Wednesday, October 17, 2012
Hi all, it is 9:45 on the west coast and I just opened a trade that might interest some of you. This is a vertical call spread using GOOG
I bought the Nov 745 and sold the Oct 20 750. This was a debit of 8.7
The plan is for Goog to stay over 750 by the Nov expiration. If so here are the approx. results.
I will make the diff in the spread ---5
I will sell calls weekly for 4 weeks and make approximately 3.5 each week =4 x 3.5 =14 (could be lots more)
So a gain of 19 but it cost 8.7 to open this position so a net gain of 10.3 for each option. I did quite a few of these so the results could be very nice.
It is earnings week for GOOG so some risk there but as the Oct 750 has over 17 in time val. for 3 days it seems pretty good to me. This isn’t for all but I’m doing them.
Good luck
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48 comments:
Jerry, what you described (GOOG trade) is a DIAGONAL SPREAD, not a VCS. Verticals have the same expiration for both legs of the spread and diagonals have different expirations. Anyways, good luck on your trade...you seem to me to be someone who tends to have good luck on your side more often than not. BTW, I just got filled on my GOOG trade for this expiration Friday...I sold the 650 puts @ .50 for 2.5 days till they expire. With the recent run-up in the stock, I see the risk to the downside on earnings tomorrow. They're going to have to justify this move up with good earnings. With 100+ points of cushion, I'm taking a stake that it will not drop below 650...otherwise I'll be an owner of the stock next Monday @ 650. BTW#2, I do appreciate you sharing your trade ideas and trades...thank you!
Dave, regarding the name, you are correct. My trading platform calls them verticals. So I just throw that in. As long as I tell the strikes I’m using it doesn’t really matter what you call them..lol. They are often also incorrectly called calendars spreads etc.
I like your GOOG play as 100 points should be enough even with a bad report. The ROI isn’t all that good with the maint that is needed but the position should be safe.
Jerry, you're right...it doesn't matter what you call them, but it could lead to a mis-understanding if different people use different terminology for the same spread. The two brokers I trade with (TOS and TradeStation) use the correct name for your trade (diagonal spread). I think you should call your broker and tell them they need to "coagulate their feces". Jerry, I've stated on this blog several times that I don't care about ROI. I have a set amount of $$$ that I want to make each month and I don't care how I get there (with reference to ROI)...I just want to get there. To do a spread trade (BPS and thus a better ROI) and get .50/contract for a 2.5 day trade, I would have use strikes closer to the actual price of the stock and I'm not going to sacrifice cushion for ROI, ever. For me, and only for me, I'll take more cushion over more ROI, every single time. Besides, I know I'm not the ROI trader that you, Taxman, and others on this blog are. I'm a firm believer in a man having to realize his limitations. I've seen too many guys get their faces ripped off trying to be something they're not...whether it's in the stock market, in sports, chasing women or whatever. I don't think you can be truly happy in life if you don't realize your limitations and you’re constantly trying to be something you're not. Anyways, whatever the ROI is, it has to be better than what you can get with a CD.
Dave, I agree, trying hard for ROI has been the ruin of more than it has helped when stretching it out and trying for bigger returns. But for me, I weigh different plays and then go for what I would consider safe enough and the best ROI available. But again, I vote for a position that lets you sleep and enjoy life. Not ones that can or might rip your face off..
The play I mentioned above is certainly for those that have investment dollars that in a worst situation can give up some of their hard earned $$. But then any play with options is usually leveraged and can hurt the investor that isn’t aware of the power of leverage.
Dave G.
Thanks for posting about your GOOG 650 puts trade. I wondered how much you were pushing the probabilities so I used AmiBroker to do an exploration of how often a drop has happened that would trigger your puts. The drop to trigger your puts would be more than -12.72% in the next 2 days. I found that there have only been two days since 8/9/2004 that exceeded that drop and one only slightly exceeded it. 9/29/08 was -13.33%. 11/20/08 was -12.7295%. There were 2055 days of data since 8/9/2004. So it seems that the odds of triggering your puts are better than 1 in 1000. Plus the two days that exceeded it were during the melt down in 2008 and it is not likely we will have a similar melt down in the next two days. It seems to me you have a very good trade.
What a rollout on aapl. Three weeks ago with aapl tanking, I decided to get back into a covered call trade so I bot 2 Feb 600 with the idea of selling 660 strike weeklies against the calls. Here are my results.
week 1 got 4.60 with aapl at 643
week 2 got 4.05 with aapl at 645
this week got 10.00 with aapl @ 638
I can only assume calls are getting inflated in anticipation of aapl eps next Thurs. If aapl does rally, I'll cover the short 660 and sell the Feb 600. I am just amazed how much the calls have increased when the stock is 7 points lower.
