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Federally Fueled Wednesday – Low Rates and Tariff Delays – What Can Go Wrong?

The Fed makes their final decision at 2pm.

We'll be doing our Live Trading Webinar at 1pm, EST so we'll be reacting to the FOMC announcement live but, other than yesterday's little dip, we've been chugging along so far this week and I think only bad trade news can derail us now.  

With this President, we won't know for sure until midnight on Sunday whether or not there will be another round of tariffs placed on China.  Yesterday morning there was a rumor the tariffs were delayed but now the signals are back to being mixed and the situation changes by the tweet.  Trump is busy at the moment, lashing out at anyone not helping to get him out of his impeachment mess but it's too late now and this will drag on into next year – but traders don't seem to care.

As it's December 11th, we only have a month to go on our "5 Trade Ideas to Make $25,000 in 5 Months" so we'd better go over them and see if it's worth risking over the volatile holidays.  We hedged our Member Portfolios last week but these were just 5 trade ideas to make money to spend for Christmas – so it really is time to take them off the table:

  • Sell 5 VAC April $85 puts for $5.70 ($2,850) 
  • Buy 7 VAC Jan $80 calls for $20 ($14,000) 
  • Sell 7 VAC Jan $90 calls for $12.80 ($8,960) 

The net cost of the spread is $2,190 and, if successful, it pays $7,000 at $90 or higher for a gain of $4,810 (219%) in 5 months, though the short puts won't expire until April – it should get us very close to our goal by January.   The ordinary margin requirement of the short puts is $5,280 so a pretty efficient way to make $4,810 in 5 months! 

As you can see, VAC has blasted up to $124.98 so we are DEEPLY in the money on this one.  The Jan $80/90 bull call spread is now $45.40/$35.50 so the full net $10 there ($7,000) and the short April $85 puts are not 0.85 ($425) so net $6,575 is up $4,385 (200%) and I'd leave the short puts to expire worthless as it's still $425 more to be gained.  

When a stock has been as volatile as WBA, we don't have to play them to win – they just need to not go lower so we're going to engineer a spread that pays us if the stock simply holds $50 into January options expiration (17th):

  • Sell 10 WBA Jan $50 puts for $3.70 ($3,700) 
  • Buy 30 WBA Jan $47.50 calls for $5 ($15,000) 
  • Sell 30 WBA Jan $50 calls for $3.60 ($10,800) 

The net cost of the spread is $500 in cash and the ordinary margin requirement for the short puts is $8,918 and, if WBA is over $50 on Jan 17th, the short puts expire worthless and the spread would be $7,500 in the money for a $7,000 (1,400%) gain in 5 months. 

WBA is doing exactly what we thought they'd do so it's a good thing we took such a conservative position.  Understanding how options work means we don't need a stock to go up to make a lot of money and now the Jan $47.50/50 bull call spread is $11.50/9 ($7,500), which is all of the $2.50 we expected so grab that!  The short Jan $50 puts are now just 0.21 ($210) and that's net $7,390 and up $6,890 (1,378%) and we're very happy with that.

Meanwhile, we can take advantage of the opportunity and put our foot down at the $20 line (even though we're a bit below it now) and set up the following options play – the 3rd in our series of 5 Trade Ideas to Make $25,000 in 5 months:

  • Sell 10 LB Jan $17.50 puts for $2.80 ($2,800) 
  • Buy 25 LB Jan $15 calls for $3 ($7,500) 
  • Sell 25 LB Jan $17.50 calls for $1.85 ($4,625) 

That's net $75 on the $6,250 spread so there's $6,175 (8,233%) upside potential if LB can get back over $20 by Jan 17th (option expiration day) and it's an efficient trade as the ordinary margin requirement is just $3,834 so a very good way to make $5,150 into the holidays!  

Again, imagine how much money you can make if you learn how to use options to make money on stocks that go nowhere…  In this case, the Jan $15/17.50 bull call spread is right at the money at net $3.15/1.40 ($4,375) and the short Jan $17.50 puts are down to $1 ($1,000) so net $3,375 is up $3,300 (4,400%) but we can do much better – almost another $3,000 – if we leave it and LB stays over $17.50 so I say go for it.

We've played THC several times over the years, usually around $15 but we're not going to be so lucky this time but all we're going to do is play them not to go lower than $20 into Jan 17th expirations and we'll be home free with the following trade:

  • Sell 10 THC Jan $20 puts for $2.50 ($2,500) 
  • Buy 20 THC Jan $15 calls for $6.50 ($13,000)
  • Sell 20 THC Jan $20 calls for $3.10 ($7,500) 

That's net $3,000 on the $10,000 spread so $7,000 (233%) upside potential is not as exciting as our other trade ideas but THC is a lot more of a blue chip so possibly the least risky of the set.  Margin is also light, just $2,886 according to TOS in an ordinary margin account.

Wow, way too conservative on that one though we'll obviously be making our full $7,000 as we're almost 200% in the money now.  As I always say: "If we make strong, fundamental picks in the first place – the rest will usually sort itself out for us over time."  At the moment, the Jan $15/20 bull call spread is $22.25/17.50 ($9,500) and the short $20 puts are 0.05 ($50) so net $9,450 is up $6,450 (215%) but the extra $550 is pretty much a sure thing in a month – so I'd leave it.

#5 of our 5 Trades to Make $25,000 in 5 months is going to be Tanger Factory Outlets (SKT), which took a deeper hit today to $14.29.  I just did a whole Top Trade write-up on them on Aug 1st - $1 higher, so no need to get into that but, for the purposes of this series, the trade idea will be:

  • Buy 50 SKT Jan $12.50 calls for $1.85 ($9,250) 
  • Sell 50 SKT Jan $14 calls for 0.95 ($4,750) 
  • Sell 20 SKT Jan $15 puts for $1.85 ($3,700) 

That's net $800 on the $7,500 spread so $6,700 (837%) of upside potential if SKT is over $15 on Jan 17th.  Since we're selling puts over the current price, the ordinary margin is $5,741, so more than we'd like but, as noted on Aug 1st, I think SKT is ridiculously under-priced.  

Are you seeing a theme here?  We came up with these 5 trade ideas because we were cashing in our more aggressive portfolios and we wanted to pick 5 bullet-proof stocks and then use very conservative option spreads to give us a very strong chance of winning.  3 of our 5 picks did not go higher but ALL 5 of our picks are huge winners.  See how options can greatly enhance your trading performance?  

The Jan $12.50/14 bull call spread is now $3.50/2.05 ($7,250) and the short Jan $15 puts are now 0.30 ($600) for net $6,650 and that's up $5,850 (731%) and yes, I'd leave $6,650 on the table to make another $850 (12.7%) in 37 days.  

Notwithstanding additional greed from here, our 5 Trade Ideas have indeed made $26,875 in just 4 months so a very Merry Christmas to all of our Members!  

Since 3 of our 5 Trade Ideas have gone nowhere – how about we bonus trade them into Easter?  

SKT was practically our Trade of the Year for 2020 and I still love them at $16.  Earnings are mid-February though so the March option contracts would be do or die on that report.  I guess we'll go for it, but selling June puts – just in case.

