Hi all, what a week, up and down in the hundreds. This Europe really has me somewhat worried. Places like Ireland and more, are paying more out each month than they are bringing in. This has to end in an ugly drop one day. I am still fully invested but in quality stocks. I avoid plays like trying to outguess RIMM or other stocks that have fallen pretty far and the temptation is to think that it can't fall more...IT CAN. Don't try to catch a falling knife. In this market my advice is to stick to quality and proven plays. I also avoid 'hot' stocks such as Panera bread and that bunch. There is plenty of money to be made and without as much risk. Many of these stocks will turn into super plays one day but not for me. I've been on the express train both north and south bound. North is much better.
Stocks like XOM, MSFT, ORCL, MCD and KO to name a few. They all offer weekly options with decent premiums. I also have a lot of CLF.
It might be a good time to do some vertical put spreads. Plenty of weekly plays that offer 1+% for a week. Compounded that is around 67% annual ROI.
Some good advice has been offered by other contributors. If you are new to options or are just getting a feel for them read all the post by our gang. Everyone here wants all of us to be successful. This is some of the best advice that is both free and available to all. Again, in a market which it can be up or down 300-400 points in a day.. leave lots of cushion and settle for less. The tortoise can win the race and have a smile on his face.
51 comments:
So I've never posted a comment here yet but I read this Blog and comments religiously. I wanted to add my results for what I've done with a MSFT "calendar" You can see the prices for which I bought/sold each contract. The first listing is my Jan 13 22.5 call which is my long contract. Then I separated each week. The Percent return is the return for the week divided by initial cost. The weeks which return negative I've had to roll to further out in time or up. All returns are after commisions.
You can also see the total return since starting this calendar.
So far I've 'reclaimed' $1.36 per contract from initial cost of $5.44. My cost basis is now at $4.08. As of yesterday, the 22.5 Jan 13 contract was at 4.65. This has taken 9 weeks.
msft price % return
10/13/2011 bto 22.5 jan 13 call 5.44
10/13/2011 sto 27 oct 21 call 0.39 6.59%
10/21/2011 btc 27 oct21 call 0.05
10/21/2011 sto 27 oct28 call 0.42 7.14%
10/28/2001 btc 27 oct28 call 0.05
10/28/2011 sto 27 nov4 call 0.28 3.85%
11/1/2011 btc 27 nov4 call 0.04
11/1/2011 sto 26 nov4 call 0.41 2.69%
11/4/2001 btc 26 nov4 call 0.13
11/4/2011 sto 26 nov11 call 0.4 -1.08%
11/10/2011 btc 26 nov 11 call 0.4
11/10/2011 sto 27 dec call 0.44 4.77%
11/21/2011 btc 27 dec call 0.12
11/21/2011 sto 25 nov4 call 0.26 4.21%
11/23/2011 btc 25 nov4 call 0.05
11/23/2011 sto 25 dec1 call .2 .21 -2.66%
12/2/2011 btc 25 dec1 call 0.29
12/2/2011 sto dec 26 call 0.18 2.20%
12/15/2011 stc dec 25 call 0.03
% return
24.98%
One Final comment, I estimate that I should completely pay for initial cost of Jan 13 call in a total of 36 weeks from start of this calendar. I need 27 more weeks, then after that its a good! I should then have 25 weeks (or so) to keep selling until Jan 13. At which point I still have intrinsic value of Jan 13 call to sell. Hopefully MSFT is still trading around 26 and thats a good return!!
Thanks for this blog. It has really helped to focus my trading and returns over the past year.
Jon
Good for you Jon, I have a bunch of the same positions and they have been very good to me also. There are many stocks that have performed in similar fashion. KO and MCD have worked very well. A stock like MCD (McDonalds) has presented some problems as it keeps going up. When doing these calendars or diagonals, at time you will have to decide when to roll up to the next strike on your short side. When rolling up you often lose the ability to make money on that week or months play but it does accomplish a hidden value. You intrinsic value of the long side goes up. One day you will want to close the long side and that is when you reap what you planted when you did all the rolling up. I have found that as much as I like AAPL, PCLN and GOOG, I do not use them anymore for this type of spread. I do like them for Vertical put spreads but they just move up and down so much I get dizzy trying to follow and figure out a safe play.
