Hi all, just a reminder that there are different stocks that are appropriate for different situations. I don’t use stocks for a calendar spreads that I would use for vertical put spreads or for naked puts.
Don’t fall into the rut of using the same stocks and trying to force them to fit where they don’t belong. An example is AMZN. A great stock with good premiums. But that is ok ok for a short play such as a one week put or even a vertical put spread. The same might be said for even RIMM or FSLR. There are lots of examples of these kinds of plays.
For a calendar spread where you might plan on owning the long call for a year or so, you don’t want the roller coaster ride associated with hi-PE stocks.
I am listing the stocks that I am now using in calendar spreads. If they fit your profile for investing, jump aboard. There are lots of others that fit the profile but these are some of my favorites. They offer decent premiums, lower volatility and especially- WEEKLY options.
AAPL, CLF, IBM, KO, MCD, MOS, MSFT, ORCL POT, SLB, XOM
74 comments:
Theoretically one can roll an ITM call all the way to the expiration and keep making money, no?
i.e. keep rolling MSFT $26 call out further all the way to 2013, then exercise the long call @ $25 and sell for $26, even if MSFT is trading at $35.
Nicky The idea is to continue rolling the weekly and make money. If MSFT increases to 35 as in your example, hopefully you will have the opportunity to roll the weekly short call UP each week as MSFT increases in value. MSFT is 27 now, if it moves to 28 in two weeks, you should try to roll UP your weekly to 28. You might find that you have to roll it out two or three weeks but you want to try and keep your weekly short call near the current MSFT price.
The deeper in the money your short call gets, the less premium you will get on your rollouts.
Remember that as MSFT increases in value so does the long LEAP. So at
expriarion in Jan 13 if MSFT is trading 30, your leap should have an intrinsic value of 5.00.
Just wondering about thoughts on when to move up to the next strike on the short call in calendar spreads. This week MSFT is nearing 27 and I am short on the 26 strike.
I did a hypothetical "look-back" at prices since August, and even though the stock ran up above 27 during the Aug. - Nov. time frame, it still eventually dropped back down to below 26.
It seems like hanging in there even if it goes above 27 is ok. I'm wondering if anyone has any guidelines for when to pull the rip cord and gap up to the next strike?
Kauai
I don't have any guidelines other than price. Take this past week for example. I was short the 11/4 27's and let them expire on Fri because MSFT was so far below 27. I waited for Mon to see what would happen. I looked at the 11/11 27's and they weren't paying anything, I didn't want to drop to a 26 so I sold the 11/18 27's for .17 and then watched MSFT rally where I could have gotten approx .25-.28
See my above post concerning my opinion about trying to roll out deep ITM calls. Bottom line, you don't get much. I would rather roll my short call UP as MSFT rallies.
Do you live in Kauai?/ or is that just a handle. Wife and I were there for two weeks about three years ago. Had a great time. Stayed one week near Lehue and one week in Princtown. Hanalee Bay is just gorgeous. Traded our timeshares. Poipu beach near the golf course and the Marriott resort was spectacular. Really liked the queens bath. Enjoyed watching the sunsets. Bottom line is that we enjoyed everything. But you can keep POI. Blah. Only thing we didn't like was the 25 hours it took to get there from Delaware.
Kauai
That is a good point regarding whether of not to roll up. I have the same situation in many of my positions this week. Today I rolled out over 200 of the MSFT 26’s to the Dec 27’s. I rolled as the time value dropped to .05 and there was a good chance I would be assigned if I didn’t roll out, or up and out. I lost about .25 per trade but I gained roughly .75 in intrinsic value per trade.
I feel with MSFT that it is coming out of its dormant state and actually going to continue a move north? With its SKIPE involvement and new windows for phones etc. there are good things ahead for the sleeping giant.