  • Buy 30 SKT March $14 calls for $2.20 ($6,600)
  • Sell 30 SKT March $16 calls for 0.95 ($2,850) 
  • Sell 15 SKT June $14 puts for $1 ($1,500) 

That's net $2,250 on the $6,000 spread but there's only 100 days to play this time.  The upside potential is $3,750 (166%) and that's because we're selling puts on an upswing instead of a downswing – which is much better.  

LB has options in February or May so May it is in this case:

  • Sell 10 LB May $17.50 puts for $2.35 ($2,350) 
  • Buy 25 LB May $15 calls for $4 ($10,000) 
  • Sell 25 LB May $17.50 calls for $2.60 ($6,500) 

That's net $1,150 on the $6,250 spread so $5,100 (443%) upside potential if LB can hold onto $17.50 into May.  Next earnings are 2/26 so that's the only report we'll see ahead of our May 20th expiration.  

Had WBA not popped to $60 into Thanksgiving, they would have been our Trade of the Year.  $58.41 is still less than 10x their $6/share earnings – so what's not to love?  We can still play it conservatively like this:

  • Sell 10 WBA April $57.50 puts for $3.25 ($3,250) 
  • Buy 25 WBA April $55 calls for $5.50 ($13,750) 
  • Sell 25 WBA April $60 calls for $3 ($7,500)

That's net $3,000 on the $12,500 spread so we have $9,500 (316%) of upside potential here with earnings to look forward to on Jan 8th.  

So we're cashing out or first 5 Trade Ideas which used just $6,565 in cash and $26,659 in margin with $26,875 (409%) in gains and we're putting $6,400 back to work to make another potential $18,350 (286%) by May and we're doing this using fairly straightforward, simple trade ideas in a conservative fashion.  

Stock Options have a bad reputation but can be a very valuable tool for any investor's tool belt – don't trade without them!  Why do they work for us?  Because, like a broker, we SELL options more often than we buy them so we are the ones collecting the fees and making the money!  

Image result for dilbert options

 


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  1. I am literally exhausted from the constant lying and gaslighting coming from this administration. They can't simply make a normal happy statement about these tweaks to NAFTA, they have to call it the biggest trade deal in the history of the world. They can't accept facts from their own appointees, they have to keep spinning conspiracy theories and even let people like Lavrov spin them unchallenged. 

    It's like they get their copywriting done in North Korea! I miss Reagan now!


  2. If we taxed like a hellhole like Switzerland, we would cut the deficit in half! If we taxed like that horrible communist nightmare of Luxembourg, we could pay off our debt in 10 years!


  3. Interesting studies:

    https://www.marketwatch.com/story/there-are-two-versions-of-the-sp-500-index-this-is-the-better-investment-2019-12-06

    Wouldn’t the S&P 500 index be improved if it gave equal weight to all 500 stocks?

    Their argument gained particular credence in the years immediately after the 2008 financial crisis, when the equal-weighted version of the S&P 500 significantly outperformed the cap-weighted version. In six of the eight years from 2009 through 2016, the equal-weighted version came out on top, as this chart shows.

    Since 2016, however, the tables have turned. 2019 is shaping up as the third year in a row in which the cap-weighted version of the S&P 500 comes out ahead.


  4. Good morning, All!

    Join Phil for today's webinar at 1pm (Eastern), here:

    https://attendee.gotowebinar.com/register/2745941633403237645


  5. Good Morning!


  6. Phil not with you there WBA Apr 55/60 spread is 5000 and not 12000 or where I have this wrong?


  7. sorry you said 12,500


  8. CTL- can't get no respect :(

    New CenturyLink bear sees revenue pressure


  9. Phil – Just for clarification…

    I think in your write-ups you recommended to keep the LB and SKT trades until expiration but then you say you are 'cashing out all five trade ideas' in exchange for the three new ones.  


  10. Good morning!

    Exhausted/StJ – That's the idea.  

    Taxes/StJ – Meanwhile, what companies have left Europe and moved to the US to benefit from the low tax rates?  What happened to that fairy tale?  

    WBA/Yodi – Well, there's 25 of them so 2.5 x $5,000 is $12,500.

    WBA/Advill – Once something finds a good bottom – I'm happy to keep selling premium against a very long position for as long as it takes.

    Inflation perkier than expected in November

    • November Consumer Price Index+0.3% M/M vs. +0.2% consensus, +0.4% prior.
    • Core CPI +0.2% M/M in-line with consensus, +0.2% prior.
    • On a year-over-year basis, headline inflation is now at 2.1%, vs. consensus of 2.0% and 1.8% previously.
    • Core inflation on a year-over-year basis is now at 2.3% in-line with  consensus of 2.3%, and 2.3% previously.

    Atlanta Fed Business Inflation Expectations slightly down in December

    Quarterly Services Report

    App tracker sees Disney Plus at 22M mobile downloads

    • Disney Plus (NYSE:DIS) has been downloaded to a mobile device 22M times in the month since it launch, research firm Apptopia says.
    • That adds onto Disney's own data that the streaming service had 10M sign-ups through smart TVs, mobile devices and desktops after its first day. Disney's holding other numbers for its next earnings report.
    • Apptopia also says the app has averaged 9.5M daily active mobile users (tops in Google and Apple's app stores).
    • It doesn't know how many of the downloads came from free trials, but does estimate Disney has brought in $20M in revenue from the app.
    • And Google's annual search trends report says Disney Plus was the top trending U.S. search in 2019.
    • Apptopia adds that "we believe Roku (NASDAQ:ROKU) is seeing more engagement due to people watching a lot of Disney Plus."
    • DIS is up 0.7% premarket.

    Apple raised on holiday sales, 5G expectations

    • Bank of America raises its Apple (NASDAQ:AAPL) price target from $270 to $290, expecting AAPL to benefit from "5G adoption driving consistent 200mm+ iPhone units" in CY20-22.
    • BofA also cites the "attractively priced" wearables portfolio and continuing strong demand for the existing iPhones.
    • Evercore lifts Apple from $275 to $305, seeing a "robust" holiday season for the AirPods and iPhone 11.
    • Apple shares are up 0.3% pre-market to $269.35. The company has a Bullish average Sell Side rating.

    Nomura bullish on Norwegian Cruise Line and Royal Caribbean

    • Nomura Instinet thinks investors are missing the boat on Norwegian Cruise Line Holdings (NYSE:NCLH) and Royal Caribbean (NYSE:RCL).
    • Analyst Harry Curtis points to 5% unit growth and 3% yield growth for the two cruise line operators that should translate to 16% EPS growth.
    • "Demand indicators point to higher prices in 2020. Recent booking and pricing trends have accelerated from an already strong position. Across consumer, and including cruise, our industry sources believe that bookings during Black Friday and Cyber Monday have been up over double digits. We believe that RCL and NCLH, especially, are in a position to lift pricing further during Wave season," writes Curtis.
    • Nomura keeps a Buy rating on both NCLH and RCL into 2020.

    Markdown madness in retail?