I have rotated my calendar spreads into safer more stable stocks.
I recently received a question regarding problems that might be encountered when ‘legging out’ of a position.
First, what is Legging-out? It is where you close one side of a spread and leave the other side to hopefully continue to make money.
There are generally two reasons that a trader would want to leg out. The least common is when you have lost faith in the long side of a position. EX: the stock is falling in price and you have a long side that might be a leap option. (long term equity position) Maybe the Jan 2013.
With the stock falling you want to sell the leap while it still has some value. You have sold a near term option and you do not want to buy it back to close, as you would be happy to just let it expire. If you do the above then you have ‘legged-out’ closed just one side.
The second and more common reason for legging out is when you have a spread that has a bought far-out call and a sold near-term call. The stock starts to rise and you close the near term call with the idea of just letting the far out call run up in value.
In the options world most ‘experts’ would say it is not a good idea to leg-out The main problem with legging out is that the stock can turn around and you lose all of the advantage you had hoped to gain. In the above second example let’s assume you have bought a Jan 2013 call and sold a Dec 18 call. Immediately after opening the position the stock starts to rise. The near-call you sold, is going up but so is the long call you have bought. You think, aha, before I lose any more money with the short near-call, I will buy it to close and just let the long term call run. You might lose a little buying back the short call but who cares as the long is gaining value and you think you might have stumbled onto the best game in town. The next day European banks collapse and your stock drops with the news. You look at the value of the one you were letting run and it is now at a lower value than when you bought it. So now to close the long-call, you have a loss on both sides. Nearly always it is better to either roll out one side or just close the complete position.
Hey Jerry!
I agree with you 100% regarding calendars and this crazy economy.
I like my XOM calendar, but I'm not planning on any more until the market crashes below 10,000. I don't want to be caught with everything tied up in a 13 month calendar.
So the plan for now is to stick with 5 trading days or less and sell Vertical Spreads. Going to keep the ROI low and play it safe!
Garrett
For What its Worth - Another AAPL
A newsletter I sub to on Condors has proposed another AAPL trade so here goes. It sold short the April 320 for 10.20 and now purchases weekly 320 puts to cover in case AAPl tanks. They have bought the 12/16 320 for .08 and currently have the 12/23 320 for .09. The idea is to continue buying the weekly 320 for pennies to protect the Apr 320 short. If it works, and the 320 puts continue to cost less than .10 per week, then the profit is considerable. There are approx 18 weeks till Apr expirey and at even .10 per week plus the
.17 already spent, the potenital profit is 10.20-1.80-.17 = 8.23.
This writer is concervative, of course you can just short the Apr 320 and keep the entire 10.20. He likes to be on the conservative side and CYA. The Apr 320 put is currently around 9.50.
Due to the short week could not get the premium and cushion i want for my weekly spx spread so after 24wks i am on the sidelines for spx this week.
Happy holidays
Rhm
Tax, the flaw in the problem is you are buying the insurance for say .10 a week. But, and this is or can be big... the insurance is only needed if aapl starts to drop. So let’s assume that AAPL does indeed drop to.. 350 then you have to buy the same insurance for the next week and this time it might cost you 3 bucks and next week 4 more and then aapl drops again to 335 the insurance might cost you 6 bucks per week. So if the insurance is needed it is going to cost you dearly. If not needed then you wasted all that insurance money. The plan only works if AAPL stays a long way from the strike you chose.
Another potential problem is let’s say aapl drops to 340. Your prem on the sold 320 put will be now maybe 15 depending on the time left. So you have to keep buying the insurance or close the open put for a big loss. Both cost keep escalating with no way off the merry- go-round. I would strongly advise you to avoid this strategy.