Nicky: as Taxman says rolling up even with a debit can still be a positive for your account. You have got think of it in terms of when rolling to a higher strike price you are gaining the INTRINSIC val of the movement of the stock. Of course the stock can drop back and then the roll is for naught…
When trying to decide to roll or not.. I use the .10 cent rule. I.E: if the time (extrinsic) value get to below .10 I usually give it my undivided attention. It is ready to be rolled.
Some newer traders seem worried if the stock passes by your sold strike price. That does not worry me, I use the .10 rule as mentioned above. As long as you have some time value, as a general rule you are safe from being assigned.
So will have to roll by Friday, the good thing is that the Nov $25 puts I sold for .39 have fallen to .05, the premium received from those will cover the roll up on the $26 calls, I think I will be selling puts every month on MSFT while I have this spread going, I sold the $26 call, then turned around and sold the $25 put, now if I roll to the $27 call, I will sell the $26 put.
Jerry, Thanks for the 10 cent rule, guess I was pretty close to assignment as well on 50 contracts of MSFT.
Jerry
Thanks for the post. I also rolled out of my 26 weeklies and into Dec 27s. Lost a similar amount to you in the roll out and up.
In your post you said that with the time value less than .10 you ran the risk of being assigned. Are you saying you were worried about being assigned before the expiration date? I know this is always a possibility, but does this actually happen often if the time value is low, even before the expiration date?
Taxman-- yes, I do live on Kauai. It is a great place to live. Glad you had a good time when you visited, we rely on people like you coming here and enjoying it...
Aloha,
Mike
Kauai; As you say, very seldom are there assignments before the the last day of trading. But it can happen and as you know our msft's were getting down to .04 time Val. Pushing the envlope and i like the trade and would have to do it anyway probably so I did it before i was slapped around.
I also open up some new trades with XOM bought the Jan 2013 77.50 and sold the 11/19 8o strike for a 10%roi. I like it
Jerry - Thanks for starting the new thread. Can I make a suggestion? When you start a new thread, can you post in the older thread 1st since by that time I am subscribed to it and will get an email. Thanks for the blog!
What about VZ or CSCO as a calendar spread candidate?
Tom talks calenders today they put one on in this AM.. A MUST watch if your interested in getting into calenders.
Click the Good trade / Bad trade Tab....If your not watching today it's at mark 166.25
https://www.tastytrade.com/ref?id=94c157f83d95a8010063febc5bb8340e
Heads up, MSFT ex-dividend date is 11/15. Pays $.20/share. Make sure your positions have more than $.20 time value on that date.
DMK, Will do on the posting..
I don't think vz has weeklys but I do like csco.
Am I the only one still left holding this weeks MSFT $26s?
Nicky
It might still be a good hold with the futures down 200+ and MSFT priced at 26.50 pre-market. Europe is waging the dog again.
FYI, good reference for list of weekly options:
http://www.cboe.com/micro/weeklys/availableweeklys.aspx
Spxpm options now available from cboe. It seems other people did not like the stop-trading-optiobs-on-thursday-but-spx-doesnt-settle-until-friday-morning nature of the spx monthly (and by default the third weekly of every month). These new ones settle Friday like the weeklies do so now youhave Friday settled weeklies all month.ill try them next week.
Rhm
BTC - MSFT Nov 11 26.00 Call for .73
STO - MSFT Dec 17 27.00 Call for .57
I should have waited, I panicked could have paid much less.
I did much worse, don't feel too bad.
MSFT Dividend next week.
Read JBL's post back up the line. I was talking to a broker friend this AM about the MSFT dividend and he said an assignment could happen at the ex dividend date.
I need help here if anyone knows, but he was saying that you run the risk if the current price of MSFT PLUS the dividend is equal to or greater than your short strike plus the current ASK of the short option .
Can anyone clarify this?????
Hi Jerry,
Loved your book.. I read it recently. I have a question on the spreads. So when you buy a leap call option and sell a call on a stock, if the stock moves above the strike price at expiration are you required to buy 100 shares of the stock if you don't own the shares outright? Just want to make sure I understand this correctly. Thanks!