Dave G - I know I mention roi in my spread strategy, but cushion always comes first, exposure second and roi falls in third. You mention your approach is $$$ oriented. Where does cushion fit in. If your account is large enough I guess you can have all the cushion in the world, have a sub 1% roi and still make your $$$ target. I usually place 3-5 spreads a week and in the past year had only 3-5 losing weeks which were more than made up in the next 2 weeks. The accounts I trade are up some 22-25% YTD. My mother, God bless her soul, is up a whopping 40% YTD. She was making 1.25% PER YEAR on CD's. My explanation of my spread strategy to her went right into outer space.
She can't beleive you can make that kind of money in the market.
Google tanked 9% on early earnings release and missed estimates and trading was halted. Guess you never know when those 1/1000 events occur! I hope folks were adequately protected! Best of luck.
Jerry - What does that goog plunge do for your recent position. I can't imagine it being good.
Dave G. During the mayhem after the GOOG earnings false release I sold one Oct. $650 Put, for $1.50 based on my 1/1000 analysis above. I meant to sell two but made a mistake and only sold one. I could have covered it within 5 minutes for $0.55 and probably should have but decided to hold for expiration. After the revised earnings release GOOG is looking like we may be clear to hold for expiration so I am back in greed mode. Thanks for bringing up the $650 discussion. :)
DaveH, good trade dude!!! Your post made my day. If I helped someone make some $$$, then that makes me feel good. As to when is the proper time to exit a trade, I think that is a question best answered by each individual trader. I will never point fault at anyone for exiting or staying in a trade. I will say this about your decision to stay with the GOOG trade...I agree with it. I'm still in that same trade. I didn't pick a strike 100 points OTM and suddenly when the stock gives up half of it, I panic out of the trade. I could have gotten out for .35, but I still have 50 points of cushion (GOOG is up over 700 now in after hours) and I plan on using all 100 of them before I decide to get out or not. I liked the price action after GOOG resumed trading and certainly like the price action so far in after hours. As a fictional, famous person once said "greed is good!” I'm going to tweak that just a bit and say "controlled greed is good!”
Taxman, for me nothing is more important than "capital preservation" and to me cushion and capital preservation pretty much go "hand-in-hand" in the same thought process. The more cushion I trade with, the more I enhance my capability to protect my precious capital. Of course, there is that trade-off in that the more cushion one trades with, the less premium one receives. That's where greed comes into play...the desire to make more $$$ could lead one to trade with less cushion. Look, as humans, we are all greedy, some more, some less and as traders we have to balance the need to "feed the greed" with what is prudent and responsible for protecting our precious capital. Bottom line: for me, cushion is my number one priority in trading.
"Don't play earning' I say to myself when I see Jerry's post, alto I'm sure he is adroit enough to manage the trade. Then I look at my own holdings and notice alot of AAPL long. So hypocrisy is not limited to politicians I guess. Like Tax, I'm doing really well selling short term contracts against my Feb LEAPs. Great premium right now and I have been able to go in and out a couple of time during the week as well. Wish I had more long term calls and less BuPS for Jan.
Dave H Good on ya! Just goes to show that Jerry's original premise is still good today. Sell them puts...
Thurs/Fri morning has been really good for AAPL premiums using the new option chain for the next week. Good luck to all!
Hi all, well this trade doesn't look all that good at this time..lol But I have not given up on it as I have a month to recoup the premiums. But GOOG does need to cooperate and give me a little help here.. As setting up this trade cost around $10 I have a month to make that up. GOOG has no real competition in most of its endeavors, I’m hoping for good things. Probably great time to open goog naked puts or a put spread pretty far below the current price as I can’t see much lower risk?
I will keep you posted as to how this works out.. This does bring to mind one of my most basic rules…DON’T TRADE DURING EARNINGS..LOL That rule is mainly for put trading as shown in the past, with naked puts you have unlimited risk. One of the few positives of my goog trade is that all risk were for funds invested at the beginning.
Jerry
Man I am chomping at the bit to pick up some DITM aapl calls out to Feb/Apr and sell weeklies. But with Tues announcement and Thurs eps, I don't want a goog selloff or do I. Because if it does selloff, that is when I want to buy those calls. Holiday sales should be fine.
