I figured we didn’t have to go over the whole trade again.

    So there’s no $4 involved in my play, it’s $30 x 1 contract = $3,000.  If IBM runs up to $155, the puts and calls will still be too much to take out early most likely but the poinit is they become "safe" and that trade is effectively done with the $9,500 cash investment that will make $2,500 at $120 in 2012.  That means, there is no neet to hold the other $15,500 allocated cash and you can now look for another trade to put money into.  That’s how you build a portfolio over time – develop "safe" positions that you don’t need to worry about and then move on to new positoons you scale into until they become either cashed or "safe." 

    VLO/8800 – Premium: $5.40 for a $7.50 puts is $12.90.  If the stock is at $12 we take $12.90 (the cost of the call’s position) and subtract $12 and that gives us .90, which is the premium of the combination of the call plus the strike price over and above the actual price of the stock.  Since you have $7.50 calls, what are they worth at $10?  Answer: $2.50 and we paid $5.40 and sold the JANUARY 2011 calls which expire in JANUARY and we still have a full year of premium.  These conversations are a bit silly as you are basically 3 moves down the lane and there are 100 possibilities (don’t forget the VIX would be higher if VLO dropped 40%) and you can’t go over the "what ifs" for evey one.  The idea is to ESTIMATE the potential damages and, if you are comfortable with your "worst case" and confident in your ability to adjust within the intended allocation then JUST DO IT. 

    It will take years of practice to make these things second nature but you are not likely to learn much without trying one or two so pick a stock that you REALLY want to own A LOT of long-term if things go wrong and start with that.  Then you just need to play it out and, eventually, you will get a feel for the ebb and flow of the options over time – hopefully…  A lot of this stuff is like going up to a chess teacher and saying "I’ve never played before but tell me what to do and I’ll enter the tournament" – that’s just not how it works – not if you want to win.  It takes time and practice, practice, practice and you WILL move up in skill level if you keep at it but there is no "secret" that will suddenly make the whole thing easy – it’s a lot of hard work and the field changes every day – that’s why you can make so much money at it and that’s why so few people actually do it, we get paid for working hard….

    Artificials/Shadow – Yes, those rock but no good for IRA people who can’t sell puts. 

    In IBM, for example, rather than tying up $12,500 on stock, even if your sell the 2012 $120 puts and calls for $30, it still ties up a lot of margin in and IRA ($215 to make $25 = 11.6%) BUT, even if you are in a CIVILIZED IRA that lets you sell puts, then you can go for the 2012 $100/120 bull call spread for $13.20 and selling the $110 puts for $9.70 and that’s $3.50 on the $20 spread ($16.50 upside) and the worst case is you own IBM for net $113.50 BUT, because you own the $100 calls, the real b/e point is $106.75, which is about a 20% discount and you net commit, even in IRA’s where you must set aside $110 to cover the puts, just $113.50 of margin and cash to make $16.50 (14.5%) if IBM simply holds $120 – not too bad. 


  31. Boy o boy now we killed the IBM deal


  32. exec… forget the mutual funds… take a stab at the currencies ( Ho Lee Schitt is one of my currerncy advisors – I’ll introduce him to you. )


  33. Phil/IBM

    Got it.


  34.  Thanks, Phil, these are very helpful discussions.


  35. Phil
    My problem with artificials is every time they reach 50% profit I think about rule 2 take the money and run which I do and later ask myself why did I do that, hold on you may end up 500%!


  36.  Shadow
    nobody get broke to take 50% profit :)


  37.  Phil/ TBT
    what is your outlook for TBT, it is a major looser in my portfolio (unrealized lost about 8% of total portfolio, mainly Jan12 35 puts which need to be worry about),
    pls advice what to do: cut it off? add more money and roll &DD? or just hold on and expect that it will be above 35 in Jan12?
    thanx


  38. Phil

    This is probably another dumb newbie question but I’m going to ask it because it’s been  bugging me. 

    In your IBM buy/write example, you buy the stock at $125 and sell 2112 $120 puts and calls for 30.   Let’s say IBM runs up to $155 two month after you buy it in November of 2110.  I had just assumed that you would have lost the stock due to the calls you sold.  Your comments below suggest that this is not the case. In these leap contracts, can the stock be taken at any time or only at expiration?