Hey All,
I am not opening any positions until FRIDAY. This market is way to volitile for selling options.
OK, Here is the scenario in real terms.
MSFT closed today at 26.20. I am long the 1/13 25 LEAP and am short the 11/18 27 call. Apparently MSFT goes ex div on 11/15 for a .20 dividend. The 11/18 27 call closed today at bid .16, ask .17.
I know I don't get paid/nor owe the dividend.
? is do I have to worry about getting assigned and at what prices. As explained to me by my broker friend, I run a risk of assignment if the 11/15 price of MSFT + the .20 dividend EXCEEDS the 27 short call strike + bid price of the 27 short call.
I have done covered calls owning the underlying stock for years, but never a covered call on a LEAP.
All of us with MSFT cal spreads are in this boat so we better know the consequences.
Taxman,
I'm new on the cal spreads also. Here is what I understand and it happened to me on Monday market closed. I found out from my broker Tuesday morning that my XOM Nov 7 contracts was assigned and they assigned the XOM stocks that I didn't own as short.
Originally I had 5 cal spreads on XOM and didn't realize 11/7 was an X-div date and got assigned on Monday at the market close. I found out from my trading platform and was verified by my broker that I was short 500 shares of XOM and I bought it back to cover my XOM short and sold the call options instead to reduce my account margin requirement. The broker reminded me to watch out the x-div date specially with the stock is ITM. Hope it helps.
Trendy
BTW, my broker said that I had to pay the dividend to the stock owner because I was short XOM. It really hurt.
Trendy
Heavy sell off today, my March Spy puts are up 50% today and the sell off just started. Buckle up.
Like others, I rolled out of the MSFT DEC 27 call today when the price dropped. I had rolled the Nov. 11 26 call into the DEC 27 yesterday. When I sold the DEC 27, price was .71. Today I bought it back for .60 for .11 profit.
Wish I had the power to see the future. If I had waited, that same call closed at about .45. Glad to make a little and offset the cost of rolling up to the DEC 27.
When I sold the DEC 27 yesterday, I thought I would be sitting on the sidelines for over a month. Amazing how things can turn so quickly with options...
I will wait for things to move back up before selling another 27, either the weekly or a monthly, depending on price and timing.
What a day today, I rolled to the Dec. $27s, then:
BTC Nov 19 $25 puts for .11
STO Nov 19 $26 puts for .32
So selling the $26 puts cancelled out the loss from rolling the calls.
I don't worry about MSFT, none of us do, that's why we're running calendars on it, so why not write puts to hedge our bets? I figure I can always roll or even take assignment and sell calls against it, that will double the income, selling calls against the leaps and the stock.
Lots of questions regarding assignment during dividend time. My general rule, to simplify.
If you have more time value in the option (extrinsic) than the dividend, that should protect you. You do have to be concerned that the company might raise its dividend and throw off your calculations some, but when dividend time comes check your options for extra time value. If it is close think about rolling out as I did and I see Hannah did also. This gives you more time val and some level of safety.
Trendy mentioned also a key point. If you position is ITM the danger level jacks up some.
IFC, if I understand you question, you are not required to buy the stock unless you are assigned. You will not be assigned if your position has extra time value. That is a general rule as you ‘can’ be assigned at any time. But a key point is that option traders are trading options and not stocks. As long as there is more money in the option than in the stock you will not get assigned. EX; you sell a call at the 100 strike and the underlying stock is up to 110. But, and this is where TIME VALUE AKA EXTRINSIC VAL matters. In the above the example the options might be selling for $11. So the ‘other’ side has a choice of exercising the option and getting it for 100 and selling it on the open market for 110 and profit of 10. Or he can just sell the option and make 11 with less commission and hassle. More money in the option than the stock transaction!
