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Wednesday, August 13, 2014

Buying Calls Instead of Stock Strategy Video -- Update on POT Example

For today's blog post, I thought I would include my silent video titled: "Call Instead of Stock Strategy (CIS): A Stock Replacement Strategy That Efficiently Utilizes Your Capital".


I produced this video on March 9th 2014. The video identifies 8 ideal strategy criteria that I use when implementing a CIS candidate.  The example shown in the video is a real trade I initiated with Potash Corp. Of Saskatchewan Inc. (POT) options. For the record, I am still "technically" in what has turned out to be a long-term option position. My original expectation would be that I would have been out of the trade long before now! Since this trade was initiated on March 7th, 2014, all original options have long since expired or have been rolled out in future months. The original CIS POT options trade that I put on was as follows:

POT underlying Stock Price @ ~$34.68 on 3/7/2014                                    
                                 BUY +3 JUN 30 Calls @ $4.95 = -$1,485.00 
                                SELL -1 APR 36 Calls @ $0.59 = +$    59.00
                                BUY +3 APR 36 Puts @  $2.19 = -$    657.00
                                SELL -6 APR 33 Puts @ $0.58 = +$   348.00
                                BUY +3 APR 30 Puts @ $0.09 = - $     27.00
                                Original CIS TradeNET DEBIT =-$ 1,762.00

The original CIS net deltas for such a position as above was approximately +195. The breakdown of the +195 deltas is calculated as follows:

                               +3 JUN 30 Calls ~+85 deltas X 3 = +255 deltas
                               -1 APR 36 Calls  ~-30 deltas X 1 =  -  30 deltas
                              +3 APR 36 Puts  ~-80 deltas X 3 =  -  240 deltas
                              -6  APR 33 Puts  ~+45 deltas X 6 = +270 deltas
                              +3 APR 30 Puts  ~-20 deltas X 3 = -    60 deltas
                                Original CIS Trade NET DELTAS= +195

The +195 option deltas position I originally had with POT as the underlying, equates to having +195 shares of stock in POT. Had I instead purchased 195 shares of POT, my net cost would have been $6,762.50 (POT @ $34.68 per share X 195 shares).  So, when I say that options are a more efficient use of one's capital for essentially the same amount of risk exposure this example should show this clearly.  In other words, the outright stock purchase for 195 shares at $6,762.50 versus the purchase of longer term calls with some nearer term downside protection hedges costing only $1,762.00 frees up nearly $5,000 of your capital!  

So what happened to these original option positions you may ask?  First of all, POT itself barely moved by the end of April expiration...$34.57 per share.  The longer term JUN 30 calls lost about 16 cents to $4.79 ($4.95-$4.79), or ~-$48.00. Of course the one APR 36 short call later expired worthless meaning the underlying price of POT never reached $36.00 per share. This resulted in me keeping the entire premium of 59 cents, or $59.00.  As it turns out, I would have benefited much more had I sold 3 APR 36 short calls, but I did not want to "collar" the trade fully, thinking POT would rise in the near term. Finally, the put butterfly hedge: +3 APR 36 puts were sold on April 17th for $1.17; or -$306.00/ -6 APR 33 expired worthless; or +$348.00 / +3 APR 30 expired worthless; or -$27.00. So, the put butterfly hedge managed to net a gain of $15.00 ($-306+$348-$27).  Thus, the overall position as of April 17th, 2014 was up a measly $26 bucks! 

The discussion of this CIS trade will be continued!  

Happy Trading!

Saturday, January 25, 2014

January 24th Trading Thoughts --- The Call Instead of Stock (CIS) Strategy

Hello Traders,

Thought I would continue a discussion on my current option trading positions and strategies.  This segment explores the CIS!! Hopefully it makes sense.  I'll try to answer any questions.  Glory to God, All Praise is Due Him!! Amen!!