Jerry
hi taxman..i complelty agree with jerry this is a completly flawed strategy,which does not take into account that buying current month options do not cover the losses of short postion. For example in an ideal worst case scenario if appl drops to 320 tomorrow your jan put will be something like 15 dollars but short will be something like 40 dollars.Assuming you paid for long position 20 cents it will bring 15 dollars,however the short put will be up from 10 to 40..which mean u will have 15 dollars loss for each of the contract.This difference will be enough to wipe out your entire account.So this insurance in IMHO is actually no insurance.All other worst scenario will result in more losses.
This has been a fascinating conversation--Taxman, Jerry and doctorali, thanks for all weighing in. Without this kind of discourse I wouldn't be learning how to think. I'm new and really grateful for people putting ideas out there and interacting with those ideas.
What sort of impact will Kim Jong Il's demise have on the markets?
I'm mostly interested in selling naked weekly puts. Any ideas for this week? I'm still looking at GS, maybe POT, RIO, HAL, SLB. Thoughts about these or others?
Points well taken gentlemen. I see the flaw. Even if you were to close both positions on a big drop, the long weekly put would probably not cover the increase in the cost of the short put.
Tax and all, this blog is open to any ideas. We can bounce them around and see if any flaws show up in our opinions. So thinks for throwing that out for discussion.
Regarding N. Korea, wow, who knows. It is a small country that can't feed its own people, but they have NUKES and NUTS so?
Dave, or anyone, have I sent you the chapter regarding Vertical spreads? If not send me a note requesting it and I will forward it to you. Especially with the advent of weekly options, these seem to offer at least 1% weekly with pretty low risk. It seems easier to find these position than good naked put positions these days. These spreads are intimidating for those that have not used them, but quite easy once you check them out.
Putman3232@yahoo.com
My optimistic prediction for north korea....new young leader fed up with his dad's mess...will take it slow at first to follow protocol then open north korea up...unification preliminary talks start nov 2012...reunification with north korea still having govt overvregion by 2015,total merge by 2020
Rhm
RHM Good to hear an optimistic forecast for a change! Like Jerry said in the past: There is always something looming on the horizon, not to ignore the macro view but not to dwell on it either. Here's wishing everyone a
prosperous and successful new year. And 'Go AAPL' also.
Sold the MSFT 12/23 $26 Call, hopefully it pins at $26 like it did last week, I love this game!
Nicky, What did you get your MSFT 26's for? I rolled on Friday for .22 Was it better to wait? Always the question.
I sold for .20, I saw it go for as high as .24, but my limit order @ .24 did not go thorough, so I changed it to .20.
Last month I opened a VPS on DECK when it was over 100. I opened the 85/82.50 12/16 expiration. Expiration was last Friday.
Last Wed., the stock closed at around 96. Thursday morning, with less than 2 days left before expiration, a key analyst downgraded the stock and it tanked hard.
When I first saw the stock Thurs. morning, it was trading in the high 84's and I confess I panicked. It was below my sold strike and I was unsure how to roll the position since it was a VPS. I closed 60 contracts for a loss of about $1, or $6000.
Once out of the position, the stock immediately started to climb. As it started to rise, I opened a new position for the Jan. 82.5/80 VPS. I was able to recoup most of my loss, ending down about $1500 total.
Now I am holding a very small cushion on a stock that has been hit and is likely to go lower on any whiff of bad news. My question is, what to do now?
Should I just try to ride it out and roll out and down if necessary, or should I try to close the position on an up day and move into something safer, or???
If I had stayed with the position I had originally, I would have been fine. The stock closed in the mid 88's at expiration. What a difference a day makes!
Can't really say what you should do but I can totally relate to 'If I had stayed with the position I had originally, I would have been fine.' It seems every time I panic, it costs me $. Good luck
ihaveoptions, did you buyback MSFT $26s, do you plan to or just wait and see what happens tomorrow?