Jerry, Good post. Explanation is simple, clear and very helpful. Thanks
My spx weekly will expire today. I also did a smaller oex (10 contracts) this week. The premiums are higher but still trying to get a handle on the liquidity. Good week all (30) will expire made $500 on 60k maintenance this week with approximately 11% cushion to start on both positions. I rolled my msft 27 and intc 24 yesterday (trying a set of calendar s along with the rest of you still trying to get a "feel" for these)
Jerry out if your list (thx again) you have aapl, msft open any others? Which would be your next ones maybe ill open up another 1-2 and share my results like ihaveoptions has so we can all share a laregr sample size.
Rhm
@ All - opened some SPX put spreads for today. (entered at 11am)
145/140 for .10
@fulgore, i think you mean 1045/1040 for the weeklies, right? if that's the case, unlikely the s&p will drop 17% this week.
Mark said...
All, I would appreciate a discussion of option spreads and taxation. Please refer to the below article, from what I'm getting out of it, any verticle spread is pretty much considered a straddle tax wise. From the article, maybe not a good ideal to carry a spread over the calender year as have to deal with extra forms.
http://www.optionetics.com/market/articles/2001/04/24/tax-tips-taxation-of-spread-transactions
November 5, 2011 9:23 AM
Interested to see if anyone has an opinion about Marks question reposted above. Thanks
Hi all, I think Taxman might be a CPA and some good answers possible. One important thing to add to the mix, I don't think your options trades are reported to the IRS. I have always reported all, as the alternative can result in real problems.. lol. Your account balance is certainly reported so anything left off will at some time be questioned.
RHMoptions;
Positions I now have are as follows., all calendar spreads.
AAPL, CLF, IBM, KO, MCD, MOS, MSFT, ORCL, POT, SLB & XOM Some of these I have rolled into Jan of 2012 and all the long calls are for Jan of 2013 except the AAPL. By rolling into Jan I have been able to roll up the strikes I am using as most of these stocks have followed the latest trend and moved up.
By rolling up the strikes two things are accomplished.
1. I can roll up two months and go to a higher strike and still make 10% for each month.
2. I get more distance between the bought and sold call which will pay dividends when closing the position in Jan of 2013
I am not a fan or rolling to soon but you also can’t lag for too long or rolling becomes less profitable.
I just closed my AAPL’s this morn. I just don't like the feel of it. I had the Jan of 2012 400/405's and AAPL trading around 382 or so..
Was it an overall loss, not really, but close to even But you can' t let that weigh on a 'good' decision. When things are not going as they should... pull the trigger.. Some of my big losses of 2000 were my thinking.. "Just hang on and it just has to come back" "It can't go any lower" etc
Open a position with the best of knowledge and hopes and if it turns sour, recognize it and close it and open a better one. Part of this options business is overcoming the hesitancy of making a tough decision.
I feel the same way Jerry, tomorrow I will close my AAPL spread for a loss but at least I will get something for it. Your right it just doesn't feel right. Last fri i opened an EEM diag spread Mar12/35 long at 7.00 and sold nov11/42 for .32 about 4.5 % will see how it works out. The good thing about the call being so deep inthe money is I only paid 2.00 for time val till next march.
Hi Jerry,
I have a 365/360 VPS that expires this Fri. I read that you got out of your AAPL cal spreads today. Just wondering what your thoughts are for the rest of this week on my VPS?
I have four long days left and since I already missed the premium doubling rule, my loss at close today would have been about .55 for 25 contracts. I almost pulled the ripcord to get out, but thought I would give it another day.
I also do not feel good about this stock any longer, but am hoping to ride it out. Your thoughts on this would be appreciated.
HI Kauai; I still like AAPL and feel they are one of the best companies in America. plenty of cash and sales through the roof and also a low PE. Buttt.. they have fallen out of favor somewhat. A lot of competition from all sides. Pads, Phones etc. but in the works is some sort of AAPL TV? Don’t know what it means but there are too many stocks that offer good returns without the stress or big moves.