Trades #7; 11; 12 Morgan Stanley (MS); United Airlines (UAL); Yahoo! (YHOO)  Purchase Calls Instead of Stock (CIS); Hedged with Buying a Near-Term Put Butterfly & Collar by Selling a Near-Term Call

Without question, the CIS option strategy is by far the most exotic that requires on-going maintenance and adjustments.  However, I believe the strategy logic and purpose is rather straight forward.  I will do my best to explain how I utilize this strategy and the criteria I use in selecting my CIS candidates.

The CIS strategy is essentially a “stock replacement” strategy.  As I mentioned at the beginning of my prior blog today, I believe options represent the most efficient means of utilizing one’s capital due to the leverage and time-frame one can benefit with a small amount of money.  I believe the CIS strategy takes full advantage of this benefit. 

First of all, to meet the CIS criteria I have to ask myself a few questions: 1) would I like to own the shares of this company?; 2) are the near-and-longer-term prospects for the company positive…do they have a great product or service?; 3) do I like the management team? 4) do they grow their earnings consistently or at least improving year-over-year?; 5) do they have good growth potential and are they taking market share?; 6) do they have a strong balance sheet/cash position?  Obviously, these are the same fundamental questions you would ask yourself if you were willing to commit buying stock in a company and becoming a shareholder. You want to take the same approach with the CIS strategy. 

Second, I want to look for companies that trade in a specific price range: Generally $30-$47 per share. I also prefer to have a stock that is trending higher, but has pulled back recently in price by 1 or 2 percent. I use $30-$47 price range because it provides easier hedging ability due to single strike options within the listed option chain.  Single strike options are generally available in this price range. However, once over $50 per share, most option chains increase by at least $2.50 per strike.  This makes it more difficult to hedge your long call position and would force you to “split-the-strikes” in order to provide an adequate hedge.  The CIS can be done at >$50 but it’s a bit more difficult to manage.

Third, the option bid/ask spreads should be no more than 10 cents wide.  The narrower the spread, the better the pricing you can obtain.

Fourth, there should be sufficient open interest volume in order to have decent liquidity for trading in and out of the options when it comes time to enter and exit a position.   

Fifth, I need the stock to have some volatility and price movement.  As discussed in my prior blog regarding double calendars, I explained how volatility in options provide more attractive premium values and volatility can help in hedging the CIS strategy.  I typically look at a 1 year monthly chart and want to see price movement average approximately $2-$4 per share per month.

Sixth, I now want to select a long deep-in-the-money (DITM) call option that has at least 90 days till expiration.  I want to purchase the calls having at least an 80% delta.  I do this because I want the calls to represent or mimic the actual price movement of the  underlying stock.  The lower the delta, the less impact it has to move in relationship to the stock price.  The higher the delta, the greater the impact it has to move in relationship to the stock price.  The higher the call delta, the higher the option premium price or cost will be.  At this point you will need to determine how much capital you are willing to commit.  Initially I typically buy only +3 long contracts with the idea of possibly buying more depending on how the position behaves. I'll describe that below under various scenarios. As previously stated, the capital requirements are much lower with options than stocks... even DITM options.  For example, if you were buying stock instead of the options and the stock is currently at $37 per share for 300 shares, the required outlay for the stock purchase would be 300 x $37 = $11,100.  Whereas the DITM may only cost $6.50 each x 3 contracts (or 300 shares) = $1,950 for essentially the same movement in stock price. That is powerful and efficient use of leverage and capital.

Seventh, after you have selected your long calls to buy, you now need to select your near-term hedge(s) to protect "some" downside risk to your long DITM calls. Notice, that I said "some", not all your risk. To hedge, I choose a near-term put butterfly with 25-45 days to expiration.  Specifically, assume that the stock is currently trading at $37 per share and I bought +3 April 32 DITM 90-day calls.  I would immediately hedge this long call position by buying +3/-6/+3 of the February 38/35/32 (27 days till expiration) put options.  Let’s also assume the net price of the put butterfly is a debit of $0.54 cents per contract.  Thus, the total cost of the put butterfly hedge is approximately $150.00.  The near-term put butterfly will help hedge your long call purchase to the 35 short strike of the near-term option.  At the same time you can further hedge your long call position and possibly pay for the entire cost of the put butterfly protection by selling a near-term call.  For example, you may be able to find a February 39 call that sells for $0.65 cents.  By selling -3 calls, or receiving a credit of $195.00 you more than pay for your put butterfly hedge at $0.54/$150.00!  However, by selling the 3 Feb 39 calls, you have now “collared” the trade and have limited your upside potential on your long calls.  Depending upon how bullish I am on the stock, I may forego selling calls initially with the hopes of either getting a higher credit or increasing the strike by a dollar or two to say maybe selling Feb 40 or greater call at a later date, or perhaps a Mar 41 call.  This decision is usually "one from the gut"!

