heres why i like diagonal spreads..say you have the cash to buy 100shares of $AAPL at about 533.($53000). you would like to get some monthly income and write some covered calls, the Apr 565 call is going for about $10 ($1000)... so you profit from stock going up to 570, almost $40 worth of upside. not bad, closes under 560 you keep the stock and the $1000 from short call..good coin.. instead look at the following, using that same $53000:
buy 3 Jan2014 400 calls for about $170 each ($17000 each)
so for almost the same amount of money you control 300shares worth of stock via a deep-in-the-money (DITM) Leap.. since you own the calls you can SELL short term calls against it for no added margin..just like a covered call with stock, so now:
sell 3 Apr 565 calls for about $10 each ($1000 each)
so you collect $3000 on these short calls vs just $1000 on a covered call with stock. the 2014 call has a .80delta so your call moves .80 for every 1.00 of stock move so you benefit from upside move as well.. more so since you have 3calls vs just 100shares.
Actions:
1. stock closes below 565, keep the short call premium and sell calls again the next month, and repeat every month just like you would with a covered call.
2. stock takes off, can either roll the short calls or close out both legs of diagonal
3. stock drops alot..can add ratio spreads as trade repair month to month or keep selling short calls...its a 2014 leap so you have 2years to do this every month, every earnings, every ipad refresh announcment, etc
its not for everyone but for me its a better use of the cash i have...$3000 call premium off of $50000 investment every month is not bad.
Tuesday, February 28, 2012
Saturday, February 25, 2012
$PCLN earnings strategy
update 28feb - per the strategy below i took profits on the call fly.. stock traded into the priced in box on chart. also closed both legs of the diagonal to take profits there. out of $pcln now.
earnings after the close on 27feb. heres my strategy. i currently have a DITM leap and a short 500 call.. yes, thats a 500 call..stock has run so much that its way in the money. i want to make a low premium trade for an upside move from earnings. the weekly options are pricing in about at 50point move in either direction (add the ATM call and put prices to get that)..so if pricing is accurate that puts the stock into the red boxes on chart.. i will be looking to buy the weekly 630/640/650 call butterfly on monday.. 650 was the highest strike available on weeklies, if higher strikes are trading i may revise this. So this call fly will profit if the options market has the move accurately priced.. if it spikes up i will take profits the next day and not try to press my luck and ride it out to friday opex since thats 4days away by then.
since my diagonal is way in the money..the "position"is not benefitting from any up move since the Leap is gaining and the short call is loosing about the same about, so rolling the short call up to next higher strike at 505 or 510 for next month still is only getting me chump change if anything. so if stock spikes up or really even if it stays unchanged i will close both legs of the diagonal..take my profit from the months of short call premium i was receiving and move that capital into another stock..maybe an $AAPL diagonal.
I am not "playing" for a down move on earnings, such as a put fly in addition to the call fly.. but if the stock sells off and gets to the red box expected area..especially if earnings are good but market sells it off anyway..(bullshit selloff as i call it)..then you have some good support levels to shoot against for credit put spreads.. all the moving averages are together near 510ish..so spreads to be at/below that level, maybe even below the 470 support level. depending on size of selloff, i may then roll the short call up to the Apr510..likely for credit.
Summary:
a. stock moves up as priced in..630/640/650 call fly profit and close diagonal to use capital elsewhere
b. stock moves down as priced in then look at credit put spreads and keep diagonal rolling up and out on short call for credit
c. stock unchanged, likely close diagonal and move capital elsewhere.
earnings after the close on 27feb. heres my strategy. i currently have a DITM leap and a short 500 call.. yes, thats a 500 call..stock has run so much that its way in the money. i want to make a low premium trade for an upside move from earnings. the weekly options are pricing in about at 50point move in either direction (add the ATM call and put prices to get that)..so if pricing is accurate that puts the stock into the red boxes on chart.. i will be looking to buy the weekly 630/640/650 call butterfly on monday.. 650 was the highest strike available on weeklies, if higher strikes are trading i may revise this. So this call fly will profit if the options market has the move accurately priced.. if it spikes up i will take profits the next day and not try to press my luck and ride it out to friday opex since thats 4days away by then.
since my diagonal is way in the money..the "position"is not benefitting from any up move since the Leap is gaining and the short call is loosing about the same about, so rolling the short call up to next higher strike at 505 or 510 for next month still is only getting me chump change if anything. so if stock spikes up or really even if it stays unchanged i will close both legs of the diagonal..take my profit from the months of short call premium i was receiving and move that capital into another stock..maybe an $AAPL diagonal.