Kauai,
At this time you have a 3.50 cushion and three weeks to go. I would hold on to the position and as you say wait (and hope) for a pop to get even. Earnings are not until Feb so that is in your favor. DECK has been a great stock with a very large % owned by institutions. If they are taking profits or losing confidence in the stock, that is a good sign to bail.
I'm sure you don't want any talk of the down side of your trade. But for a lesson for all to learn from, some points that might have been done different.
If you are in a stock that is not going as expected, if a weekly position, I would have rolled down one week to the next lower strike. If the stock still was not making a comeback or worse yet still falling. Take your lumps from that position and get out of that stock. Since DECK does not have weekly options, rolling out into Jan in a stock you don’t trust is not a good idea unless you can lower your strikes by a large amount and get out even.
The idea that traders want to get even in the same stock is easy to fall into. My experience is that I will bail and try to get even in a stock that is working correctly.
Nicky, I'm waiting. Didn't see it above .15 and didn't really like the monthly either. I did liquidated at .04 because TK will let me without commission and I thot maybe it would pop up later this week. Waiting, waiting, waiting. All said I like this MSFT trade, works better than some of my other calendars.
Nicky, Back at the computer and see that it is at .17 now but still waiting, half hour to close
Thanks Jerry. I'm hanging in there for now, allowing some of the time value to leak out. Cramer had some negative things to say today regarding this stock, which had been one of his darlings.
One thing I have learned over the last few months is that acting in haste usually leads to worse outcomes. Sitting on my hands until the dust settles is my new credo.
@Kauai, I don't understand, if you were able to recoup most of your losses, why didn't you close your entire position???
On a side note, that's the big problem I find with VPS - sooner or later you will be caught in a bad trade, wiping out months of your gains or even worse biting a significant portion of your capital. You need to ask yourself, can you risk your (remaining) capital in the hope of underlying going up? The answer will tell you what to do? Easier said than done though. Good luck!!!
I have started avoiding VPS (especially, weeklys). I find them too risky given the meager credit I get upfront. I don't feel comfortable risking so much money for 0.5-1% return. I have decided this cannot be my long-term strategy going forward. Hats off to the few on this board who have been successful doing VPS.
I have been following this blog for 7 or 8 months now and I find myself disagreeing with Jerry more than I agree with him. But, that last blog by Jerry was (IMHO) the best post from him since I've been reading this blog. Special emphasis on the last paragraph and even more on the last sentence in that paragraph. A few years back, I was trading in a stock (an ETF actually) and I was selling naked puts on it and it got put to me. It kept dropping in price and as it was dropping, I was selling calls against my position. The call premiums were nowhere near enough of a compensation to make up for the falling stock price. It was making me mad and I was bound and determined I was eventually going to recover my losses trading this stock (I just wanted to work myself back to a break even position). Then one day I was watching CNBC and someone was talking about a position he was in and how he was losing money on it and how determined he was to get his money back. I could feel the anger in his voice and then someone else came on and talked about how trading with anger, or wanting revenge, or being hell-bent on breaking even with a stock is the wrong way to trade and will probably only lead to more losses. As that person was talking, everything that was being said exactly described me in my losing position in that ETF. I told myself that I did not want to trade like that. I closed out my position (locking in an over $9,000 loss). I moved onto something else that was working and have never traded it since. One of the best moves I have ever made in trading was to dump that ETF and move onto something else that was working. No more trading with "anger" or "revenge" or "wanting to break even" because, for me, trading that way will probably only result in more losses.