Eighth, depending how things work out after placing the trade, you manage the trade accordingly.  For example, assume the price jumps from $37 to $45.  Your long-dated calls will also jump in relation… in fact the delta will probably be close to 100% under that scenario.  Your Feb put butterfly would be nearly worthless, so you would lose on that end of it… but so what?  You will have a very substantial profit on your long calls... remember it’s essentially the same as owning 300 shares of stock.  What if you sold a near term short call and collared the trade?   Obviously, you would lose on that as well.  You then would have to decide if you want to close out the position entirely or possibly roll the near-term call to a later month?  It’s your call!  It’s a good problem to have if you ask me.  What about the scenario where the stock price drops to $34 per share or lower then what?  Well, it depends on a number of things… is the stock down for a firm-specific reason or is it in sympathy to a downgrade made on a competitor?  Is it a macro reason?  Or worst case, did something fundamentally go wrong with the company that changes your outlook?  If that’s the case, you need to exit your entire position.  Otherwise, you may see this as an opportunity to buy more DITM calls, possibly 30-days further out in time depending on when this “news” hits or share price drop happens. If you decide to buy more, it may be necessary to close-out of your put butterfly or keep it depending again on how many days remain till expiration.  In either case, you still need to buy another +3/-6/+3 put fly… in this case at $34 per share you would likely select the 35/32/29 strikes.  Keep in mind depending on the volatility of the shares, the strike width may be only 2 strikes wide if it is a less volatile stock.  The more volatile the stock, the greater the width of the strikes you would choose as your put fly hedge.  If you had a scenario where the stock price fell to $35, your near-term put butterfly would be at maximum profit at expiration and you could then use the proceeds to help finance the purchase of more DITM calls and start the process all over again. 

In the final analysis, I guess I like the CIS strategy because how often have you purchased a stock and it immediately went against you?  Provided the stock does not crater, and even if it did you are only out the debit you paid for the calls, at least the put butterfly hedge and short call if collared , will under most conditions be profitable.  And if I still like the company, I can simply buy more DITM calls and try it again!

Below are the current CIS trade set-ups I have on. These are real trades and are for illustrative purposes only.