I am not "playing" for a down move on earnings, such as a put fly in addition to the call fly.. but if the stock sells off and gets to the red box expected area..especially if earnings are good but market sells it off anyway..(bullshit selloff as i call it)..then you have some good support levels to shoot against for credit put spreads.. all the moving averages are together near 510ish..so spreads to be at/below that level, maybe even below the 470 support level. depending on size of selloff, i may then roll the short call up to the Apr510..likely for credit.
Summary:
a. stock moves up as priced in..630/640/650 call fly profit and close diagonal to use capital elsewhere
b. stock moves down as priced in then look at credit put spreads and keep diagonal rolling up and out on short call for credit
c. stock unchanged, likely close diagonal and move capital elsewhere.
Wednesday, February 22, 2012
My Fast Money brush with glory $GOOG
19mar - looks like Joe Terranova took his loss on the $GOOG short via his tweet today "did take the loss on $GOOG on friday"
orginal post.
As you are aware i am now officially a big shot since my tweet was covered on the Fast Money web extra on 22feb.... heres the link http://video.cnbc.com/gallery/?video=3000074328
but enough about me, lets see what we are talking about, Jumping Joe Terranova made short $GOOG his final trade last thursday, stock closed at about 606. Ill cut joe some slack since it looked like his comments were off the cuff on the web extra, but lets keep track of how it does. Wednesday 23feb on FM lunch he said he actually put the trade on today..612 i believe it was vs actually putting on the trade following previous weeks show. Personally i think his stop of 630ish mentioned on web extra is a little far away..hench my question of if breaking 50day to upside would be reason to close for loss. ive posted previously that pull back to low 590s or break of 50day will get me looking at possible spread entries.
orginal post.
As you are aware i am now officially a big shot since my tweet was covered on the Fast Money web extra on 22feb.... heres the link http://video.cnbc.com/gallery/?video=3000074328
but enough about me, lets see what we are talking about, Jumping Joe Terranova made short $GOOG his final trade last thursday, stock closed at about 606. Ill cut joe some slack since it looked like his comments were off the cuff on the web extra, but lets keep track of how it does. Wednesday 23feb on FM lunch he said he actually put the trade on today..612 i believe it was vs actually putting on the trade following previous weeks show. Personally i think his stop of 630ish mentioned on web extra is a little far away..hench my question of if breaking 50day to upside would be reason to close for loss. ive posted previously that pull back to low 590s or break of 50day will get me looking at possible spread entries.
The Free Trade on $AAPL
Heres the scenario...you scraped together enough cash to buy 100 shares of $AAPL stock. You expect great things to happen the next 3weeks from shareholder meeting, Ipad3, whatever and you want to get double the upside move and might as well throw in you want that double upside for no added risk. Heres what you do, buy a ratio spread.. also called a backspread. You already own 100 shares so now you:
Buy 1 Mar 525 call for $11.50
Sell 2 Mar 540 calls for $6.50 each
trade will be for a small credit.
Stock is about 515 now. Max profit on just those options is at 540, which will be $1500. Stock appreciates at same time for profit of $2500 for total of $4000 profit with the same risk as just owning 100shares.
The ratio spread profits between 525-555... so anything the ratio brings in is better than you would have made just owning the shares
Things to do at opex:
1. stock below 525 then ratio expires worthless and you keep small credit.
2. stock between 525-555, close ratio spread for profit.
3. stock above 555, close ratio for loss but your shares appreciation far offsets that.
4. if stock above 540 i guess you can let the your shares get called away at 540 and you made the profit from the ratio..but i would do #3 if it came to that
This technique is often recommended as a trade repair when your stock drops, as a way to get back to break even..but why wait for stock drop...no reason you cant do it when you expect upside move. At some point profit is capped but thats not a bad problem to have after $4000 gain
Buy 1 Mar 525 call for $11.50
Sell 2 Mar 540 calls for $6.50 each
trade will be for a small credit.