Today I opened a Cal spread with SNDK. I bought the Jan 2013 @ the 50 strike and sold this weeks 52.5 A 6% ROI and not the same stress. But if I were you I would hold on as the 370 ‘should’ be fine. If not you can later roll it down and still make some money,
My calendar spread was for Jan 2012 I just didn’t want to hold that long.
Thanks Jerry. AAPL has really disintegrated in the last two weeks since an analyst dissected their supply chain and made the assertion they were cutting back orders. In this kind of market it is all about perception, not about fundamentals.
I'll be steering clear of them for a while after this.
Jerry, Did you keep any of your longer term LEAPs with AAPL? I've still got some Jan13s as well as XOM and MSFT. Like the slower movers for the calendars tho I'm scared stuffless about the EU situation and here in the US the so called Stupercommittee.
Hi guys, I closed all of the aapl. longs and shorts.
I try to be aware of the world events but I have learned that there is always something just over the horizon that will be earth shaking... The market seems to need a looming crisis?
US companies in general are doing just fine. Lots cash and good balance sheets.
But I doon't hesitate to close or open positions if necessary.
I recently sold the July 310 Aapl put and collected $20. I also have the jan 2012 $390 call. Down on the call.. Any thoughts on this? Is it time to bail? Thought about waiting for the black Friday rise..
I'm sticking with AAPL, retail sales up and Xmas around the corner. Everybody (admit it) wants one or more of their gizmos. Market sentiment seems to be shifting.
ihaveoptions.. I agree, with reservations. Don’t stick you head in the sand regarding the competition. I have I-ph, I-pod and getting a I-pad this week so I love ‘em but, many good and viable products from their competition are coming on scene all the time. So be aware that they don’t have a lock on this field as in the past. Buyers that are on a tighter budget will migrate to comparable products that are a cheaper price.
Yesterday sold SPX 1125/1105 for 0.25 and OEX 505/485 for 0.20. 20 contracts each.
Week-22
regards
rhmoptions
@ Glenn it was the 1245 / 1240 sorry
I will see about opening a position on Friday again.
Jerry,
Loved your book... have been trying to learn about options for the past 2 years and am finally acting on them.
How do you pick your long call strike/month? How do you decide when it's time to roll either the short or long?
Thanks for this blog!
@rhm, would 20 contracts on your SPX trade above fill at once or partially (few at a time)?
Any thoughts on GRPN options? One can sell the Dec $15s for .25, that's a 37%+ cushion, only 21 1/2 trading days till expiration, seems like a safe bet during the lock-up period??
To Everyone
I am a CPA, but my professional ethics precludes me from givng specific tax advice to non clients especially when I am unfamiliar with their tax situation. Taxation of option trading can be very tricky. I can give you the IRS site so you can get info on the taxation of option trading.
1.Go to www.irs.gov
2.Click on Individual right below the IRS logo.
3.click on forms and publications under IRS resources
4.Under forms & pubs click on Publication Number
In the "FIND" box enter Publ 550 and click on FIND
5.Click on Pub 550-Inv Inc & Exp
The entire 84 page pub will display.
6.Under Chap 4 -Options go to pages 59-62. You will find directions on how to report option trades.
Good Luck, it is about as clear as mud. Please consult your own tax advisor on the proper reporting.
That is about ALL I can do.
@Taxman,
Oh how tax is interesting in Canada. If you SELL an option you have to pay tax on the profit.
If you BUY then SELL an option, any profit you make you pay no tax if you go through a tax free savings account when using the money. So in turn you can make any amount of money using a BUY position and never pay tax.
But I guess that is why 75% of options traders who BUY options lose money and 75% of options traders who SELL make money.
again I will wait till FRI most likely to open any positions.
This is a test.
Perigee, thanks for the nice words.