*MS @~ $31.03 / $31.54 / $30.55 MS CIS COLLAR WITH BUTTERFLY HEDGE Open Dollar Value     01/24/14         Current  Net P&L     MS Current Price: $30.45
12/20/13 Buy 3  Apr 14 27 Call $4.60 -$1,380.00   $3.925   -$202.50     Current Avg. IV: 29.81%
01/23/14 Buy 3  Apr 14 27 Call $4.80 -$1,440.00   $3.925   -$262.50    1 σ move +/- to Feb expiry:        $32.95/ $27.93
01/24/14 Buy 3  Apr 14 27 Call $3.95 -$1,185.00   $3.925   -$7.50  
12/20/13 Sell -3  Jan 32 Call $0.47 $141.00 01/17/14 $1.36 closed -$267.00  
01/17/14 Sell -3  Jan4 32 Call $1.39 $417.00 01/22/14 $0.46 closed $279.00  
01/22/14 Sell -3  Feb 33 Call $0.46 $138.00   $0.18   $85.50
12/20/13 Buy 3  Jan 31 Put $0.87 -$261.00 01/07/14 $0.48 closed -$117.00
12/20/13 Sell -3  Jan 29 Put $0.27 $81.00 expired $0.00   $81.00
12/20/13 Sell -3   Jan 29 Put $0.27 $81.00 01/07/14 $0.08 closed $57.00
12/20/13 Buy 3  Jan 27 Put $0.11 -$33.00 expired $0.00   -$33.00
01/07/14 Buy 3  Feb 32 Put $1.41 -$423.00 01/21/14 $0.55 closed -$258.00
01/07/14 Sell -3  Feb 30 Put $0.56 $168.00 01/21/14 $0.14 closed $126.00
01/07/14 Sell -3  Feb 30 Put $0.56 $168.00   $0.370   $57.00
01/07/14 Buy 3  Feb 28 Put $0.21 -$63.00   $0.085   -$37.50
01/23/14 Buy 6  Feb 32 Put $1.06 -$636.00   $1.96   $537.00
01/23/14 Sell -12  Feb 30 Put $0.27 $324.00   $0.77   -$600.00
01/23/14 Buy 6  Feb 28 Put $0.07 -$42.00   $0.22   $87.00
01/24/14 Buy 3  Feb 32 Put $1.84 -$552.00   $1.96   $34.50
01/24/14 Sell -6  Feb 30 Put $0.66 $396.00   $0.77   -$66.00
01/24/14 Buy 3  Feb 26 Put $0.02 -$6.00   $0.06   $12.00
*Underlying Open Share Price    
29.61% IV @ open Initial Option Hedge = -$102.00 O P&L=   -$495.00
TOTAL MS P&L  = -$495.00


*UAL @~ $37.70 UAL CIS COLLAR WITH BUTTERFLY HEDGE Open Dollar Value  01/21/14 Current  Net P&L    UAL Current Price: $46.13
12/12/13 Buy 2  Mar 31 Call $7.63 -$1,526.00 01/17/14 $15.85 closed $1,644.00     Current Avg. IV: 42.96%
12/12/13 Buy Mar 31 Call $7.70 -$1,540.00 01/17/14 $15.85 closed $1,630.00      1 σ move +/- to FEB expiry:  $51.60/     $40.68
01/09/14 Buy Jun 48 Call $4.00 -$1,200.00   $4.050   $15.00  
01/17/14 Buy 3  Jun 49 Call $4.65 -$1,395.00   $3.675   -$292.50  
12/12/13 Sell -2  Jan 40 Call $0.81 $162.00 01/17/14 $7.19 closed -$1,276.00  
12/12/13 Sell -2  Jan 40 Call $0.89 $178.00 01/17/14 $6.85 closed -$1,192.00  
12/12/13 Sell -1  Jan 40 Call $0.89 $89.00 01/03/14 $1.12 closed -$23.00  
01/03/14 Sell -1  Feb 43 Call $1.16 $116.00   $3.975   -$281.50  
01/09/14 Sell -2  Mar 50 Call $1.75 $350.00   $1.425   $65.00  
01/17/14 Sell -2  Feb 40 Call $7.59 $1,518.00 01/17/14 $7.25 closed $68.00  
01/17/14 Sell -4  Feb 50 Call $1.30 $520.00   $0.695   $242.00  
12/12/13 Buy 2  Jan 38 Put $2.01 -$402.00 01/07/14 $0.54 closed -$294.00
12/12/13 Sell -2  Jan 35 Put $0.755 $151.00 01/07/14 $0.10 closed $131.00
12/12/13 Sell -2  Jan 35 Put $0.70 $140.00 expired $0.00   $140.00
12/12/13 Buy 2  Jan 32 Put $0.27 -$54.00 expired $0.00   -$54.00
12/12/13 Buy 2  Jan 38 Put $1.89 -$378.00 01/07/14 $0.54 closed -$270.00
12/12/13 Sell -2  Jan 35 Put $0.70 $140.00 01/07/14 $0.10 closed $120.00
12/12/13 Sell -2  Jan 35 Put $0.70 $140.00 expired $0.00   $140.00
12/12/13 Buy 2  Jan 32 Put $0.26 -$52.00 expired $0.00   -$52.00
01/07/14 Buy 4  Feb 40 Put $2.69 -$1,076.00   $0.325   -$946.00
01/07/14 Sell -8  Feb 37 Put $1.275 $1,020.00   $0.120   $924.00
01/07/14 Buy 4  Feb 34 Put $0.52 -$208.00   $0.050   -$188.00
01/07/14 Buy 4  Feb 48 Put $2.69 -$1,076.00   $3.150   $184.00
01/07/14 Sell -8  Feb 44 Put $1.075 $860.00   $1.160   -$68.00
01/07/14 Buy 4  Feb 40 Put $0.41 -$164.00   $0.325   -$34.00
*Underlying Open Share Price    
41.02% IV @ open Initial Option Hedge = $1,974.00 O P&L=   $332.00
TOTAL UAL P&L  = $332.00