    • The latest consumer price report from the Bureau of Labor Statistics revealed weakness in apparel prices for the month that included Black Friday and Cyber Monday.
    • Men's apparel prices fell 0.9% in November from a year ago and women's apparel was off 3.6%. Boys' apparel prices were down 3.9% and girls' apparel prices dropped 2.2%.
    • Also today, American Eagle Outfitters warned dramatically of higher markdown activity with its earnings report and guidance update. A similar theme on markdowns was heard on conference calls this quarter from Ascena Retail, Urban Outfitters, Francesca's and Designer Brands.

    U.S. crude supply rose 1.4M barrels last week, API says

    • The American Petroleum Institute reportedly shows a surprise build of 1.41M barrels of oil for the week ending Dec. 6.
    • Gasoline inventories reportedly show a build of 4.92M barrels, distillate inventories show a build of 3.24M barrels, and Cushing inventories show a draw of 3.53M barrels.
    • Energy Information Administration data to be released tomorrow is expected to show crude inventories declining by 2.8M barrels last week, according to S&P Global Platts.
    • January WTI crude recently was $59.07/bbl in electronic trading after settling at $59.24/bbl.

    Chevron to take $10B-plus asset writedown

    • In the biggest energy company writedown in years, Chevron (NYSE:CVX) says it will write down the value of its assets by $10B-$11B in its Q4 results, more than half in its U.S. shale holdings in Appalachia.
    • For the third straight year, CVX says it plans to hold organic capital spending flat at $20B, continuing its emphasis on short cycle investments which it expects will deliver improved returns on capital and stronger free cash flow over the long-term.
    • CVX says it will cut funding to various gas-related opportunities including Appalachia shale, Kitimat LNG in Canada and other international projects, and will evaluate its strategic alternatives for these assets, including divestment.
    • As part of its forecast for lower commodity prices, the company also is reducing the value of production from its Big Foot offshore oil project in the Gulf of Mexico.
    • CVX's sobering reappraisal likely will ripple through the oil and gas industry, forcing others to publicly reassess the value of their holdings in the face of a global supply glut and growing investor concerns about the long-term future of fossil fuels, WSJ reports.
    • CVX -0.6% after-hours.

  11. Clarification/Jeff – That's because you are not forced to do either.  I'm saying, officially, we're done with the first 5 but I, personally, would keep those 2 as I don't need the cash or margin for anything better over the next 45 days – so why not wait for the full amounts?  If, on the other hand, I were running a portfolio with just $100,000 in it – I would more likely want to get back to cash and wait for a better opportunity.







  12. Thanks Phil on WBA OK , possible my fault as I base the plays on 1 option play, not going like the multimillionaires to 25 and 30 options, as I feel it is easier to get out of 2, 4, or even 6 options than 25 or 30. Obviously everyone needs to make their own decisions.
     


  13. Thanks Phil--

    I have had a hard time closing deep ITM spreads (I suppose there are worse problems to have !)  I try to put in an order close to full value in TOS and just leave it to be filled but it rarely does.

    for example I have been trying to close/cash out the WBA spread for 30 days @ 2.45  (out of 2.50)-- TOS reads the "price of the spread" as 2.60 but obviously can't fill both sides so it goes unfilled.

    I got burned on THC -  as I tried to close them individually and only one side got filled (unfortunately it was the calls) and the stock took off exponentially the next day and the puts never filled so I actually wound up close to even on that trade (grrrrr….)


  14. Phil- You posted this yesterday:

    Virgin Galactic takes off again; +11%

    Virgin Galactic (NYSE:SPCE) is up another 11% to $9.35/share this morning after climbing 12% on Monday.

    While a near-term price target of $22 was set at Morgan Stanley, the firm predicts shares could rise as high as $60 over the coming years if the company successfully executes its goals of hypersonic point-to-point air travel and space tourism.

    SPCE haas warrants which entitle the holder to buy SPCE stock at $11.50 per share for five years.  (Expiring in October 2024.)

    If the stock moves to $40- %60 in 5 years they offer tremendous leverage, currently trading at $2.28.    FWIW, I bought some, and I'll put them away and see what happens.


  15. 5 trades – thanks for the ideas. I played it somewhat differently.

    VAC – pass

    THC: bought 20 Jan 21 $20 long synthetic stock @ $1.21 unrealized P/L +$32,700

    THC bought 20 Jan 21 $18 puts for $4.01 unrealized loss -$5,150

    so net profit currently around $27,500 with all the upside still to play for and the long puts not really necessary (famous last words). That unlimited upside was something I was trying to capture which was the most frustrating thing about the PSW-ABW setup.

    SKT – sold Jan 20 $15 puts – $1.17 – should be a winner. My main REIT vehicle is NLY.

    LB – I continue to manage the holes that this stock digs itself into every few months. I cannot share the love that Phil has for this name, and I watch with interest the continuous trade ideas that are shared on LB, but stick to the principle of not adding to my losing positions. Of course if I had traded it every time it was mentioned I would have had some winners – but real money trading doesn't work like that.

    WBA – another PSW pick that has blown up a few times, so I was somewhat leery on going too gung-ho, so went for a cautious setup:

    WBA: bought 20 Jan 21 $50 long synthetic stock @ $0.76; unrealized P/L +$13,750

    WBA bought 20 Jan 21 $52.5 puts for $7.60;  unrealized loss -$7,600

    However monthly straddle/strangle selling has been a massive income generator on WBA which already covered a couple of times the cost of the long put protection.

    The hedged synthetic is doing exactly what I wanted it to do. Being able to ride the momentum when it kicks without any upside cap, and a defined risk on the downside due to the purchase of the LEAP puts. 

    Another example, WSM that I went for Yodi's setup of long stock and selling of front month strangles. Over the last 6 months that has been quite a bit of work adjusting, bur still a profitable setup. But I decided to replace the long stock with hedged synthetic stock whilst still selling front month straddles/strangles:

    WSM: bought 20 Jan 22 $67.5 long synthetic stock for a CREDIT of $2.50 (when the Jan 2022 LEAPs came out there was some bizarre mispricing of certain names); unrealized P/L +$8,500

    WDC bought 10 Jan 22 $62.5 puts for $12 (bizarre pricing also works on the downside, but I only took half a position; unrealized loss -$3,000. Those are not great returns, but again the selling of monthly premium more than makes up for it, Currently I have sold the Dec 19, $67.5 / $70 strangle with a unrealized P&L of $13,000 – they had to be rolled a few times, but eventually they will be closed out for a substantial profit.

    Of course, traders on the long side are flattered these past few months, so let's not mistake luck for skill!

    I traded a raft of short Jan 20 puts on a variety of names and they have all been winners (e.g. AAPL, CMG, DIS, NKE, TGT,  TXN, SOXL).

    Fish – Pond – Shooting.


  16. Strangely enough on SKT WBA and THC , I am holding various positions
    SKT with 1000 stocks and an average of  4 to 5 option plays, started Mar. 2018 and I am down some 2,800.00
    WBA with 300 stocks and an average of 2 to 6 option plays, started Mar 2018 and I am up some 40.00
    THC with 200 stock and an average of mostly 6 option plays, my record goes back to Nov. 2016 and I am up 12,300.00.
    I do not take div. payments in to consideration. Just a cherry on the top.
    Not that I am complaining but like to show you how different things can work out.
    Obviously the stock is only a paper loss as long as I do not liquidate the same.