YTD, I've done 305 naked put trades (this is not counting the trades I've done today in AAPL which expire next Friday). Of those 305 trades, 12 were losing trades. Of those 12 losers, half (6) were losses of less than $20, 2 were between $20 and $50, 3 between $50 and $99 , and only 1 was for over $100. That losing trade over $100 was in SPX (a trade that, as it played out, would have been a winning trade had I stayed with it). In all 12 losing trades, had I stayed with the trade one of two outcomes would have transpired: 1. they would have been winners and expired out of the money or 2. I would have been put the stock and played the WOF which as it turned out, would also have been a winner. So, now I have changed my strategy on selling puts. I now only sell puts on something I am willing to own and if it goes ITM, I will just let the stock be put to me and play the WOF on it. The only two exceptions to that are SPX (cannot take possession of that) and AAPL (my brother bought AAPL stock @ 325 and I kind of want to better that price...although, I probably never will get the chance). That is how I'm going to play it going into 2012.
On the DECK trade, S&P up almost 1% today, DECK down over 5%...that's not good (it probably would have been down a lot more if today had been a down day for the market). The gap down on 12/15 (that gap) represents an area of resistance that's going to be hard to overcome. Looking at the chart, the old cliché "trying to catch a falling knife" applies here. If I'm "trying to catch a falling knife" it's going to be on a dividend paying stock where the lower it goes, the higher the yield on the dividend is (that will help to provide support to the falling stock price), but that doesn't apply to DECK. It doesn't look good for DECK right now (it gaped down below its 200 MA), but it did the same thing back in August and recovered nicely. It's not a stock I trade or follow...good luck to you on the trade.
RHM - with the VIX being so low, are you having trouble finding enough premium? I'm surely having that issue on my side with SPY.
Kauai - exact reason why I stick to ETFs/Indices for put spreads - you won't get a move like that in an ETF. Also, your cushion was too small and you were a bit too "greedy", perhaps. Then, what made you get into DECK? Looking at stock from a technical standpoint, (of course hindsight is 20/20), the stock did show some signs of weakness in early December.It had a death cross (50/200 cross) and also formed a head a shoulders bearish pattern. My trade would be to the downside on this one, I actually had it on my radar but did miss that move.
@dmk . I did not open an spx trade on monday since i could not find the premium i wanted at my set cushion. I was able to get it in the past with the vix at 20 so it may be due to lower trading volumes. As a rule if i do not open an spx trade monday i pass.
Rhm
Dave I found MSFT to be a great stock for the WOF method, little to no risk involved in selling at the money puts on MSFT, if assigned I just turn around and sell weeklies.
Nicky, I'm familiar with WTF, but what's WOF?
Dave
If willing, I think everyone would be interested in reading your strategy on selling naked puts.
What stocks/ETFs do you use, how far away are the strikes from the underlying, do you use weeklies or monthlies. We already know you don't go for ROI but for actual dollars. Anything else you would like to add. Great record and thanks.
Jerry --a clarifying question. You had mentioned that it was a Good Idea to open those Weekly/Leap Spreads as a Spread and not as 2 separate trades. I think that's what you meant--right? Then if the sold option goes ITM and there is a need to roll, are you saying to close the whole Spread and reopen a whole new Spread or in that case just leave the LEAP in place and roll the short side out of the money in a timely mannor?
@ ihaveoptions - read Dave's post above yours, it's the wheel of fortune, you write puts close to the money on stocks you like, that you are willing to own, if you get put on, you sell calls until the stock gets called.
Nelson
Not to interfere with Jerry's response, but you would hold the LEAP and keep rolling out and possible up the short weekly call.
Hope everyone has a great holiday with family and friends. Whatever holiday you may be celebrating. See you all next Tue.
Rolled the weekly 26 MSFT for a net of .15. As always, MSFT decided to rally right after the trade closed. Oh well
Hey Taxman I'm still holding the $26 weekly, last week I got lucky MSFT closed right at $26, can lightning strike twice? Should I just roll????
Nicky
Looks like you can net .17 right now. i think you need to consider the markets are closed Mon, so that is another day of premium decay. You won't be able to open a position until Tues. If MSFT continues to rally you win, if not you might open your short on Tues for a little less premium. I wish I had your crystal ball.