*YHOO @~ $35.27 & $39.05 / $37.92 YHOO CIS COLLAR WITH BUTTERFLY HEDGE Open Dollar Value 01/21/14 Current  Net P&L    YHOO Current Price: $37.91
11/20/13 Buy 2  Feb 14 30 Call $6.05 -$1,210.00 12/18/13 $9.20 closed $630.00     Current IV: 41.44%
12/05/13 Buy 2  Mar 14 34 Call $6.15 -$1,230.00   $4.800    -   $270.00              1 σ move +/- to FEB expiry:  $42.25/ $33.59
01/24/14 Buy 2  Apr 33 Call $5.95 -$1,190.00   $5.975   $5.00  
11/20/13 Sell -2  Dec 37 Call $0.65 $130.00 12/18/13 $2.03 closed -$276.00  
12/05/13 Sell -2  Jan 41 Call $0.90 $180.00 01/07/14 $0.70 closed $40.00  
01/07/14 Sell -2  Feb 44 Call $0.97 $194.00   $0.390   $116.00  
11/20/13 Buy 2  Dec 36 Put $1.67 -$334.00  expired $0.00   -$334.00
11/20/13 Sell -4  Dec 34 Put $0.68 $272.00  expired $0.00   $272.00
11/20/13 Buy 2  Dec 32 Put $0.21 -$42.00  expired $0.00   -$42.00
12/05/13 Buy 2  Jan 40 Put $2.24 -$448.00 01/06/14 $0.75 closed -$298.00
12/05/13 Sell -4  Jan 37 Put $0.88 $352.00 01/07/14 $0.02 closed $344.00
12/05/13 Buy 2  Jan 34 Put $0.29 -$58.00  expired $0.00   -$58.00
01/06/14 Buy 2  Feb 41 Put $2.61 -$522.00   $3.750   $228.00
01/06/14 Sell -2  Feb 38 Put $1.14 $227.00   $1.735   -$120.00
01/06/14 Sell -2  Feb 38 Put $1.14 $227.00 01/24/14 $1.72 closed -$117.00
01/06/14 Buy 2  Feb 35 Put $0.39 -$78.00   $0.545   $31.00
01/24/14 Sell -4  Feb 36 Put $0.82 $328.00   $0.855   -$14.00
01/24/14 Buy 2  Feb 34 Put $0.31 -$62.00   $0.325   $3.00
*Underlying Open Long Call Price    
32.17% IV @ open 11/20/13 Initial Option Hedge = $100.00 O P&L=   $151.00

Remember that option trading is risky business.  Become knowledgeable and paper trade before using real capital!!  All material in this blog is for illustration purposes only.
Happy Trading & God Bless!

Trading Thoughts --- Week Ending January 24, 2014

Hello Fellow Traders! 

I know that it's been a very long time since I last posted on this blog... with Stocktwits & Twitter I am able to post most of my trading activity there, so please give H2Options a look. These social media sites are pretty cool as they give me an opportunity to both journal my trading activity and keep me honest on the decisions I make both good and bad.  Hopefully most of my decisions will be good ones as my livelihood depends on it!  This blog is nothing more than an extension to this... the main and obvious difference is I have the opportunity to express my thoughts in greater detail here on my blog. 