    Just to show you that you can gain or lose in different type of plays. But by not putting all eggs in one nest, one should get out in a positive light.


  17. Winston as shown one should not always fish in the same pond.


  18. Closing/Jeff – If you have 30 spreads, like the WBA Jan $47.50/50 spread, try selling 5 at a time so as not to get burned.  

    The Jan $47.50s are $9.60/12.45 and WBA is $58 so they are $10.50 with no premium (last was $15)

    The Jan $50s are $7.90/8.60 and WBA is $58 so they are $8 with no premium. (last was $8.20)

    As WBA is down 0.37 today and the delta on the $50s is 0.91, I'd offer 0.35 less than last or $7.85 for 5 and I'd ask for $11 on the $47.50s and see which one fills first.  If they both fill, my $2.50 spread goes for $3.15 and, whichever one fills first, I then tweek the other to sell it as close to net $2.50 (or over) that I can.   Once I fill 5 and 5, I offer up the next 5 and 5 until they are all gone.

    Fills go the same way, only take a position if you get a BETTER price.  You don't NEED any of these positions – why chase?   

    Also, use your head.  If the stock is going down and the market is going down – sell the long calls first and then sell the short calls – a little swing trading goes a long way towards improving your spreads.  

    • SPCE/Albo – I want to set up a "Future" is now Portfolio, let's talk candidates:
    • SPCE
    • TSLA
    • BYND
    • SPWR 
    • LMT (Fusion) 
    • DIS (entertainment) 
    • XYL (water treatment)
    • WM (more people, more waste)
    • CRSP
    • IBM (AI) 
    • QCOM (5G…) 
    • ISRG 
    • BLDP, PLUG, FCEL (not sure which)

    Additional ideas would be appreciated.  

    Ponds/Yodi, Winston – I'm never ashamed to go back to the well.  People fish the same lake their whole lives – you just need to know the difference between the waters that replenish themselves and ones who don't.  

    Oops, Oil just collapsed – taking the indexes with it.  ROFL OPEC!

    Crude inventory unexpectedly rise

    • EIA Petroleum Inventories: Crude +0.8M barrels vs. -2.8M consensus, -4.9M last week.
    • Gasoline +5.4M barrels vs. +2.5M consensus, +3.4M last week.
    • Distillates +4.1M barrels vs. +1.6M consensus, +3.1M last week.
    • Futures -0.14% to $59.16.

    How was that unexpected, API had a net build of 10Mb and this is a net build of 10Mb – just in different places.  Traders are such morons!  

    More to the point though – yet another big holiday weekend where demand is a bust.


  19. interesting - 

    Since 3 of our 5 Trade Ideas have gone nowhere – how about we bonus trade them into Easter?  

    SKT was practically our Trade of the Year for 2020 and I still love them at $16.  Earnings are mid-February though so the March option contracts would be do or die on that report.  I guess we'll go for it, but selling June puts – just in case.

    Buy 30 SKT March $14 calls for $2.20 ($6,600)

    Sell 30 SKT March $16 calls for 0.95 ($2,850) 

    Sell 15 SKT June $14 puts for $1 ($1,500) 

    That's net $2,250 on the $6,000 spread but there's only 100 days to play this time.  The upside potential is $3,750 (166%) and that's because we're selling puts on an upswing instead of a downswing – which is much better.  

    LB has options in February or May so May it is in this case:

    Sell 10 LB May $17.50 puts for $2.35 ($2,350) 

    Buy 25 LB May $15 calls for $4 ($10,000) 

    Sell 25 LB May $17.50 calls for $2.60 ($6,500) 

    That's net $1,150 on the $6,250 spread so $5,100 (443%) upside potential if LB can hold onto $17.50 into May.  Next earnings are 2/26 so that's the only report we'll see ahead of our May 20th expiration.  

    Had WBA not popped to $60 into Thanksgiving, they would have been our Trade of the Year.  $58.41 is still less than 10x their $6/share earnings – so what's not to love?  We can still play it conservatively like this:

    Sell 10 WBA April $57.50 puts for $3.25 ($3,250) 

    Buy 25 WBA April $55 calls for $5.50 ($13,750) 

    Sell 25 WBA April $60 calls for $3 ($7,500)

    That's net $3,000 on the $12,500 spread so we have $9,500 (316%) of upside potential here with earnings to look forward to on Jan 8th.  

    So we're cashing out or first 5 Trade Ideas which used just $6,565 in cash and $26,659 in margin with $26,875 (409%) in gains and we're putting $6,400 back to work to make another potential $18,350 (286%) by May and we're doing this using fairly straightforward, simple trade ideas in a conservative fashion.  

    Stock Options have a bad reputation but can be a very valuable tool for any investor's tool belt – don't trade without them!  Why do they work for us?  Because, like a broker, we SELL options more often than we buy them so we are the ones collecting the fees and making the money!  


  20. Phil/Yodi;  thoughts on PSA a dividend stock/armchair trade?  Quarterly dividend is $2 and earnings are $2.75.  Steady earner but stock price is way off the high from earlier this year.  Thanks


  21. As we are spinning 300 and 400 % potential gains, here I set up a more conservative approach of the poor man’s play with the same stock WBA trading at present 57.90.
    Buy the Jan 22 50 call for 11.60 and sell the April 20 62.5/50 strangle for 2.80 PM margin 540
    All based on one option play.
    Now you have a capital outlay of 1160.00 less the 280.00 = 880.00. To be noted the Dec 19 50 call you can sell at present for 8.60.
    So on your first conservative option strangle sale you are on par with the net stock price of Jan22.
    That is obviously if the stock stays on an even par in relation to today’s stock price.
    Now all future strangle sales until 2022 I base on the PM margin only.
    So all being even I would say on a zero cash outlay you would be selling an other  6 to 7 strangles at conservative 250 x 6 only = 1,500.00
    Now you work out the potential gain. Naturally with a bit of work!!!


  22. Option_alpha  PSA I have favored the stock since 9/2018 where I have sold a put 200 strike for 23.30.
    Based on 200 stk price the play could be a favorable one, however for many still a pricy stock for an armchair trade. The stock gives a steady 2.00 every month.
    The stock was only in Sept 366.00 So quite a drop for 3 month.
    If you happy with todays price you  could buy the stock 211 and start selling the Mar 195/220 strangle for 7.75, which will give you a combined  monthly return of 2.9%
    On the other hand the poor man’s play
    Buy the Jan21 no 22 195 call @ 24.30 and sell the same Mar 20 strangle 7.75.
    The Dec 19 195 call has at present a sales value of some 15.60, so you would be nearly out of the woods with your first strangle. With an other  4 to five strangle sales you could do well.
    Cash outlay on the stock 21,100.00 on the long call 2,450.00 less the 775.00
    But no div. payments.


  23. I trust Phil will set you up still with a nice leap BCS


  24. Phil, really like the "5 Ideas to Make Money before Christmas" series. How about a similar one for the Independence Day?