I got .20 on the MSFT with a credit limit inm y TK account. The same order in my Schwab remains unexecuted. Will probably settle for whatever I can get in the next few minutes. Tire of watching this!
Pulled the band aid off on DECK. Thanks Dave G and DMK. I figured I should just get out on an up day and live to fight another day.
I've been very happy with MSFT cal spreads. Anyone selling naked puts, or is everyone doing cal calls?
Selling nakeds on MSFT, good for the WOF method.
Down to the wire with MSFT!
Oh nO!!!!! 26.03 F!!!!
I'm having a bad week, lets see if they call these shares @ $26.03, hopefully tomorrow will be good, go Giants!!!!!
For the record, got .18 on the MSFT26 for the 30th, not the .20 stated above. Didn't have the stuffin' to hang on for the close like you Nicky. You will probably be alright tho, like the last time!
OK I'll bite. What does WOF mean.
How about "GTFO"
Of course it means "Get The Funds Out"
It's the wheel of fortune, you write puts close to the money on stocks you like, that you are willing to own, if you get put on, you sell calls until the stock gets called.
It turns out that is what I'm doing, in theory--WOF, eh?
I sold AVP puts, the stock tanked, now I just wrote my second covered calls against those 100 shares. I'm trying to get my feet wet, so I just shorted one option and had it put to me.
I've been really enjoying GS, but it sure is volatile. I sold the GS Jan12 85s for $1.92 on Dec 12th. Just BTC that position for $1.20. 5 contracts, $320 for 11 days.
How many contracts are people doing? Nicky, is this your full time income? I'm trying to replace my income in the next 5 years, so I'm a touch aggressive right now and tolerating more risk (greedy). Foolish, perhaps, but having a blast! My first month in the options business and I made $1350.00! I'm delighted...but I have a long way to go before it's my only source of income...
I do have a job, but cut back on the hours, was told to get another job when I ask for the reduction in hours, then they caved and kept me on, whatever, this is what I enjoy, the financial markets, my job is something I do to have extra money, hopefully one day I can walk away from it.
Hi all,
Nelson, as Taxman said regarding the roll, unless your thoughts on the underlying stock have changed, just roll the short call and keep the leap. Regarding opening the position. It is usually incorrect to ‘leg’ into or out of a spread. The reason is probably obvious but there are two main reasons that should be mentioned
1.The stock price might change between the time you open a different side, maybe good – maybe bad?
2.Some brokerages only charge a one-sided fee for both sides if open all at once.
Some interesting comments regarding MSFT. I held many of mine and were assigned some of them. There are a ton of reasons and ways to do this or that when assigned. Current stock price, opinion of the underlying stock, account balance and many more.
Here is a general rule of thumb of what you might do. First you should know that there is a rule that is called the substitution rule. So you get a holiday of the margin of money that might be needed.
Assume you were assigned 20 calls on the MSFT at the 26 strike. If you don’t have the shares in your account you will have to go on the open mkt and buy them. That would cost you around 52,000. But if your account bal. is 20,000., your brokerage will let you exceed the required margin to buy the stock since you are immediately selling it for 26 per share.
That isn’t the exact wording but I’m sure you get the idea.
The most common and usually the most profitable way to do it is to, buy the shares and hold the long calls or sell the long calls also.
If you hold the long calls then you can sell more calls and start the spread position all over again.
Another way that it can be done when assigned part of a spread, is to exercise your long calls and satisfy the obligations that way. But you lose any intrinsic value of the long call when doing this. But discuss it with your brokerage for their advice on what works best for you.
Hope that helps for any of you traders that were assigned or have the worry when you are near assignment.
I've got the XOM 1/21/12 at 82.50 with the market closing for XOM at 85.22. I'm worried about assignment and am wondering if it makes sense to roll to the 85 or even 87.50 before being forced to liquidate this position? The long is the 80 for Jan of 13. Any input appreciated...Thanks
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