So, with that in mind, I want to begin by stating that 2014 has gotten off to an interesting start to say the least.  The weather, for one, is currently at extreme cold temperatures, with even colder temperatures on the way… –25 below!!  In contrast, the stock market has been on quite a roll and to many it’s been too hot to touch.  

That sentiment may have begun to change on January 24th, seeing the Dow drop over 300 points closing below 16,000 to 15,879.  According to various news reports I’ve seen, many investors have been waiting for a pull back in the market before “pulling the trigger” on their funds. These folks have remained in disbelief that the market is for real ever since the 2008 financial meltdown.  On the flipside, there are those who have participated in the market run up, and are getting nervous and have been looking for reasons to sell.  For me personally, I’m somewhere in between these two schools of thought.  I have steadily taken money off the table throughout 2013 in my stock portfolio, as I was an aggressive buyer in mid 2009.  At this point I continue to hold a well diversified portfolio of dividend paying stocks (~65%) and cash (~35%).  My cash allocation is much higher than I use to have before I became more knowledgeable about options.   I use the cash portion for all of my option trading activity as I believe options provide the most efficient use of one’s capital given the leverage and flexibility it provides.  

As I gain more knowledge in trading options, I am more inclined to allocate funds to these instruments.  This way of thinking has become even more apparent after the stock market sell-off the past two days. I’m convinced even more the important role options can play in hedging one’s portfolio.  Sure, my option portfolio took a hit, as it is “net long”… however, the losses would have been much greater had I invested my money solely in a stock or mutual fund.  As you probably know with stocks and mutual funds, you can only make money on these instruments one way… they all must go up in value.  However, with options you have the ability and flexibility to make money if the underlying stock goes up, down or sideways.  They really are fascinating instruments if constructed WISELY.  

As I say on my Stocktwits profile: “I emphasize hedging ALWAYS.”  I say this because there is option strategies out there that are quite risky… for example, selling naked puts or uncovered calls can be quite lucrative, but can be disastrous to one’s financial health if the market moves against them severely.  I would assume this scenario played out for some on Friday!  All of my option trade strategies are “hedged”. This simply means that each strategy has defined risk parameters built in to ensure that I know what the maximum loss will be on any given trade.  That gives me great comfort, and I can sleep at night.  The drawback to options is that in most of the trades I implement caps the upside or downside potential I can make.  To me, this is an acceptable “drawback”, as the leverage feature of options in terms of the amount of capital needed and the time frame involved (usually 20-90 days) is very rewarding.  

Current Open Option Trades
Underlying Equity
Option Strategy
Date Opened
# Days in Trade
Current Profit/Loss
Apple (AAPL)
Iron Condor
Akamai Tech. (AKAM)
Double Calendar
Akamai Tech.#2 (AKAM)
Double Calendar
Celgene (CELG)
1-3-2 Put Butterfly
Dow Chemical (DOW)
Double Calendar
Ebay (EBAY)
Double Calendar
Morgan Stanley (MS)
CIS Collar w/Put Butterfly Hedge
Russell 2000 (RUT)
Iron Butterfly
Russell 2000 (RUT)
Iron Butterfly
Scherwin Williams (SHW)
Dbl Diagonal Calendar
United Airlines (UAL)
CIS Collar w/Put Butterfly Hedge
Yahoo (YHOO)
CIS Collar w/Put Butterfly Hedge
Yahoo (YHOO)
Double Calendar
Current Open Options Gain / Loss:
2014 Closed Option Trades Gain / Loss:
Total Open/Closed Option Trades 2014:

Trade #1 Apple Inc. (AAPL)  Iron Condor Strategy  

I entered this position on late Friday afternoon to take advantage of elevated implied volatility (IV) levels due to Apple’s earnings coming out Monday, January 27th after the close. I initiated the trade with AAPL trading at ~$548.39.   An iron condor consists of selling both an out-of-the-money call and put spread simultaneously so there is only one commission charge.  It is considered a 4-leg option. I like taking advantage of high IV because you can obtain higher premium prices that you sell for a credit.  In this case, I sold 4 contracts for a net credit of 85 cents.  This translates into my money market account receiving ~$340.00 less transaction costs.  This is the maximum profit I can make on the trade.  I can “keep” all of this “up-front” credit if Apple shares remain between $587.50 and $520.00 per share at expiration on February 1st.  Should Apple shares exceed or decline by more than these levels, the maximum loss I would face at expiration would be $660.00.  Below “Return on Risk” box shows the risk/return parameters of this trade.
AAPL JAN5  587.5/590 C - 520/517.5 P
x # SHARES @