  25. PSA/Options – I like PSA when they are cheap but $210 is $37Bn and they "only" make $1.5Bn so p/e is about 25 and it's not like they are going to have explosive growth or anything – just a nice, steady business.  The high was ridiculous, now it's just expensive.  In mid 2017, we sold 2021 $200 puts for $24 but that was the extent of our play (closed at nice profit in Sept).  They are back to $16 now and  there are no 2022s but, when there are, net $180 is a fair long-term price.  

    That's a good WBA alternative, Yodi.

    Meanwhile, hopefully this will set a floor for /NG:

    Kinder Morgan's Elba Island terminal set for first LNG export shipment

    • A tanker has docked at Kinder Morgan's (KMI +0.2%) Elba Island LNG export terminal in Georgia, and observers of the liquefied natural gas industry are waiting to see if it will leave with the facility's first export shipment.
    • KMI confirms the arrival of the LNG tanker Maran Gas Lindos at the facility but does not comment further.
    • India or Pakistan, which have received more than 60 U.S. LNG cargoes so far, are considered the most likely destinations, S&P Global Platts reports.
    • Elba is poised to become the sixth major U.S. LNG facility to ship an export cargo, nearly five months after production began at the site near Savannah.
    • The facility will have a capacity of 2.5M mt/year when all 10 trains are completed during next year's H1.

    Space investors gather ahead of huge year

    • Morgan Stanley posts an update on its space summit held this week in New York City.
    • High-level observations from Morgan Stanley are that private equity investments could tighten up if 2020 results don't impress and government involvement in the sector is on the rise.
    • Space-related topics included national security, earth observation, launch, broadband and hypersonic transport. Private companies like SpaceX (SPACE), Rocket Lab and Blue Origin were also discussed.
    • As for publicly-traded stocks, analyst Adam Jonas and team say Virgin Galactic (SPCE +3%) reiterated expectations at the summit for a commercial operations launch in 2020 with scaling efforts materializing in 2021. The space company sees the long-haul premium market today at ~$300B to $400B  and expects it to reach $500B in the next five to ten years. MS launched coverage on Virgin Galactic earlier this week with an Overweight rating and price target of $22.
    • A catch-all investment in the space sector going into 2020 is the Procure Space ETF (NASDAQ:UFO). Top holdings include Maxar Technologies (NYSE:MAXR), Garmin (NASDAQ:GRMN) Trimble (NASDAQ:TRMB) Viasat (NASDAQ:VSAT) , Eutelsat Communications (OTCPK:EUTLF), Iridium Communications (NASDAQ:IRDM) and Inmarsat (OTCPK:IMASF).

    GRMN cracks me up in that sector:  "In 4.3 light years, make a left at Alpha Centauri"

    Kind of futuristic:

    Alexa devices sell out in Europe

    • Amazon's (AMZN) new generation of Alexa devices is sold out in parts of Europe, and most won't restock until after the holidays.
    • UK users will have to wait until December 20 or later for an Echo Dot or as late as January 2 for a third-gen Echo speaker.
    • Shoppers in France, Germany, and Spain can order an in-stock Dot a few days before Christmas but will have to wait until January for an Echo.
    • All of the mentioned markets will have to wait until 2020 to receive an Echo Studio. The Echo Show remains in stock.
    • European users can find some Echo products at third-party retailers.

    I guess we may have to consider AMZN as a smart home and future shopping play – especially with drone delivery.  

    Image result for jetsons shopping animated gif

    Independence/Alter – Geeze, there's 3 above already – how many of these do you guys need?

    Webinar time!


  26. Phil, about one you don´t like, TSLA:

     

    They are the gold standard to compare with.

    They are in the only market segment that will growth in the next decade

    They have a name as innovation and wow! factor, the Apple of EV´s

    And they have now the 17% of the world market.

    https://www.nextbigfuture.com/2019/12/tesla-has-17-of-the-global-ev-market-and-could-maintain-or-grow-share-through-2025.html


  27. Thailand / Phil:

    You will be dealing with golden triangle  faces…be very careful

    Verify with your friends in intel before deciding what to do.


  28. Hi Phil

    What do you think of ENB or EPD for dividend paying Energy play? Was thinking of covered strangle in each with a smallish position. Already have ET from your previous play..Thx…


  29. ISRG / Artificial intelligence of companies as Deep Mind or IBM  is a sector that will fudge with robotics.


  30. Advill, TSLA I personally am very negative about electric cars in general. Just remember all other car manufactures are also coming out of the woods now.
    In general however the sales of electric cars are the same than the fairy story of "the king’s new cloth". Until you can charge an electric car at the same speed as you can fill up your tank now, electric cars are just a fools men believe.
    I have not yet have found an explanation, for the scenario that I am standing on the autobahn in stau (no traffic moving) for two hours, cars hardly move and outside the temperature is – 2 degrees C. How will the climate in my car prevent my wife from turning in to ice, while the motor is not even turning? I still have my RV in tow, which refrigerator is running on 12v DC during travel hooked up to the car. You might just say at – 2 you do not need much refrigeration, still the deepfreeze is -15. Meanwhile while standing in stau, I have to cover another 150 KM with possible no charging station in site. But still if I would find one I have to stay at the station for some 6 to 10 hours, while three other person also waiting to charge up their Tesla!!!! People who believe in these type of cars are just as smart as the clown supporters.
    I stick to my diesel!!!! I still can roll through France without getting robbed at the gas station


  31. For those who are still great believers in SKT stock @ 15.50 now, here is my poor man’s trade, in the hope they found a bottom.
    Buy the Jan22 13 call @ 3.20 and sell the Mar 20 14/17 strangle, leaving some space for the recovery of the stock, @ 1.00. The Dec 19 sells for 2.85!!!
    Prices fluctuate quite a bit.


  32. EV´S /Yodi:

     

    I lost money in all the batteries  companies in the market (now defunct most of them)  Axion Power, A123, Ballard, Valence ..you name it.

    But new technology is finally arriving into the market  most of them are "air something" a chemical reaction of air with some metallic compounds that  finally are solving the  biggest issues in EVs, the amount of electrons stored by kg. of battery and the speed  of recharging avoiding the thermal runaway..

    In the other hand tha battery future is not sustainable with actual technology and Tesla is a firsthand in the game, additionally is  applying SpaceX technology in the field, the Cybertruck is a new paradigm in a 100 years old industry., as Phil says, perhaps is the Tucker of XXI century. ….and agree with you about diesel cost in France, I do the same.


  33. GME (-17%) big miss and cut guidance, but bought back almost 1/3 of the outstanding shares!  They might as well take advantage of the low point of the cycle and go private…

    Meanwhile, CLF – close to $9 now


  34. Phil  why not to include SPCE in your analysis…


  35. EV's/advill – yesterday here in Vancouver BC we just had the World's first commercial all electric airplane flight and the company plans to switch all its planes to electric over the next 2 years! 


  36. Airvine / EP´s

    Yes, I see it today, an small hydroplane.

    Most them are still toys but Airbus is working in a hybrid commercial plane with a turbine powering a charger for the batts.