Stock is about 515 now. Max profit on just those options is at 540, which will be $1500. Stock appreciates at same time for profit of $2500 for total of $4000 profit with the same risk as just owning 100shares.
The ratio spread profits between 525-555... so anything the ratio brings in is better than you would have made just owning the shares
Things to do at opex:
1. stock below 525 then ratio expires worthless and you keep small credit.
2. stock between 525-555, close ratio spread for profit.
3. stock above 555, close ratio for loss but your shares appreciation far offsets that.
4. if stock above 540 i guess you can let the your shares get called away at 540 and you made the profit from the ratio..but i would do #3 if it came to that
This technique is often recommended as a trade repair when your stock drops, as a way to get back to break even..but why wait for stock drop...no reason you cant do it when you expect upside move. At some point profit is capped but thats not a bad problem to have after $4000 gain
Thursday, February 9, 2012
Selling a Strangle on Stock for Income Strategy
heres the scenario... you own 100 shares of stock and are considering buying 100 more. lets say $FFIV.. stock is about at 125.. you can "sell a strangle" to get a better entry price or give you better upside than a covered call.
so you would:
Sell a Mar130 call for about $3.75 and
Sell a Mar120 put for about $3.40
for a total of about $715 per 1lot
now remember you already own 100 shares so selling the call is essentially like a covered call AND you are considering buying additional 100 shares (which means you have the margin/capital to do that) so Selling the Put is not naked..it is covered by that margin.
Possibilities at opex:
1. stock moves above 130, you get your 100 shares called away at 130 plus you keep the $715. ie...you are selling your shares for 137.15 (130+715) which is $1200 higher than were it is now..about 10% gain.
2. Stock drops below 120, you can get "put" the additional 100 shares at 120. but you keep the $715..giving you effectively an entry price of $112.85 (120-7.15) if you do not close out the put prior to opex
3. stock stays between 120-130.. you keep the $715.. about a 6% gain just on option premium.
This is an alternative to just sitting there and watching the quote screen all day wondering what to do with that margin you had set aside to buy more shares..gives you 10% more upside, 6% return if nothing happens, or gives you 6% discount on entry from current price.
so you would:
Sell a Mar130 call for about $3.75 and
Sell a Mar120 put for about $3.40
for a total of about $715 per 1lot
now remember you already own 100 shares so selling the call is essentially like a covered call AND you are considering buying additional 100 shares (which means you have the margin/capital to do that) so Selling the Put is not naked..it is covered by that margin.
Possibilities at opex:
1. stock moves above 130, you get your 100 shares called away at 130 plus you keep the $715. ie...you are selling your shares for 137.15 (130+715) which is $1200 higher than were it is now..about 10% gain.
2. Stock drops below 120, you can get "put" the additional 100 shares at 120. but you keep the $715..giving you effectively an entry price of $112.85 (120-7.15) if you do not close out the put prior to opex
3. stock stays between 120-130.. you keep the $715.. about a 6% gain just on option premium.
This is an alternative to just sitting there and watching the quote screen all day wondering what to do with that margin you had set aside to buy more shares..gives you 10% more upside, 6% return if nothing happens, or gives you 6% discount on entry from current price.
Friday, February 3, 2012
Options Action $BAC trade - the missing info
One of tonights trades from Dan on Options Action was the May 7x6 put ratio spread for .05 debit.. i put on the same trade but for April. just want to make a few comments about this type of trade since it always bugs me when i see the description. you will:
Buy 1 of the May 7 puts and
Sell 2 of the May 6 puts
you will pay 5 cents ($5) for each 1x2.. so you put this on with the presumption that the stock will pull back. your reason for putting this on can varry.. almost free hedge against long stock, outright short belief, etc
The profit range at Opex in May will be pretty much from 5-7 with max profit being right at 6 bucks..now i can talk in option "greeks" but im not pretending to be some big time trader so ill keep it in english and pretty simple.. if the stock pulls back tomorrow to 6, you will not make that huge 95cent profit since the may6 puts will also increase in value..likely in excess of what you gained on the may7 puts.. so you will have to wait all the way till may to realize the big gain. you have to wait for the time decay of the may6 puts. thats the first thing that annoys me about these type of trades that gets overlooked or not mentioned.