Trade #2 & 3 Akamai Technologies (AKAM) Double Calendar Strategy

I entered these trades on 1/21/14 to take advantage of expected moves in the stock due to earnings that will be announced on Wednesday, February 5th after market close.  AKAM was trading between ~$48.59 and $48.81 when I initiated the above trades.  The double calendar involves selling near term Feb1 calls and puts and buying the longer-dated Feb same strike calls and puts.  In order to maximize profit AKAM will need to trade near the near term 55 call/42 put short strikes at expiration in 13 days.  The maximum loss on the trade occurs is the debit paid on the trades totaling ~$530.00… this would occur at ~$75 on the upside; $35 on the downside. Maximum gains at the short strikes on calendars are difficult to determine.  The ability to obtain at least some profit is quite wide as the breakeven points are $62.50 on the upside and $37.50 on the downside.  One important thing to consider is that implied volatility typically rises into an earnings event causing option premiums to widen which should be advantageous for the trade.  It will be interesting to see how this trade plays out.

Trade #4 Celgene (CELG)  1-3-2 Put Butterfly Strategy

I opened this unbalanced trade on 1/13/14 with CELG trading at ~$164.65 per share.  Celgene as well as other large bio-tech stocks have been trading at rather high levels.  The 1-3-2 put butterfly strategy takes advantage of situations where you believe a stock is due for a pull-back, albeit minimal.  So, you are in essence neutral-to-bearish on the stock.  The beauty of this strategy is there is no risk for the stock continuing its ascent should it’s bullish ways continue.  I entered the exact same trade (different expiration) back on 12/19/13, where this actually happened: the stock was trading at $163.41 when I opened the trade and on expiration on 1/10/14, Celgene was trading at $169.81… the result: a $26.00 gain.  I only execute this type of trade when you can receive a net credit.  The current trade shows that I received a 45 cent credit… so with 2 contracts, at minimum I will keep $90.00 if CELG trades at $160.00 or greater at expiration in 13 days.  You begin to see greater profit potential in the $155-$160 range. In fact, the maximum profit is the middle short put strike at 155, where you have the potential to receive $1,090 at expiration.  The breakeven point on the downside is $152.30 and maximum loss of $910.00 occurs at $150 or less.  Celgene took a pretty good hit on 1/24 to $161.22, so it is getting real close to the maximum profit range of $155-$160. 
CELG 1-3-2 Put Butterfly
$90 Gain @ $160 or greater

Max Gain:
~$1090 @ $155.00 per share
Max Loss:
~$910 @ $150 or less
 @ $152.30

Trade #5 Dow Chemical (DOW) Double Calendar Strategy

The same idea as with AKAM, is employed here with Dow Chemical.  It reports earnings
before the market opens on January 29th.  Maximum profit occurs at the February near-term short strikes 47 calls and 39 puts.  Currently, DOW is trading right in the middle at $43.41 per share.  So, any movement towards either strike between now and February expiration 27 days from now could result in a decent profit. Losses are again limited to the amount paid for the trade which is ~$400.00.

