Silver - it will out perform gold if the bullish trend continues

Silver will out perform gold in the longer term. So, I am overweight on Silver than gold in my precious metals portfolio.

It will be a surprise to many traders that while trend for precious metal is extremely strong, there are contrarian speculators that short the market. These are big institutions consist mainly the big banks. Conspiracy theory surmised that they are government agents used to subdue the price of gold.

Speculations put aside and lets get the facts. The latest report shows that JP Morgan now holds 200 million net short in the COMEX future. This is a 40% of the entire short of COMEX.

In total, there are 500 million ounces or 100,000 contracts in silver shorts at the COMEX. To put this in perspective, this is equal to 75% of annual world production of silver.

Something has to happen. This has been going on for a while. Similar situations happened with Gold and a lot of times, these commercial institutional traders won the game in the past times when gold prices surged.

It could be different this time if:

· The strength of the bull or the demand for gold and silver is so strong that it overwhelms the effort of these institutions to bring the price down. If it happens, it could send gold and silver prices to the moon

· Industrial demand for silver continues to increase. If there is a need for physical delivery, there may be no way to hide under the cover of paper shorts

The situation is creating stress to the system. It is historic. It may even have the remote probability to cause COMEX to shut down. If the bull wins, price for precious metal will explode.

Therefore be careful of ETF and paper futures. If the remote possibility of COMEX having to shut down, it could cause great problems to ETFs and futures.

It is better to stick to physical gold and PM related stocks if you are thinking of riding the bull.

The overall trend is in line with what I expect. It is a healthy correction for precious metals. Precious metals will continue to go up but silver will outperform gold by a ratio of 2:1. It has happened this year and it will happen in 2010. It is more volatile and need more management but more rewards.

Gold seems to have bottom at 1100. If it falls below 1080, another correction to 1040 is possible. I will add short calls. If it falls below 970, it is then a false break out so far. I will add my puts for protection. This is how I profit the profit I had so far since November.

Although I am bullish, anything is possible.

ITM Covered calls - HSY and XOM

I am planning to enter naked puts for Hershey and Exxon with intentions to take ownership of the stocks and convert it to a ITM Covered calls.

Both stocks are good candidates for ITM covered call as they have great fundamentals. They are great company with great managements, good brand recognition, steady and increasing dividends, buying back stocks every year and plenty of cash.

Both stocks have been driven down recently because of pending acquisitions. Hershey is in a bidding war with Kraft for ownership of Cadbury and Exxon is buying XTO for $32 billions dollars in stock. Together with the debts of $10 billion, it will cost XOM a total of $42 billion. This is a very big acquisition.

Exxon is a $360 billion company. It earned nearly $60 billion in CASH last year. It can borrow money cheaply because of its AAA credit rating.

Normally, during an acquisition, the acquirer’s stock will be driven down because they have to pay a premium for the company to be acquired. But we have to examine whether the acquisition makes sense in the longer term. If it does, it is a great time to acquire the stock.

HSY is a long term performer. If you examine HSY performance from 1980 until today, it is better than 15% per year assuming you re-invested the dividends. Since 2005, HSY has repurchased more than $1 billion worth of its stock. It continues to pay and increase dividends. In 2008, the company produced >$500m in cash from operations. It spent $300m on dividends and share buyback plus repaid $138 m in debt. The company continues to pay out $500m per year to shareholders and I expect this to continue.

Hershey has tremendous amount of “economic goodwill”. The company is capital efficient, which means that in an inflationary climate, when chocolate prices go up, more money ends up in the price of shareholders. It has proven over the years, it can produce more without proportional increase in capital investments. During its best year in 2007, the company annual capital budget only increase 9.8% or $189 m,


The business model is similar to Coca-Cola. Between 1989-1999, Coke’s market cap rose nearly 12X. The company raised its dividend consistently each year. We know the success story of Warren Buffet with Coke.

What makes the company so successful? It is simply branding. Coke is the no. 1 brand in the world for soft drink. Hershey is the number one brand for chocolate in US. It will become the number one brand for chocolate if the bid is successful.

Hershey is in a biding war with Kraft to take over Cadbury. It will cost $20billion. But Hershey’s market cap today is only $8billion. So it must take on some huge debt to finance the deal. This is one of the reasons why the stock is trending down.

I am speculating that if Hershey were to take over Cadbury, the money will have to come from someone who knows the business. This person is Warren Buffet.

Warren Buffet is cash rich. He likes this kind of business. He has invested in See’s Candies and Coke. He helped to provide financing for the Mars takeover by Wrigley. Hershey has retained investment banker, Byron Trott for the deal. This is the same guy who did the Mars / Wrigley deal for Buffet.