  37. PSA / Phil, Options_Alpha
    Phil,

    I'm wanting to know a little more about how you decide what is a fair price.  You said PSA at a price of $210/share is expensive (PE=25), but "…net $180 is a fair long-term price."

    According to Stockopedia, their TTM earnings are:
    EPS Reported = $8.46
    EPS Normalized = $7.38

    A stock price of $180 gives a PE of either 21 (for Reported) or 24 (for Normalized).

    Could you say a little more about what PE's are reasonable in this case and why? I'm especially interested in the "why".

    Thanks. Still learning. Finally made a little money on JO :-)


  38. Phil;  as a follow up on PSA as well.  How does the $8 per share dividend fit into the eps of $8.46.  Doesn't that make the payout ratio almost 100%


  39. TSLA/Advill – The car and the market have nothing to do with whether Tesla, THE COMPANY, will make money.  Lots of great products don't make great profits and being first and even being best doesn't make it that way.   As Yodi notes, the average person isn't going to get an electric car until they are sure it performs as well as a gas one – that will take many years and will require a lot of infrastructure that hasn't been built yet.  Yes, TSLA has 17% of the global EV market and, in the US, there are 1.2M EVs now on the road – but that's out of 272M cars – 0.5% so 17% of 0.5% is not even 0.1% of all cars – of course they can have "explosive" growth when the number is that low to start.

    Meanwhile, the guys who sell 10M cars a year can flip a switch on a production line and completely crush TSLA's economies of scale in 90 days – once they decide it's worth it which – so far – they have not.

    DDD had a similar lead in 3D printing 10 years ago and the market was growing and they were dominating and 3D printing is indeed the Future but DDD is an also-ran already as later companies crushed them.  They are still around and still in the game – but not the winner they seemed like they'd be.

    Golden Triangle/Advill – We didn't do Mexico due to worries with cartels but this is with the direct backing of the Thai Military for business in Thailand for their NHS – I have a reasonable expectation we'll be able to conduct our business unmolested.  

    EPD/Sun – I don't consider ENB to be a bargain but EPD is interesting but I'd have to look more closely at both before giving an opinion so remind me on the weekend.

    Batteries/Advill – I don't think we're there yet on batteries either.  I'd rather buy the winning battery company than the car company for the long run.

    GME/Mito – That's a very hit and miss business these days.  It's like a movie theater – they have to rely on someone else's hot games and consoles (and a lot of games are going direct now – cutting them out).  

    CLF finally getting respect:

    SPCE/Advill – It's the first one.

    EV Air/Arivine – That's very cool!

    PSA/Sag – Well of course I like to pick up non-cyclical companies with reasonable growth for 20x or less and then circumstances dictate whether I mind paying more or not.  PSA at $210 is $37Bn so I want to see $2Bn in profits to pay that but we're at $1.3 so I want to pay 30% less or $150/share but note profits grow faster than earnings (makes sense as they pay off more properties and stop depreciating structures) and that's likely to continue.  Also $150 was the price in 2013, when they made $1Bn on $2Bn in sales.   Sales are now $3Bn and profits about $1.4Bn due to reinvestment and should improve over time again so not likely to see $150 again and $180 is right between $150 and $210 so a reasonable pullback to expect and, from there, I can sell puts to get me closer to a net $150 entry that will make me happy. 

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 1,965 2,177 2,382 2,561 2,669 2,754 2,822 2,858 2,942 +7.0%
    Operating Profit $m 951.1 1,055 1,232 1,374 1,423 1,564 1,609     +10.5%
    Net Profit $m 1,052 1,144 1,311 1,454 1,442 1,711 1,721 1,364 1,385 +10.2%
    EPS Reported $ 4.89 5.25 6.07 6.81 6.73 8.54 8.46     +11.8%
    EPS Normalised $ 4.87 5.23 5.96 6.80 6.72 7.45 7.38 7.51 7.70 +8.9%
    EPS Growth % +27.5 +7.5 +14.0 +14.1 -1.3 +10.9 -0.4 +0.71 +2.60  
    PE Ratio x           28.6 28.9 28.4 27.7  
    PEG x           40.2 40.7 10.9 12.4
    Profitability

    PSA/Options – Yes, they are a REIT, they pay out 90% of their profits by law.  Another reason they are not likely to go below $160, where the dividend goes over 5% and attracts new buyers.  

    Of course, why should I own PSA for $210 to collect $16 in dividends by Jan 2022 when I can sell the 2022 $200 puts for $16 in my pocket now and just $30 in net margin required.  My worst case is owning them at net $184.  Buying them for $210 and selling the 2022 $210 calls for $16 puts me in for $194 and ties up $60 in margin (ordinary) – there's really no point.


  40. Phil your argument even better on PSA.  The $ 16 is for the 2021 puts so only compares to $8 in dividends


  41. Winston/WBA – when you have moment.

    In you post today at 10.42AM, you said:

    WBA: bought 20 Jan 21 $50 long synthetic stock @ $0.76; unrealized P/L +$13,750

    WBA bought 20 Jan 21 $52.5 puts for $7.60;  unrealized loss -$7,600

    However monthly straddle/strangle selling has been a massive income generator on WBA which already covered a couple of times the cost of the long put protection….

    Can you please share what/how the monthly straddle/strangle selling works on a WBA position. Do you sell each month and adjust based on the stock price? If I want to start a position in WBA – how does that work?

    Thanks in Advance.


  42. PSA/Options – That’s right, it’s only for one year!


  43. vkat/monthly premium selling – I'll share what I do, but what works for my style and my thinking won't fit with the next person.

    The synthetic stock position gives me the same risk profile of long stock except I aim to buy the position for close to zero (long ATM LEAP calls / short ATM LEAP puts). The money I 'save' is then invested in buying a 1 strike out of the money long LEAP put.

    The cost of the trade is the net cost of the synthetic stock (hopefully close to zerp) and the cost of the LEAP puts. 

    The I get to work on cost basis reduction which also has to cover the hedging 'gap' between the ATM synthetic stock price and the strike price of the long LEAP puts (normally the value of one strike differential).

    Now the premium selling. I look at the premium for the ATM straddle and if it looks like I can cover the cost in 3 – 4 monthly rounds I'll take the max premium knowing that I am going to have to adjust the losing side. So month one premium selling is going to be a straddle and then I end up in the following months with strangles. Based on the ebb and flow of stock prices, I might end up selling straddles again. But it's not a science – and in the same way you can't practice winning the lotto – only selling premium in the heat of battle can advance the learning process. 

    There will be swings, gap up and downs, earnings surprises and earnings misses. But through thick and thin I sell the premium every month. I try to move fast to get my cost base reduction completed. 

    One caveat on the premium selling. The initial setup gives a risk profile with unlimited upside and defined risk on the downside. Selling calls is fine because even if you are effectively selling covered calls you can roll and roll you are essentially rolling the short leg of a bull call spread. So no problem there. However, selling the monthly puts mean that you are effectively creating a ratio put calendar spread – 1x long LEAP puts (the downside hedge) + 1x short LEAP puts (from the synthetic setup) + 1x front month short puts (part of the monthly premium selling). That used to bother me from a logic perspective – but now I just separate the initial setup from the monthly premium selling. My job is to focus on premium selling.