Trade #6 Ebay (EBAY) Double Calendar Strategy
Trade # 10 Sherwin Williams (SHW) Double Diagonal Calendar Strategy
Trade # 13 Yahoo! (YHOO) Double Calendar Strategy

I thought I would go ahead and lump trades 6, 10, and 13 together since they all are the same types of strategies as discussed AKAM and DOW.  Without question, the double calendar in earnings season is one of my favorite options strategies.  I'll try to explain... With the heightened volatility in the general market environment, coupled with a company earnings report, this generally bodes well for calendar trades.  Volatility (i.e., significant uncertainty/fear) is expected to expand into a company’s earnings report. This should in turn expand my calendar position value to the point that I can possibly close or adjust the positions ahead of the company report. However, in the case of trade #6 Ebay, they just reported on Wednesday 1/22... I've decided to hold the position because volatility has remained high.  Why? I believe there are two primary factors: 1) the macro environment is more uncertain; 2) some lingering stock specific news from Carl Icahn demanding Ebay to spin off their PayPal unit.  I'm hoping for some pop/drop in the shares soon, otherwise any sign of a volatility crush, I will close out the position immediately. Under normal conditions volatility in the option pricing should fall quickly after company earnings and this too can potentially expand closing prices because of the effect of time decay (theta).  Theta also works in my favor as the short options lose value faster than the longer dated calls and puts.

I also want to emphasize the probability of profit on calendars are pretty darn good.  Again calendars take advantage of the underlying trading at or near the strike in the trade and there is also a wide range for the stock to trade which gives a better probability of success especially if there is a significant move in the price of the shares.  Keep in mind that each individual calendar can potentially more than double in value so there is a very good risk/reward situation for a trader. The logic with calendars is to have the shares to be near either short strike in order for the calendar to expand and any rise in volatility will also increase the value of the options.  Below are the double calendar set-ups and current P&Ls:

*EBAY @~ $54.74 EBAY DOUBLE CALENDAR  Open Dollar Value Open Delta 01/24/14 Open IV     Net P&L EBAY Current                Price: $54.30
12/31/13 Buy 5   Mar 57.5 Call $1.68 -$840.00     24 $1.040   24.95% -$320.00         Current IV: 27.45%
12/31/13 Buy 5   Mar 50 Put $1.04 -$520.00  -27 $0.605   28.03% -$217.50      1 σ move +/- to FEB expiry:  $58.51/         $50.26
12/31/13 Sell -5   Feb 57.5 Call $1.29 $645.00   20 $0.500      27.41% $395.00
12/31/13 Sell -5   Feb 50 Put $0.73 $365.00  -25 $0.235    30.93% $247.50
*Underlying Open Share Price Max Loss -$350.00
*Opening IV@ 29.74%      O P&L= $105.00
TOTAL EBAY P&L  = $105.00

*SHW @~ $183.15
SHW DOUBLE DIAGONAL / CALENDAR  Open Dollar Value Open Delta 01/21/14 Open IV   Net P&L     SHW Current Price: $190.80
01/03/14 Buy 2   Mar 200  Call    $2.25      -$450.00             22       $3.25          22.                           92% $200.00     Current IV: 28.34%
01/03/14 Buy 2   Mar 155  Put $1.53 -$306.00    -11 $0.600 31.  37% -$186.00      1 σ move +/- to FEB expiry:         $205.61/ $175.75
01/03/14 Sell -2   Feb 200  Call $1.35 $270.00      17 $1.98 23.   50% -$125.00
01/03/14 Sell -2   Feb 160  Put $1.20 $240.00     -11 $0.300 31.   18% $180.00
*Underlying Open Share Price
*Opening IV@ 26.04%   O P&L= $69.00
                                                                TOTAL SHW P&L  = $69.00

*YHOO @~ $41.55 YHOO DOUBLE CALENDAR  Open Dollar Value Open Delta 01/21/14 Open IV Net P&L  YHOO Current Price: $37.91
01/08/14 Buy 7    Mar 47  Call $0.84 -$588.00     24 $0.325   34.45% -$360.50      Current IV: 41.36%
01/08/14 Buy 7    Mar 37  Put $0.79 -$553.00    -20 $1.915   34.55% $787.50    1 σ move +/- to FEB expiry:        $42.24/ $33.59
01/08/14 Sell -7    Feb 47  Call $0.47 $329.00     18 $0.085  35.61% $269.50
01/08/14 Sell -7    Feb          37    Put $0.41 $287.00    -15 $1.245  34.16% -$584.50
*Underlying Open Share Price 7
*Opening IV@ 33.54% O P&L= $112.00

Happy Trading!

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