  39.  exec
    american style options can be executed any time, but because it is a time premium(specially for LEAPS) it is unlikely. So before exp. date you can roll your options and this way you can save/hold your stocks if you want


  40.  Exec,
    Looking at 5 and 10 year charts, $155 for IBM in Nov seems unlikely, but this is a hypothetical, so it would mean by a miracle intervention you make 24% on your stock purchase if you bought at $125.
    If you`d bought IBM at $125 on 8/24, you get @$17 for the call and @$15 for the put, 100 X $32, $3200. Your basis for the stock is $9300.
    The person who bought your call for $17 can take your stock for $12,000 any time he wants, but he paid $1700 for that right, so he`s not even breaking even until the stock hits $137. 
    Say it goes to $155 in Nov, and is called away. In that case you get $12,0000  from the caller and keep the $1700 he paid for that right. You lose $500 on the stock trade, but are up $1200 minus the commissions to but the stocks and sell the call. That`s $1200 profit on an investment of $10,800(actual cash you invested to buy the stock not including the put side of the trade). That`s 11%. 
    You still have the put you were paid $15 for. You can hold it, hoping to pick up IBM again at $120 in 14 months, or you can close the trade, pocket the money and move on by re-purchasing that put which has most likely dropped to around $7 if IBM is at $155. You would make @$8 on that side of the trade.
    So if you go back to your original trade which was $12,500 for the stock, minus the $3200 you received in the buy/write, you invested $9300. You would have lost $500 on the stock, made $1700 on the call sale, made $800 on the put sale, for a total profit of $2000 on a $9300 trade. 21.5% in 2+ months. Multiply that times six trades a year and you can see why losing the stock is pretty profitable.
    The beauty of that trade is that there is a much better chance your stock will be called somewhere around $140 then it will  go to $155. If the stock stagnates for 14 months, you make $3200 for your troubles. If the stock collapses, you only really paid $9300 for it and have another 100 shares coming at $120 for an average of $106.50 for 200 shares.
    You get so many more options trading this way and a downside protection from $125 to $93 to boot.


  41.  ben1b
    if it is still 10 months until exp. of the option, doesn’t matter how high will be IBM, chances close to zero it will be executed because it is still a lot of time premium on that option. Usually it can happen with high dividend payers close to dividend day and not more than couple of month left till the end of option


  42. exec and others
    Last year I played around with the ups and downs of ETFC, etrade. I had 5,000 shares and 150 $1.50 contracts that would expire after earnings. The price was up on talk TD Amitrade would buy them out but I was sure they would post a loss. I exercised the options and sold 20,000 shares @ $1.90 the next week, I paid about $.10 for the options, profit 300%. My broker at the time thought I was crazy but the stock dropped to $1.35 at which point I wanted to buy a bull call spread that he said I was risking too much on and didn’t. The stock went to $1.85 and I opened an etrade account because I made money on their stock. The point is it happens and like a stock being put to you which happens more often just sell the stock or as Phil says don’t sell putters on stock you don’t want to own. I hear sometimes a profitable bull call spread can end up with an assignment at expireation, again just sell the stock the next Monday to get your money back.


  43. question re taxes--I sold my house, so i can no longer itemize. so, can  Phil’s fee be deducted from anything?
    thanks


  44. drumkeerin
    I believe it is an expense like transaction cost but I don’t care if they say no, I just pay their requested ammounts. How did you sell your house?


  45. shadowfox-an in the family situation-getting old


  46. Thanks everybody. The comments this weekend have been very helpful. Now that I’m back to civilization, I’ll try to put together a spreadsheet that makes it easy to track the buy/write trades.


  47. drumkeerin
    I am no spring chicken either but want to take care of my parents 89 and 94 and take over their house that is much smaller than mine. I have spinal injuries, right leg doesn’t hold me up, and left arm is about the same, so mostly I can drive them around. My house is 6 miles from a ski area and nothing is selling here. The value has dropped from $800 to 500,000, taxes down $2,000 this year, too much snow for someone who can no longer ski or shovel snow, 23 degrees last night. I have no kids, wife died young, nobody else worked out.


  48. shadowfax
    I am possible a bit older than you but can not complain to much about my health. Have my admiration for you, as you are carrying the cross on earth. I do not know what your general portfolio is not only stk and options. But hell man sell the house and enjoy still where you can.
    I live in Cancun Mexico so I do not shovel snow but check that the ac is working the low in winter goes dow to possible 18 degress C and now we are midday about 33 C night 25C.
    If I hear things like this I appriciate what I have.
    God bless you man


  49. yodi
    Thanks I am trying to leave, I don’t have to sell but maintainance takes 2/3 of my disability check, live here or not. Cancun sounds nice and maybe someday, I just wish reeal estate would move here. I also have another possability in North Carolina  that came up today. The only negative is it will cost half of my investment account. In C last night it was about -5. I will be 60 soon.


  50. Phil,
     
    I put together a spreadsheet for the Buy Write strategy.  I think I have the formula’s right but hoped you could give it the once over to make sure the percentages are the same as when you caculate them.
     