2nd, there is the usual paragraph about how you may get "put" the stock if its under the $6 price..this is correct but it also means at Opex time, not now. if it pulls back to $5.90 tomorrow, you will not be put the stock on that extra may6 put.. that will only happen if you do not close the trade out prior to expiration in may. Breakeven is mentioned to be $5.05.. meaning if stock drops below that at Opex, THEN this ratio spread loses money. but you dont have to sit there and let your broker exercise the options(ie, force you to buy 100 shares of stock at $6), you can close the spread at a loss. That part never seems to get mentioned, you can just close the trade..just like you should close the trade for a profit if stock is at $5.95
3rd, this is not a free trade, you have to set aside enough buying power/margin to buy those shares at $6 if you dont close out that extra short may 6put.. so figure about $600 margin needed for every set of 1x2 ratio you buy. so if you were thinking of buying BAC at $6 a few weeks ago or would like to again and have $6000 in buying power available for that purchase.. you could put on a 10lot of this ratio.. buying 10 may7 puts, selling 20 may6 puts all for $50 of risk.
Sooooo... then you have to wait till near May opex then:
1. if stock is above $7, you lose just $50
2. stock anywhere between 5-7, close out both sides for profit
3. stock is below $5, then close out both sides for loss, unless for some reason you want to buy the stock (have it put to you at $6 )
i like these trades because you only pay a few cents for a high probability profitable trade.. in some cases you can do this trade for a credit and get paid to wait / paid even if stock closes above $7 in this example
Buy 1 of the May 7 puts and
Sell 2 of the May 6 puts
you will pay 5 cents ($5) for each 1x2.. so you put this on with the presumption that the stock will pull back. your reason for putting this on can varry.. almost free hedge against long stock, outright short belief, etc
The profit range at Opex in May will be pretty much from 5-7 with max profit being right at 6 bucks..now i can talk in option "greeks" but im not pretending to be some big time trader so ill keep it in english and pretty simple.. if the stock pulls back tomorrow to 6, you will not make that huge 95cent profit since the may6 puts will also increase in value..likely in excess of what you gained on the may7 puts.. so you will have to wait all the way till may to realize the big gain. you have to wait for the time decay of the may6 puts. thats the first thing that annoys me about these type of trades that gets overlooked or not mentioned.
2nd, there is the usual paragraph about how you may get "put" the stock if its under the $6 price..this is correct but it also means at Opex time, not now. if it pulls back to $5.90 tomorrow, you will not be put the stock on that extra may6 put.. that will only happen if you do not close the trade out prior to expiration in may. Breakeven is mentioned to be $5.05.. meaning if stock drops below that at Opex, THEN this ratio spread loses money. but you dont have to sit there and let your broker exercise the options(ie, force you to buy 100 shares of stock at $6), you can close the spread at a loss. That part never seems to get mentioned, you can just close the trade..just like you should close the trade for a profit if stock is at $5.95
3rd, this is not a free trade, you have to set aside enough buying power/margin to buy those shares at $6 if you dont close out that extra short may 6put.. so figure about $600 margin needed for every set of 1x2 ratio you buy. so if you were thinking of buying BAC at $6 a few weeks ago or would like to again and have $6000 in buying power available for that purchase.. you could put on a 10lot of this ratio.. buying 10 may7 puts, selling 20 may6 puts all for $50 of risk.
Sooooo... then you have to wait till near May opex then:
1. if stock is above $7, you lose just $50
2. stock anywhere between 5-7, close out both sides for profit
3. stock is below $5, then close out both sides for loss, unless for some reason you want to buy the stock (have it put to you at $6 )
i like these trades because you only pay a few cents for a high probability profitable trade.. in some cases you can do this trade for a credit and get paid to wait / paid even if stock closes above $7 in this example
Wednesday, February 1, 2012
New $GOOG setups
just missed tagging the 200 day a few days ago.. target points for entry are still testing the 200day and also breaking above the post earnings high at 591ish.. will price out spreads when either of these hits.. set alert at >591 and <563
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