The deal will probably be announced in 1-2 weeks.

If the deal does not go through, I expect the shares to go up.

If the deal goes through, share may go down temporarily as the market may worry about the debt. In that case, I will double the stake when it stabilized.

Longer term, this is a very good deal for Hershey if it goes through.

As for Exon, it is a very well run company. The stock will find support at 66. It is now very oversold.

But my indicators have not gone bullish yet. Naked put are bullish trade. So I will place the trades when the technicals give me the bullish signal.

Lots of actions on quadruple witching Friday - 12/18

Friday 12/18 was quadruple witching. It was one of the busiest trading days of the year. Volume was very high.

It was a very busy day for me too.

I had a put diagonal for WMT. I closed my WMT bearish put it for a nice return of around 30%. It ended exactly at my short put price of around 52.5. This is the best I can hope for.

I am having a put diagonal for FDX and MON. Both are above water. My palm put calendar is doing extremely well. I started it a few months ago by having a put calendar with the LP at 15. Last two month I closed my SPs as long as the trend is still bearish for the stock. On Friday, I closed my SP for Palm at 10 taking most of the credit. I did not allow the trade to expire. This trade is going to give me a 100 % winner. It is about 95% ROI now.

The key to calendar is not just setting the target for 25% ROI. If the trend is on my direction, there are times I simply close the short option, maintain the long option and continue the trend for a few more months. You can make a lot more money this way. I did it for POT on a Call calendar which also gave me a very healthy profit of 150%. I closed it when POT turned bearish at 120 at the beginning of last week. I know it is sometimes difficult and you make mistakes with the direction. But with calendar, if you make a mistake, you can compensate for it with some adjustments.

It is nice to know money on a bearish trade in a bullish trend. I closed my AIG reversed collar today for a profit. I had a short position and a SP at 32. It went ITM. So, the trade will close with a profit finally after 4 months with an ROI of 17%. The details will be made available on the trade section in the blog.

It is important that we learn how to play bearish trend. We have enjoyed the bull for so long. If it turns bearish, lot of people will be struggling. Most people know how to ride a bull not do not know what to do when they encounter a bear. I believe a bear could appear anytime. Just be prepared. Most probably, we will have another up leg and after that a major correction or even a downtrend. Many of my indicators are showing major divergence despite the bull run. Volume is light. As long as there is no sell signal, I am still riding the bull but will be prepared to jump into the bear camp once my technical shows me the signal.

I got assigned for GDX at 48. Instead of buying a put on Friday, I shorted a call at 50. This was a new strategy I used. I felt it is better to sell a SC on imminent assignment rather than buy a LP. I will buy a LP only if the trend turns clearly negative. So I will have a covered call on Monday. My cost is 46.25. Stock closed at 46.29 on Friday. So, on Monday, if trade closed below 46, I will certainly convert it into a collar.


I was assigned stock on naked put for SU at 34. SU closed at 33.7. So, I will be profitable. I will decide on Monday whether to do a covered call or collar. May not even do anything as oil is recovering from the low at 69.

I am happy that I am getting some assignments with my short puts. At last I am getting some of my extra cash to work.


I rolled number of SC for my covered calls which went ITM this month.

- Line covered call : rolled DEC 25 SC to Jan 25 SC

- VZ covered call : rolled Dec 30 SC to Jan 32 SC. This stock has made me the maximum profit but I rolled it up keeping it slightly ITM for the short call. I like to keep the stock for the dividend.

- NLY covered call : rolled Dec 18 SC to Jan 18 SC

Finally, here ia an interesting adjustments which I am experimenting.

I had a call diagonal on GS DEC 165 SC and Jan 165 LC. It was losing some money. I added a LP at Jan 165 in the middle of the week. The banking sector was downgraded by a prominent analyst. The trade is now a straddle. I may put in some short positions next week to make it a single calendar or double diagonal. I may lose some money on this position but it will be minimum.

It is a handful on Friday. There were lots of action. Hopefully, we can learn something for all these adjustments.

I will comment on my position on precious metal in a separate posting on my blog this week.

Why I am still bullish on Gold?

I have given a lot of good reasons why I am still bullish on Gold.

I received lots of questions whether I am still bullish after the recent consolidation.

The answer is I am still bullish!