    I have it set up so that once the strikes and premiums and are entered for the call/put, it should give you the potential profit scenerios as well as your net basis and put too basis.
    http://chart.ly/l73vkjs


  51. Good morning!

    Nice market takedown by the Journal this morning, who led off with an article questioning the EU stress tests saying: "From this point of view, it is not surprising that the doubts raised about the validity of the stress tests are weighing on the euro and also on other risk-correlated currencies."  Then, to make sure no one misses the article, they run another headline for the US markets that says "Concerns Over EU Banks Hit Euro" in which they quote themselves:

    New concerns about the ability of European banks to weather the financial crisis came after the WSJ story highlighted once again the weaknesses of the stress tests. The report helped to widen the bond spreads on peripheral debtors and knocked European stock markets lower as another wave of euro zone jitters hit the market.

    If this seems like BS manipulation to you, you will be doubly insulted to know that the US isn’t even the target of the manipulation.  Mr. Murdoch, an Aussie, is simply expressing his displeasure in a Labor Party victory in the Australian elections today and is knocking down their dollar by simulataneously boosting both the dollar and the Yen (also in the article is news that the BOJ will not intervene in the Yen, which is total BS) to push down his native currency and make a post-election statement.  Just a media giant throwing a temper tantrum this morning. 

    [EUSTRESS]Think about the "nature" of this story.  There is nothing NEW in this NEWs, is there? It’s the kind of article that could be written any time someone wants to push the markets.  Even the data they are using is from back on 3/31 – they didn’t even bother to update their facts for Q2!  Notice that the aticle is pure worst-case speculation by the WSJ, followed by comments like:

    • An FSA spokeswoman declined to comment.
    • CEBS didn’t disclose that the banks were calculating the figures in that way.

    Wow, pretty damning evidence that they couldn’t get a comment contrary to their BS on a holiday weekend!  Meanwhile, in  

    Of course, that’s knocking down commodities:  Copper is down 3%, oil 2.5% and gold is back below $1,250.  Nat gas is back down to $3.85 ($3.75 is still our buy point on the futures).  Miners will get whacked in Australia over the mining tax again, which the Conservatives were sure they defeated (kind of like the Conservatives in this country are already doiing a victory dance)  

    Asia had been flat with the Nikkei down 0.8% on Yen strength this morning and Europe was opening up but dropped fast and is now down 1% as Mr. Murdoch stirs the pot (he controls the British press as well, including the EU’s main satellite network) despite the fact that the Economist reported this weekend that the IMF concluded in not one, but TWO papers this weekend "that there is too much pessimism about public finances."

     The IMF argues that despite historically high debt-to-GDP ratios, many countries still have room for fiscal manoeuvre. Typically, the debate on the point at which a country’s debt burden spirals out of control has tried to identify a single debt-to-GDP threshold, above which things are no longer sustainable. The fund’s economists argue that a universal debt limit does not make sense.

    Also this weekend, BGN points out that According to figures to be published by the Bank for International Settlements, foreign bank loans and other commitments to Portugal, the Republic of Ireland, Greece and Spain, which are the so-called Pigs, rose by 4.3% or $109bn, in January-March.  This is actually a positive report that shows faith in the system but it’s the same data the WSJ spun into a doom and gloom scenario – isn’t spin fun?  

    Anyway, I was intending to make a quick comment and now I’m writing my post in comments but the point (from the perspective of the morning Alert) is that we shouldn’t take this move too seriously as long as our levels hold and, of course, watch the volume – we had NONE last week so the whole thing could topple like a house of cards but, if we have only a minor sell-off on strong volume – that will be a positive sign, not a negative one.  

    We’re still watching the same levels and using the 3 of 5 rule to guide our short-term trading so not too bullish until )(if) we pop the Dow AND the Nas, who were close but no cigar on Friday:

    • Up 2.5% (we hope): Dow 10,455, S&P 1,100, Nas 2,255, NYSE 7,000 and Russell 650
    • Middle Range (MUST hold): Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635.
    • Down 2.5%: Dow 9,945, S&P 1,043, Nas 2,145, NYSE 6,630 and Russell 619

    We’d like to see the S&P and the NYSE hold the line this morning but they only had about 0.5% wiggle room from Friday’s close.  The RUT needs to hold 635, which is 1% down for them and, if they don’t, then the S&P is a good short candidate.  

    SDS Oct $30s (now $2.62) give good bang for the buck as they were $4.75 on Thursdayj and $6.55 on the Friday before last.  Those are good momentum plays naked and you can take quick profits or look to sell the $31s (now $2.13) or $32s (now $1.75) to cover when they give you all your money back and then you can relax with a $1 or $2 spread and, if it moves back against you, you can wait until the $29 puts (now .43) hit $1 to sell them and that would put you in a very nice overall spread.  

    Keep in mind I’m not buying the drop but it’s good to have a cover play ready – just in case.