Picking the long and short isn’t hard or tricky. I pick a long (bought) by ging out about a year. At this time the Jan 2013 fits that bill. I try to pick the nearest time period such as the current weeks. I only use stocks that offer weekly options as it gives me all the choices of a monthly only stock, plus I can use weekly’s when they fit.
The strike price for the long is chosen by picking the nearest strike price just below the current stock price. The strike price for the short is by going just past the current stock price. There are times I might deviate some but usually that is the first place that I look for strikes that offer good ROI and some safety.
Nicky; that is a ton of cushion and probably safe but I avoid these kinds of stocks until proven. Also it might be hard to get the .25. at .20 it would be an 11% ROI not bad.
Thanks taxman. I have been doing them since 1997 and never questioned.
Interesting: Goldman Sachs' derivatives strategists recommended selling January $24 MSFT puts and collect 40 cents when the stock was at $26.74.
"Since 2005, investors who sold the closest to a 10% 0ut-of-the-money listed January put on Microsoft in mid-November and held to expiration collected the full 100% five of the past six years -- all years except 2009 were profitable."
Jerry, When you say you've been doin'em since 97 do you mean you just report your net P/L? Just curious. I know the accountant shouldn't be driving the bus but mine seems to look askance at anything that doesn't have a W-2.
@ska all at once. Sometimes it may fill in two steps but usually all at once.
Cheers
Rhm
Wondering what the consensus is on MSFT for the coming week. Drop down and sell the 26, wait for a bump and sell the 27?
My 27s will expire tomorrow worthless, and I know several of you are in the same boat...
Kauai, I started one of my MSFT positions at 27, rolled down one week to the 26 only to have to buy my way back up to the 27. So I think I'll stay at the 27, even with diminished premium and see where we go. Guess it depends upon whether you think this drop is temporary or something more lasting. I tend to think its only the EU situation that's doing it and that will probably be resolved.
I rolled my MSFT to Dec 27's and netted .44. Did it on Tues beacause I didn't want to have to deal with the dividend and possible assignment. Works out to a 10% roi for the month. Hopefully MSFT will recover towards 27 by then.
I would NOT trade down to 26 and have to buy your way back up to 27"s.
All - On the spike down today I opened up SPY put spread ($117/113) for $0.12 credit which is about 3.2% return! I did it on the spike down. With one day left till expiry, 5 points should be enough cushion.
Looks like all my shorts may expire OTM on my calendars this week. What to do? Wait for better prices next week? That would expose all long calls owned to serious market decline.atstoc
Just closed my MSFT Dec 27's for
.17 that I sold on Mon for .44 to keep away from the potential dividend assignment issue. No sense waitng 4 weeks to capture the remaining .17. Hopefully MSFT will rally during the normally bullish T'day week and I'll either resell the Dec 27's or look at a weekly opportunity.
Spx and oex positions expired.
Doin it again next week
Rob
Hi all, ihaveoptinos; yes I just report the basic’s. Pretty much how it comes from the brokerage. Just What, When, Open date Close date and results. I don’t track or report commissions etc..
Regarding the overall market, this Europe stuff keeps affecting the market, next is Spain and France. My advice is leave lots of cushion and leave as little time as necessary. You don’t need to take excessive chances with options to make money. Even with the Europe etc there is still plenty of money to be made with options.
Nicky I would be careful following that advice regarding MSFT. That is a lot of time to give for bad news to come out. I have over 250 MSFT in my calendar spreads so I like the steady action of MSFT but caution should be the by-word with any naked put. There is a name for traders that take bigger chances on what ‘seems’ to be a safe play… they call them ‘broke..’ so be careful.
Hope everyone had a "Happy Thanksgiving"!
Just wanted to take this opportunity to say, "Thank you so much", Jerry,for all of your advice regarding trading techniques; your suggestions for trades and feedback to help keep traders on track each week.
I appreciate your time and effort so much and your trading philosophy and ideas are GOLDEN!
Sue
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