I believe the gold MAY go down another $50-$60 but when the uptrend returns, it is going to be parabolic. It could go up another $500. The reasons are complex but simple and succinct explanation is given by legendary fund manager in his recent presentations ( on slide 2 )are:

"
* Printing money will lead to paper currency depreciation
* Demand for gold as a reserve currency will increase
* Demand will overwhelm supply, causing price to rise sharply "


But that does not mean I am not hedging or protecting my portfolio of gold and gold stocks. I am current having short calls on all my long positions. If the price go up to my SC strike, I am fine as I will increased my profit. It is overshoot my strike and I believe the market is breaking up, I will roll the SC out and up or simply close it and take a small loss before adding short calls later when the stock reaches another level of resistance.

If gold falls below 1050 which is my support line, I will add protective puts to protective all my gold positions. It is small insurance to make sure that I keep the huge profits I have for this year. It does necessary mean I am bearish.

I am planning multiple scenarios and adjust as the opportunities present itself. It is important that I do not lock myself in a possible outcome although I believe the trend is up for gold. The market is never or always rational or logical.

If you think there are extreme emotions, there will be irrationality. To me, the point of irrationality for gold is still not present. I continue to see people getting out of gold at the slightest reasons and also, many of the smartest money managers and traders are still not going into gold. Thus, I maintain that the current leg up is still not a bubble or at a point of irrationality. This correction is healthy. Fundamentals are overwhelming to support gold. With the all the pressure building up on debts, loss of confidence in the paper currencies worldwide. and all the "energy" built up leading to the last run up for gold, I believe gold has some way to go on the upside.

SLV and GLD adjustments

There must be a lot of questions about the direction of gold and silver.

I firmly believe that gold is just in the phase of a correction. It may last for one week or even 1 month ( most probably ).

But the bubble is just at the beginning. ( see diagram above ) I expect a bigger move next year.

So meanwhile, I am just selling calls for all my long positions. I have not added any puts. But I will add protective puts once gold falls below my rising channels.

Meanwhile, I made two adjustments to my ratio spreads:

I sold back my SLV backspread call ratio for .38 losing $170 for 10 contracts. There is no point keeping this trade as it will require substantial movements up to make money. Time decay will eat up most of my gains in the coming weeks. If SLV collapses, I will make some money. But this is an unlikely scenario. Most likely scenario is that SLV will stay between 17 and 20 in the next 6 weeks. So, it is better to get out with a small loss.

I also made adjustment to GLD call backspread. It should work well as GLD goes up. I sold another 5 calls at 110 to reduce my cost. This will bring my risk profile to diagram above. I like the profile. If GLD goes down, I make some money. If it goes up above 112 ( not too much), I will also make money as long as it does not take its time to go up. If it goes up a lot, I will make a lot of money.

I am keeping my broken butterfly trade. It is slightly under water but time decay will compensate and I believe I will end with a profit for this trade.

News alert - fear of debt default by Dubai

On Monday, China stock market fell 3% because of fear of inadequate capitalization of major banks. Now it is fear of a debt default by Dubai.

There will be a flight to safety. But the challenge whether the market is going to move to dollar or to gold for safety or to both. I bet gold will ultimately win as market and central bankers realized it is a better refuge for a debt collapse in the market.

Looks like this morning action, gold is decoupling from the dollar. The dollar went up and gold went up too. The highest was 1195. This is a very important test of any potential change in the price of gold. If it holds, it could really go parabolic as shorts will be forced to cover the next few days.

Also, watch companies with high debt. They had a great time since March as most of these companies are able to raise funds through issuing capital. Among these are companies like CAL, SPG, MGM, GE ( yes GE!) etc where mounting debts could cripple the companies anytime.

SPG - Synthetic Put and reversed collar

Fundamentals:

Simon Properties is the largest mall owner in America. It owns 320 mails and shopping centers across 41 states

It owes $18 billion ot banks and barely can cover half the interest on their debt every year.

One of the bearish signs earlier beginning of this year was that insiders sold more than $25 m worth of shares since Sept 2008.

Its real estate is valued at $19 billion consisting of mostly shopping malls. Against these assets, its has debts in excess of $20 billion. Its tangible net asset value is only $2.9b. Note that if the assets decline in price by 14%, its shareholders could be wiped out.

Long term debt / Equity is 3.93. P/E is 53.07. Sales Q/Q -1.14. EPS Q/Q –24.77%.

The company is a REIT company which requires them to pay out 90% of their earnings as dividends. SPG spent about $1b on dividends which was $200 more than the cash flow it earned.

Against these appalling fundamentals, why does the stock rises from 45.22 around May to 77.9 today.

The key reason is that they were able to raise some money from the re leveraging of companies with high debts since May this year.