I'm also looking at next week NDX put spread. NDX is down 85/90 points in last 2 days. Can it go down another 150 by next Fri AM???
Sure can. I'll wait to see if Mon becomes 1987 25 years later. Bad economics finally catching up to the Fed printing presses.
Be patient grasshopper.
Henry Blodget was on CNBC this morning discussing GOOG. He said that GOOG still owns the search market and everyone uses Google search rather than the competitors. I know I do and I remove Bing whenever they try to sneak it on as my default search engine. He said MSFT has spent $10B on Bing and it is just money down the drain.
Took a bath this morning on Priceline. Bought it on Tuesday at 565/555 figuring no earnings. Woke up this morning and the darn thing was down 4%, was fine all week then had to sell back into the open market. Got beat up pretty hard on this one.
Anyone have thoughts for next week?
Watch out for Mon. Selloff could continue like 1987 or markets coulf rally since they closed at their lows. Hopefully aapl has good mojo with their Tues announcement and hopefully Thurs eps is not a complete disappointment.
How much help was that!!!!!
I have had the AAPL Feb 650/700 Bull call spread since 9/6 and the Feb 640 call that I sell the weeklies off of. Today I sold STO the 665 for next week.
I have ben trying to "game" what could happen next week by using risk profile and testing potential trades in TD, to soften any blow or even make some money. Then went back to the original concept in Jerry's book. Don't trade on expiration. Granted I sold the 665 for next week but I have some cushion there.
I am just going to hold on and watch for the week. Maybe its a bad idea but it may be safer.
Just a thought.
Ed, I'm a PCLN player, but I do not touch it until expiration day. Broke my rule once and got burned. When dealing with PCLN you have to remember the earnings date of EXPE (10/25), as EXPE's results greatly influences PCLN stock price.
Tax, Thanks for the warning. Strange tmes for strange investments.
Andy, I was in the AAPL 685s STO, for which I got 3.85. STC today for 1.75 netting $2 in one day. Its seems pretty good unless you look at the underlying LEAPs which are not doing well given this recent dive. Don't know what to expect next week but will sell some more if I gte the chance while we wait for AAPL to hopefully recover.
Jerry, Hope your GOOG trade is working out. Would be interested in knowing how you might manage such a position when the market brings you a big sell off. Thanks for putting this forum together. Its nice to see what others are doing and have a place to touch base with other traders.
Unfortunately I have a spidey sense AAPL is going to tank on Monday. Too many people probably got assigned with this week's puts, and so there will be selling pressure.
Had 9 positions expire thur/fri, all in the money. Happy not to be holding anything right now. I used to focus alot on technical analysis, and i dont like any of the charts i'm seeing right now. I think i'll see how things open on monday, and then probably just focus on naked puts this month with the 20%+ cushion. Gut tells me this is not the time to be shooting for the big score.
Very happy that selloff was Fri and NOT Thurs. All my NDX spreads settled OTM. If this were Thurs, I would have been a very unhappy camper closing ITM spreads. As one of my writers says "Sometimes you get the bear and sometimes it gets you". Well this time I got the bear. 60 point cushion evaporating in one day - WOW.
Another writer was talking about aapl this weekend. He indicated aapl fell thru its head/shoulder neckline that formed from mid Aug thru mid Sept and that set up a downside target of 600. Great to see aapl rallying today. Hopefully Tues and Thurs bring some good news and aapl keeps going. Made a "big" bet on ONE aapl call Fri which I sold at the open for a nice profit.
@Taxman -Got burned by the PCLN position last week. With a few companies having earnings this week, need to re-coup some $$. I am going to try a index. I was reviewing SPY. (Thinking about weekly 137/127 and aim to get around 1%, setting up Tuesday PM or Wednesday AM) Has that approach worked for you? Or is 10 pt spread too much?
Do you create a position on the call side as well?
Thanks!
Ed K
I don't trade SPY. I trade SPX, NDX & RUT. Spy 137/127 is equivalent to SPX 1370/1270, that is 100 points. If SPY falls thru the 137, the 127 will be NO help.
With last weeks volatility, I would be very carefull placing any trades this week. I am possibly looking at a trade on Wed PM, even Thurs AM. My fav index has been NDX but if aapl disappoints Thurs, then Fri AM settlement on NDX could be real ugly.
I am actually looking at a RUT 780/770 BuPS for .15/.20. RUT is now 818 so that is 38 points. I was also looking at an SPX 1370/1350 or there abouts. With SPX at 1425, that is 55 points or 550 Dow points. I am very hesitant about putting those trades on however. This market does not look good and I have a great week set up already rolling out weekly aapl, tza, qqq, & fb puts/calls.
