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
|
(LESS) NET CREDIT
|
$0.85
|
MAXIMUM RISK @ EXPIRATION =
|
$1.65
|
x # CONTRACTS
|
4
|
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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