SPG was able to raise $500m by selling stock at $31 per share and another equity offering for $800m @ $50 per share earlier this year. It diluted the shareholders value but the stock rallied because is has greatly improved its capital position.
REITs are able to use leverage to continue to operate at a capital deficit because real estate prices almost always go up. But if real estate price goes down, they will face big problems

I believe because of this SPG has rallied from $50 to $77.9 together with the general market. I have been watching this stock for the last few months and decide to go bearish today because the technical indicators are giving me a sell signal to go short.

The mortgage reset has started especially for commercial property. There will be bigger interest payment and more commercial estates are expected to collapse. So, I do not expect prices of real estate for commercials to rise.

Technical

SPG has formed a double top ( see diagram )

SPG has also reached its 61.8% Fib. retracement and not able to move up further. Its weekly chart shows clear big loss of momentum since July 09. MACD is rolling over negative and STO are breaking down

Finally underlying fundamentals are catching up and the technicals are giving a leading signal.

The stock market has risen 65% from March 2009. Any correction will bring SPG easily down to 68 which is the next support

Trade:

Buy a synthetic put for SPG

· Sell short SPG at 77.9
· Buy a protective Jan call 80@ 1.35

Cost basis : 76.55

PE: This is not a long term trade as the seller has to pay dividends. We will close the trade by Jan when the stock hits below 70. Plan to close the trade at a ROI of about 15%

SE: Sell a SP to reduce cost if the stock breaks 80 and manage it as a reversed collar. Roll the protective call up by beginning Jan if the stock shows a bullish bias.

SLV - broken winged butterfly and call ratio backspread

Looking at the actions of gold last week, it is believed the bullish momentum will continue. Any corrections just intraday.

Since my GLD call ratio entered on Sept 09 expired last week with a profit of 300%, I decided to enter more trades on SLV and GLD.

Despite, the overbought situation, I believe we have entered scenario 2 and 3 outline in the previous post. Some of the momentum are certain the results the short squeeze by commercial traders. The trades below are suitable for prices that are overbought and the belief prices will go from high to higher highs. Instead of chasing the stock, it is structured that if the direction is wrong, we will lose little or make even a small credit.


1. SLV - Broken Wing butterfly

BTO Jan 18 Call / STO Jan 20 call - 2X / BTO Jan 21 Call for a debit of .6.

PE: Close the trade When when the ROI hits 200% or at > 1.8.

SE: I struggled with the SE. The first idea is to break down the trades into 2 - a bull call 21/20 and a bear call 20/21.

The bear call is an ITM trade. So credit is high and risk is minimal. It should be allowed to expire on its own. With the bull call, we will aim for maximum ROI of >25%.

So the SC is to be prepared to take a loss of .6 for 1 contract if SLV collapsed. In this case you will take the maximum risk of the bear call and the bull call. This is not a likely scenario given the current bullishness of the precious metal market. With this trade, time is on my side. If the trade stays >18.5 during Dec or at expiration, it will be a good trade. (see diagram )

If it goes up, it will be great trade.

If it collapse, I will take the maximum loss.

2. SLV Call backratio

STO Jan 17 Call / BTO Jan 20 calls - 2x for credit of .3

This trade requires SLV to move up or down. If it get stuck by expiration at 19, 5there will be a loss of 1.6. But if SLV drop below 17 by expiration, I will collect a credit of .3. If SLV goes in the direction expected, the profit is unlimited.

PE: If Silver continues to be bullish, hold on to the trade until end Dec where the time decay effects start to kick in and also if silver shows signs of a correction. Currently, it is overbought but the momentum is huge and thus silver could easily rise any 10-20% before correction. The ROI could be huge. Will exit the trade by end December if SLV shows signs it will slide back to 19-20.

SE: The reverse is true for this trade compared to the broken butterfly. Time is not on my side. The trade must move. It is similar to a straddle or strangle where time decay will kill the profit.

If SLV show signs of getting stuck in a range at 19 by beginning December, close the trade or convert to a calendar trade by sell SCs at a higher strike to the bullish side of the leg.

BG - synthetic collar by Joseph

This company in the agriculture sector, and its competitor is ADM.
Its fundamental is not the best,making money last quarter, but growth rate is negative.
This trade is based on technical indicators.

We have buy signals from MACD, RSI and 5ema and 20ema. It also crossed 200ma and 50ma on 11/18.
The volume on 11/18 is more than 2 times of average volume.
Support is around $55, and first resistance is $65 and second resistance $70.
Price was around $62 when I spot it because the volume of its DEC 65 call was usually high (open int 2500, volume 6219). Jan 70 call volume is also high.
It indicates that the expectation is for the stock to go up.