I think this market is being held up on a wing and a prayer. I know you want to get back some of your lose, but in times like this cash is a position. There will be another bus coming along later this week or next, so be extra cautious.
FYI
Just placed an SPX 1360/1340 BuPS
for .25 at 1425. Gives me 65 SPX points/650 DOW points(I equate 1 SPX = 10 DOW points)till Fri PM.
Famous last words, but I don't see the SPX/DOW correcting 65/650 points THIS week. Besides, I have lots of profits on previously mentioned call/put rollouts. This is my lottery play. Short leash.
Delta of short 1360 is 6.
Hi Jerry, it's been a very long time since I last commented on here but do read all comments most of the time....I've just been busy.
Anyway, since you now mostly place diagonal (calendar) spreads, when is your next chapter of your book out on this as I look forward to seeing your rules and strategies particularly for situations when and how to roll up and down and out etc. on the short leg?
Thanks Jerry!
Hey Taxman,
Have you been placing these spreads as "all or none"?? Somehow whenever I place SPX spreads as All or None, the order gets rejected. I called my brokerage and they informed me that CBOE will not take any contingency orders.
Lets see what happens today. Good time to sell some credit spreads, glad they got rejected yesteday :)
Hospital
I do not indicate all or none. I rarely have a problem getting filled on 10-15 contract orders. I sometimes have problems on larger orders. I just looked at available open put strikes for SPX and see they are not limited. I guess they opened more puts at lower strikes given the drop in the market. Yesterday I was looking at RUT & NDX and put strikes were limited.
Given what the market is doing, watch your exposure time in the market. SPX settles at fri close where NDX & RUT are fri open.
Taxman, please explain BuPS, I've tried to figure it out but no luck.
Thank you
Cliff
buPS means bull put spread meaning ur a bull or want the market to go up
Sold SPX 1340/1325 for 25 cents this am around 11:30 AM.
Got 72 points of cushion for 3 days giving more than 1.5% ROI.
Have been missing the volatility in the market for quite sometime now.
Hospital
Was looking at a very similar SPX spread. I already have a 1360/1340
placed on Mon. Waited tho to see if markets would sell off into the close and how they would open on Wed. I'll be looking in the 1320-1345 area depending on the open. Will also be looking at NDX 2475-2525 area.
Might want to look at FB. They announced last night and the stock is poppin from 19.50 to 22.50 in premarket. I assume it is a monster short squeeze. I'm playing the Jan 20 put. Have 30 contracts and have been selling weekly 19 and 19.50 against it. I'm playing the unlocking of 1.2 BILLION shares on Nov 14-15. You think peeps buying the IPO at 38, seeing it trade to 20 just might want to dump a few 100 million shares on Nov 14-15????????? Might be a good lottery play. Jan 20 puts traded 2.40 yesterday when FB was 19.50.
At 22.50, they will be a lot cheaper. Just play the unlocking.
@Tax,
I was thinking the same for NDX as well. Any impact with Apple earnings coming out Thursday evening? I assume since this closes on Friday AM should be limited impact.
Tried submitting RUT this morning but no bites.
Ed K
Here is my take. I dove into spreads today.
SPX 1360/1340 for .25 cush 54
RUT 785/770 for .15 cush 29
NDX 2550/2525 for .30/.40 cush 100+
NDX has a Fri AM settlement and IT WILL be affected by aapl earning Thurs night. The overnight futures WILL affect NDX opening tick. That is one reason I have 100 points of cushion on my NDX trade. Unless there is a major selloff today and tommorrow, I cant beleive an aapl miss will affect NDX to that extreme. I WILL be watching NDX for the next two days.
I almost didn't place the NDX spread because NDX was selling of early today. It seems to have found support.
You might want to give that FB trade a thought. Bounced it off a broker friend of mine and his view is that FB is worthless.
Wondering what to do tomorrow before earnings. I've got some 630 APR13 calls that I have been selling shorts against as the price has dropped.
I'm a little underwater, but not too bad. If AAPL misses and the stock drops below 600, I'm thinking I won't have much opportunity to sell shorts for a while against my 630s since I won't be able to sell below that strike.
Considering getting out tomorrow before the call to wait for the possible post earnings drop to buy back in. Only thing is if they beat expectations or miss by only a little, the stock might rally and I will miss the bump.
Anybody got any ideas on this?