    In terms of stock selection, more or less the same guidelines that Phil uses for his Butterfly portfolio – I like to see price action that respects some kind of channel. I do not want rocket ships or basket cases.

    But as I said, this is what fits my style and works for me. Each to his own. 

    Please ask if anything is unclear – there appears to be a lot of moving parts, but once you get the setup right and go with the rhythm everything seems to flow. 


  44. Winston – Thanks for the explanation. I do like your hedge synthetic setup. I assume that selling quarterly (instead of monthly) straggle/strangles is the lazy man's process but it still looks like a good income generation system. However, I do see where selling the monthly/quarterly puts might scramble the logic a bit. When you buy a put to "hedge" you synthetic, you protect the downside but then you add risk by selling the shorter term puts. You do mitigate the risk somehow but do not eliminate it and you also reduce the income potential. You and Yodi have very similar goals with different setup. I might use a couple of examples to compare potential returns in both cases.


  45. Winston – Thanks much for taking the time to write it and explain it. It helps. 

    Like Stjeanluc said – quarterly selling might get more premium. For volatile stocks (TSLA/NFLX, etc.), I guess you can even try weeklies. 

    Once again thank you.


  46. Phill/  Future Portfolio stocks to consider

    BRKS, ROK – for automation

    UBER, NVDA – Autonomous vehicles

    ADI – IOT

    Thanks


  47. Vkat – Actually, selling monthlies might get a bit more premium than quarterlies but it's also more work, more adjusting and more commissions (although we are getting close to commission free trading it seems).


  48. Future is Now

    Some guy on twitter asked a similar question a couple of days ago. He said "if you had to invest 100% of your wealth in one company for the next 10 years, which would you choose and why?

    Answers were all over the place though a large number of people responded with Ripple and many also said SQ. I had to look up ripple to see what it was. https://ripple.com/   SQ is also a payment company, so possibly money and its movement is something we should think about in the Future is Now discussion.  

    There were also lots crypto suggestions and something called vechain, a blockchain company. 


  49. stjl,vkat/premium selling. I chose monthly cycles after we shared data a while back showing the significant increase in cumulative premium sold of 12 monthly sales versus 4 quarterly and one annual. And of course, 52 weekly cycles should bring in more – but I haven't done the analysis. I do take advantage of the weekly cycles if I need to roll – and I like the fact that there are many more strike prices in the weekly options than the monthlies.

    Now, big up moves are a blessing and a curse. the LEAP long synthetic with a delta close to 1 does its job, but of course the long LEAP hedge put loses. Big down moves mean the Long LEAP call loses and the hedge will not provide 1 to 1 protection – that's why I want to achieve cost base reduction to zero as fast as is as prudent. 

    Also, I wanted to leverage this approach using size. But it is best to do this by using size in terms of number of different positions than size in terms of number of contracts. So I have about 12 of these positions on at the moment. That means one 'rogue' is not going to cause too much trouble. It's like having a stable of racehorses. You get to know each one individually and under what race conditions they perform the best. 

    In terms of different approaches, it's best viewed in terms of long delta. What's the best approach of achieving a long delta in terms of equivalance? Long stock a delta of one, synthetic long stock a delta of one, Using WSM as an example (currently it is at $70 so you can play with the setups easier) you need 8 contracts of a Jan 22 $65/$75 BCS to get a delta of one. Each of those has a different capital requirement with the synthetic being the cheapest, but dividend paying stocks get you the dividend but the most capital intensive.

    I also started to look at this approach when I got frustrated by picking winners (or Phil picking winners!) and seeing the gains capped by the BCS, and when the odd dud was picked the downside risk of the LEAP short put. However, Phil knows how to adjust that setup very fluently, by using doubling down, up and sideways (see the recent discussions on AAPL which is a masterclass.

    But as Phil says – it's all about premium selling. The underlying asset you sell against is a side show (albeit an important side show).

    The ultimate approach would be selling daily premium on SPX using  the same synthetic hedged setup (but that's way off in the future. It would probably something that PeterD would have been into. But I would have to address the put side in a different way (far too risky to have those additional short term short puts naked, bit selling an Iron Condor could address that).

    I'm sharing this as an exchange of ideas, I couldn't possibly recommend it as it is not straightforward. Managing weekly short straddles is a full time job.

    But you learn about position size, risk management and a lot about the psychology of trading using this approach. It may be the devil's work.



  50. Shopping with the ultra-rich




  51. Winston great discussion on your play. However as much as the set up, especially on the synthetic leap stock which is clear in your mind, it is not too clear with others.
    Initially you set up a leap by buying a BCS and selling and buying leap puts. You than show with WBA a profit on the leap position of 13,750..
        WBA: bought 20 Jan 21 $50 long synthetic stock @ $0.76; unrealized P/L +$13,750
    WBA bought 20 Jan 21 $52.5 puts for $7.60;  unrealized loss -$7,600
    This possible needs a better explanation. To me setting up a Leap BCS even by selling mostly half the amount of leap OTM puts will always cost money, especially as you are as well are buying leap puts ITM,ATM or OTM???
    Than you further explain the WSM with a leap BCS 65/75 x 8 options giving a delta of 1.
    I trust with 8 options you want to get close to the stock price of 7,000.00.
    The cost of the Leap with 8 options is 3,780.00 in reference to the potential gain of the spread being 10,000.00 if stock is at 75 at expiration Jan 22 minus the 3,780.00 equals somewhat 6,220.00, 780.00 short of today's stock value, it I have that right.
    I do prefer in respect of buying leap long calls to have a bit higher delta to 1 say .70 to .75.
    In this respect having more intrinsic value near expiration time.
    So please it would be nice to set up your power synthetic leap stock in more details by given the numbers, so especially everyone can follow. Just use the WSM, where I have shown a 10k profit by riding the armchair since Apr. 2018 with 400 stock.
    Setting up short term strangles is a matter of greed and no greed of the individual, especially in today's "CLOWN" market. Thanks


  52. Great discussion with Winston Vkat and Yodi, thanks, what is clear for me is that selling consistently short term is safer than all the ups,downs and circles of the long term positions.

    In my case for example having MJ 2021 has been a haemorrhage with an unpredictable result, and having having biweekly or monthly positions ( selling premium) has compensated others losing positions.


  53. Advill, I followed your comment on US tax deductions of div. payments of 35% and more.
    It was than obvious that any armchair plays are not the right thing for you.
    However the leap long call not over .75 ITM is the better option for any plays. Any calls or puts with a higher delta are now as well subject to tax deductions even that you do not receive a dividend. Must be the clown's idea.
    I like to hear Winston's comment in respect to his iron clade Synthetic leap stock in a more refined way.


  54. Phil,

    Looking at AMTD in respect to the buy out. Even having only 200 stock bought in 7/11/19 for 40.34, (I did advise the board!) together with my put and option sales (Armchair etc.) I could rig up a nice profit. The stock now at the 51 still down from it's high days of 63, looks to me like being on the high side of the scale.

    Do you think the take over will be a mess as usual by these buy outs, with other words close the plays?


