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".
SEE VIDEO: http://screencast.com/t/TvL9xPSq
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!
Wednesday, August 13, 2014
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 | ||||||||||||||
| FOR ILLUSTRATION PURPOSES ONLY!!! | |||||||||||||||
| *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 | 2 | 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 | 3 | 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 | ||||||||||||||
| FOR ILLUSTRATION PURPOSES ONLY!!! | |||||||||||||||
| *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!
H2Options
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
19
|
Unrealized
|
||||
Underlying Equity
|
Option Strategy
|
Date
Opened
|
#
Days in Trade
|
Current
Profit/Loss
|
|
1
|
Apple (AAPL)
|
Iron Condor
|
01/24/14
|
0
|
$22
|
2
|
Akamai Tech. (AKAM)
|
Double Calendar
|
01/21/14
|
3
|
-$160
|
3
|
Akamai Tech.#2 (AKAM)
|
Double Calendar
|
01/21/14
|
3
|
-$90
|
4
|
Celgene (CELG)
|
1-3-2 Put Butterfly
|
01/13/14
|
11
|
$13
|
5
|
Dow Chemical (DOW)
|
Double Calendar
|
01/08/14
|
16
|
-$49
|
6
|
Ebay (EBAY)
|
Double Calendar
|
12/31/13
|
24
|
$105
|
7
|
Morgan Stanley (MS)
|
CIS Collar w/Put Butterfly Hedge
|
12/20/13
|
35
|
-$495
|
8
|
Russell 2000 (RUT)
|
Iron Butterfly
|
01/15/14
|
9
|
$30
|
9
|
Russell 2000 (RUT)
|
Iron Butterfly
|
01/22/14
|
2
|
-$126
|
10
|
Scherwin Williams (SHW)
|
Dbl Diagonal Calendar
|
01/03/14
|
21
|
$69
|
11
|
United Airlines (UAL)
|
CIS Collar w/Put Butterfly Hedge
|
12/12/13
|
43
|
$332
|
12
|
Yahoo (YHOO)
|
CIS Collar w/Put Butterfly Hedge
|
11/20/13
|
65
|
$151
|
13
|
Yahoo (YHOO)
|
Double Calendar
|
01/08/14
|
16
|
$112
|
Current Open Options Gain / Loss:
|
-$86
|
||||
2014 Closed Option Trades Gain /
Loss:
|
$463
|
||||
Total Open/Closed Option Trades
2014:
|
$377
|
||||
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.
IRON
CONDOR
|
|
AAPL
JAN5 587.5/590 C - 520/517.5 P
|
|
PUT & CALL STRIKE MARGIN
|
$2.50
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(LESS) NET CREDIT
|
$0.85
|
MAXIMUM RISK @ EXPIRATION =
|
$1.65
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x # CONTRACTS
|
4
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x # SHARES @
|
100
|
MAX $ RISK =
|
$660.00
|
MAX % RETURN =
|
51.5%
|
MAX $ RETURN =
|
$340.00
|
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
|
|
Break-even:
|
@ $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 | ||||||||||||||
| FOR ILLUSTRATION PURPOSES ONLY!!! | |||||||||||||||
*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 | ||||||||||||||
| FOR ILLUSTRATION PURPOSES ONLY!!! | |||||||||||||||
| *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! H2Options | |||||||||||||||
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