Kauai
Some thoughts. AAPL is up around 620 premarket. You own the Apr 630 which gives you time for aapl to recover in case of a miss. With the high option premiums you could short out to next week or out to Nov expirey for added protection and/or you could buy an Oct 26 bear put spread to protect the downside. A 610/590 Oct 26 put spread would cost you 7.00 to possibly make 20 if aapl drops below 590, or a 600/580 would cost 5.25 to make 20 if aapl drops below 580. Or just ride it out.
Buying the spreads will cost you and you will lose the $$ on a rally. I think I would just try to sell as much premium as I could given the high volatility and ride it out. The next quarter should be great and you are holding Apr calls. Just my .02. Good luck
Created a spread on RUT this morning and had 20 pts of cushion and now thats down to about 15. This is my first index spread that settles tomorrow. Anything I should be aware of? Advice?
Should I close it out later afternoon if it drops more
Thanks
Ed K
Need more specifics Ed. What are your stikes. Your cush was 20, now 15, I assume with the market rallying again, your cush is back close to 20. Bad aapl eps should not affect the RUT and a 15-20 point cush should be fine. That would mean RUT would have to drop
2%+ overnight. I'm in a 785/770 and feel safe. I can't tell you what to do, but would feel safe with that cush unless the markets tank big time into the close.
I do admit that Fri AM settlement makes you feel helpless. Once the market closes on Thurs there is nothing you can do but wait.
Kauai - Decided what you will do with aapl?????
I notice the focus here on credit spreads is the points of cushion. But it's an arbitrary measure since 54 points for NDX is risky (<2%) while it's a safe distance for SPX (4%) assuming a similar implied volatility. % OTM is a relative measure which simplifies comparisons for those who can't calculate %'s real time in their head. Something to consider.
Tax:
I decided to ride it out. I got into most of my positions in the 650 to 680 range, and have been selling against them since open. As you can imagine, I am in the hole after the recent drop.
This a.m. I was going to sell some of the 630s and buy calls at a lower strike, but it looks like the stock has recovered, so maybe no need.
The rollercoaster of AAPL continues!
Wheeeeeeeee............
All my weeklys puts 520/535/560/570/575 for the week of 10/26 expired "worthless" (my favorite word...as a seller of options). I sold the 570 and 575 strikes on the open this morning as 1 day trades. Normally I do not sell weeklys on the week of earnings (only the monthlies), but could not resist those elevated premiums. Also, with the recent decline in AAPL shares leading up to earnings, I felt that any disappointment in AAPL earnings was pretty much already baked into the share price. AAPL did disappoint, but not enough to drop below my highest strike - 560...thank you AAPL. For next week, 11/02, I'm short AAPL puts @ the following strikes: 520/525/540. I’m also short the NOV monthlies @ 430/445/460/465/470 and DEC monthlies @ 370. All those monthlies are now bidding for less than half the premiums that I sold them for even though AAPL has continued to decline in price. That's due, in large part, to the vol crush that happened today in AAPL options now that earnings has come and gone. I'm also short the GOOG 530 and 555 puts, both of which are bidding for well less than half my sale price. GOOG seems to have found a bottom around 675-680. I entered those trades the day after GOOG earnings and we all know how that turned out.
Dave G, I think most of those puts you're writing on AAPL will expire worthless, but isn't the premium too low to make a decent return on capital?
For example, take the 370 DEC put on AAPL, that will gain you 0.38$ ... In my opinion you'd might as well go long SPY (or short puts there less OTM).
Just my thought.
I was just wondering if the 20% out of the money rule would apply to weeklies. I noticed that it is difficult to find strike prices in the weeklies that are 20% or more out of the money.
Annie,
20% out of the money does not in general apply to weeklies, its for monthlies.
With a low VIX for the last 5-6 months, I find it hard to get juicy premiums like last year but there are still a lot of options to sell without risking too much.
Look at the SPY Strike 136 expiring on Nov 2nd or AAPL Strike 555 or 550 expiring Nov 2nd. In terms of credit spreads, look at SPX 1350/1325 and try to sell it from more than 40 cents.
Have a nice trading week
Hospitalist,
Thank you, for your recommendations. However, the SPY is currently 141.35 so the 136 would be less than 4% out of the money. The AAPL is trading at 604 and at 555 is 8% out of the money. Even though these weeklies expires in 4 days, they seem a little too close for comfort. Other than entering a stop order for double the premium, are there any rules for protection when choosing a weekly as far as the percentage out of the money? Since there are 4 weeks in the month, is it 20%/4 weeks or 5% out of the money?
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