  55. Hi Yodi – thanks for the comments, I'll highlight in your post where I need to clarify:

    Initially you set up a leap by buying a BCS and selling and buying leap puts. You than show with WBA a profit on the leap position of 13,750..
        WBA: bought 20 Jan 21 $50 long synthetic stock @ $0.76; unrealized P/L +$13,750
    WBA bought 20 Jan 21 $52.5 puts for $7.60;  unrealized loss -$7,600

    No, the trade setup does not involve a LEAP BCS. It is setup by buying a long ATM LEAP call and selling a short LEAP put. This is not a covered trade. Those trades can often be put on for zero cost.

    This possible needs a better explanation. To me setting up a Leap BCS even by selling mostly half the amount of leap OTM puts will always cost money, especially as you are as well are buying leap puts ITM,ATM or OTM???
    Than you further explain the WSM with a leap BCS 65/75 x 8 options giving a delta of 1.
    I trust with 8 options you want to get close to the stock price of 7,000.00.

    Again, this is not about setting up a leap BCS.

    The next post will layout the trade if you were going to add a hedged LEAP synthetic on WSM, prices as at close of business yesterday.

    Buy WSM Jan 2022 $70 call for a debit of $13.60

    Sell WSM Jan 2022 $70 put for a credit of $13.40

    Net of the synthetic long stock is $0.20 debit

    No Bull Call spread involved here.

    Now we add the hedge:

    Buy WSM Jan 2022 $67.50 long put for a debit of $12.90

    Cost of the trade setup  is $0.20 + $12.90 = $13.10.

    In terms of P&L I look it as a long 2022 LEAP call position at $70 strike with a short 2022 LEAP put spread (short $70 put + long $67.50 put).

    As this is a defined risk debit trade, the most I can lose is the total debit of $13.10. However, I also lose an additional $2.50 on short 2022 LEAP spread (the difference in the short-long strikes ($70 – $67.50).

    So my net net max loss basis is $13.10 + $2.50 = $15.60.

    I now completely forget about the hedged synthetic stock trade and sleep easily at night (that peaceful sleep is interrupted when I go to the next stage!).

    The next stage is to trade around the position by selling premium on WSM. – it doesn't matter what you sell – straddles, strangles, Iron Condors, Credit spread, Ratio spreads etc - the only laser like focus I have is that by the expiration date of Jan 2022 – my sole objective is first to sell cumulatively $15.60 of premium to bring my cost basis down to zero.

    In fact, I don't actually care where the sold premium comes from – neither trade type or underlying. I want trades that generate income. This is an income engine setup.


  56. Hi Winston great explanation!!!!! and thanks for coming back to me. That synthetic stock of yours is something one has to experiment with. Simpler buy the stock and set up a leap put vertical. But again you not talking about 15.60 here.
    It is great to experiment with, especially for new comers, but work on paper trades only.

     

    .


  57. Winston; the big difference between your method ("the Winston") and Phil's "Butterfly", is he would sell the Leap Call and you're selling the Leap Put.  Also your doing monthly and he would do quarterly premium selling.  I agree the monthly approach is more effective.  My question and concern would be the short term short puts.  Can you say what proportion of the Leaps you sell on a short term basis (100%, 50% etc.)?  Do you look at delta to determine the strikes?  Thanks for sharing.


  58. Yodi, I'm happy I was able to explain it better. Yes, there is no difference between using the synthetic stock or long stock (except cost of capital and dividends, if paid). But for stocks that don't pay any dividend I don't see an advantage to buying the stock versus the synthetic long stock (unless I'm missing somethin?). 


  59. Winston, Absolutly right, I never buy stock if I do not see a div. of at least 3%


  60. optionsalpha/ regarding the sale of the short term options (they are not LEAPs, but I know you know that) I sell the same number of contracts as the long synthetic LEAPs. I normally start off selling a straddle to gain the max premium income. But I always sell the straddles or strangles with the same number of contracts as the number of LEAPs.

    So in the WSM example above if I bought 20 contracts of the synthetic long I would be currently selling 20 contracts of the Jan 2020 $70 straddle. That straddle is currently selling for $4.75. 

    That shows you how the numbers stack up. In the WSM example I am looking to 'recover' $15.60 and with my first sale I get to cover just under 33% of my target. So in a blue sky scenario, 3 more straddle sales like that I'm at goal. All further premium sales drop straight to the bottom line. Of course the straddles are never going to pin at the sold strike. But I'm willing to give it a year to get my money and then I have 12 months selling for pure profit.

    On the call side of the sold straddle/strangle I am happy to keep rolling – because this is always covered by the long LEAP calls. So I never sell more front month calls then I have long LEAP calls – I don't want to be naked on the call side.

    On the put side of short term selling, a big down move is more challenging – then your adjustment skills are brought into play. There I might sell more puts – knowing that I'm picking up premium on the short call side – I like this binary trading – you are always winning on one side of the short term sales.

    But of course, one should have a trade plan on how much premium you feel comfortable selling each month – in terms of number of contracts and strikes. But you need to do get into a habit of doing it regularly – don't let months go by without selling premium.

    But hey, this is not a free money trade setup! You have to work it to earn it.


  61. Good discussion – thank you for clarifying it, Winston, I felt like I was misinterpreting it yesterday. Rarely do I mess with synthetic stock, but now you've got me thinking of utilizing it a bit more. Good stuff.


  62. Winston, by setting up your suggested synthetic Leap at 70 I cannot see any type of profit if WSM would stay at 70 near 2022. Only you make possible good on the near strangles. Not sure if TOS considers this type of set up a counter balance to your short term plays. The leap has not really any value.
     


  63. And lastly, my personal rule of thumb guidelines in terms of number of contracts are:

    Stock price > $100 – 10 contracts

    ……………….>  $60    – 20 contracts

    ……………….<$60      – 30 contracts

    Because I diversify amongst a number of names. 


  64. Your cost of the leap is the purchase of your long put, and I see only any gain in this leap if the stock goes up, but on the down turn you only balancing your short and long put, after the drop of the difference of in your case 2.50, but losing constantly on the long call.


  65. Yodi – correct. If WSM stays at $70 and you own the stock you still have an asset worth $70. For the LEAP synthetic, you have an asset which you paid ZERO for, and it is now worth zero.

    But in the synthetic setup that is why it is critical to sell the short term premium. That is the focus of the trade. 

    As you can see from the premium in the sale of the short straddle at $4.75, I would LOVE WSM to stay at $70 for the next 24 months!

    You make a valid point – there is always a trade off to accomodate one's individual style.


  66. And one final point – I found this setup addresses two concerns I had – providing protection (at a cost) and not capping upside profits. Those who have a different risk tolerance will look at things differently. And of course I trade plenty of different types of setups – this is just another tool in the toolkit.


  67. Phil / Future Portfolio Ideas:

    ENPH (semiconductor based micro-inverters and residential storage solutions) really good growth prospects, excellent option expirations and high implied volatility.

    TPIC (manufacturers composite wind blades and related precision molding and assembly systems) has run into operational issues, but has good prospects for future growth, option expirations are minimal with high  implied volatility.