Trade selection: This is bullish trade. I could have chosen bull call calendar (BTO April 10 strike 65, and STO Dec 09 strike 70) delta is 31.
But I chose a trade with higher delta since is a short term momentum trade:

STO Jan 60 put at 2.87
BTO Jan 55 put at 1.35
BTO Jan 70 call. at 1.45
==================
Delta: 43
Net credit $0.07
Maximum risk : $4.93
Maximum profit: unlimited.
Break even $60.

Primary exit: Close half to 2/3 positions at $65.Let the rest run.
Secondary exit: If the price is slightly below break even, short call first (synthetic covered call).
If too bearish, long put also. so it will becomes synthetic collar.

RIMM - Bear Call

I made another contrarian trade today. Most people expect RIMM to go up. There are rumors of MSFT buyout and the company is buying back $1.2 billion dollars of their shares.

I am not optimistic shorter term on RIMM primarily from the technicals.I am not bearish longer term. Thus, I am willing to collar the stock if my SC goes ITM.

RIMM is having a Head and shoulder with the neckline at 60-65. If it breaks 60, it could go down to <50. So far,the actions in the last few days were not positive.

So I decided to go for a Bear Call

o BT0 65/70 Bear Call for a credit of 1.35.

PE: Let the short call expires and keep the credit by December
SE: The BE for the sale is 65+1.35 = 66.35. So if stock goes ITM at 65, I will either close the trade or buy the stock at around 66.35. I will be putting a stop limit order to buy the stock at 66.35.

If the order is triggered, the trade will be turned into a collar. Let the SC expires, roll the Long call 70 to Jan and buy a put in Jan or Feb stike 65. By that time, it is probably confirmed that RIMM has turned bullish if it breaks 65.

GLD - Ratio Spread

I just closed my GLD ratio call spread for a 100% ROI in 3 days. It may be too early but the profit is too tempting.

The charts above are my projections for gold. It touches 1135 as I write. I believe it will hit 1300 by March next year. Before that, there should be a small correction. Any move below 1100, I will be adding to my bull trades. This move is very strong and is not going to slow down soon.

The first chart gives 3 scenario on how gold price will move. Scenario 2 is the most probable scenario.

I also drafted out the Fib. Fan. It agrees with the projection on the first chart.

Below are some not so common arguments why I am bullish on Gold:

1. Central bankers are net buyer of Gold this year.
2. Many successful money managers are buying gold - David Einhorn, Paul Tudor Jones, and Jim Rogers
3. In Financial times last week, 2/3 of 100 respondents to a survey by the Family Office Channel said that the super rich are now more likely to invest in gold and other commodities
4. Total World bailout is about 19 Trillion dollars. All the gold ever mined now is about $5T dollars
5. 2008 Gold production is about $73 billion. Demand is far greater than supply now.
6. The market cap of all the gold minors is only about the same size as WMT. Oil and Gas industry is 12 times higher.

The panic has not started yet. Once it starts, gold price will be parabolic. The fact that gold has exceeded the pre-bust high in 2008, should be a monumental indication we are headed high.

As I said, there should be a short correction. Once there, I will load up again to my current positions which is already sizeable.

How to overcome situation when you make a major mistake in your trade and is caught in the wrong direction?

Below is an interesting recent case study on RIMM. The drop on end September caught a lot of people by surprise. Overall the market is bullish and one may get complacent and made some silly mistakes like forgetting to put a protective put before earnings.

Sept 24th 2009





Bought an ITM covered Call

· BTO 100 stock at 83.16
· STO SC Oct 75 at 10.10

Cost Basis: 73.06
Reward: 1.94 or 2.65 %

Made a major mistake. Earnings was on 9/25 and the position was not protected!


Sept 25th 2009



Earnings disappointed and price dropped 17% to around 69.3

Steps taken:

1. Roll the SC down from Oct 75 to Dec 70

· BTC Oct 75 Call for 1.15
· STO Dec 70 Call for 5.9

New Cost basis: 73.06 +1.15 – 5.9 = 68.31

Note that the cost is already below the closing price after the drop.

Next decision was to buy a put to make it a collar. There was hesitation because of the IV, the price of put was expensive. Nevertheless, since there is a major change in the sentiment for this stock, a put was added

2. BTO Dec 65 Put for 2.92

Note the put is bought OTM. Trying to keep the CB low.

New Cost basis: 71.23

3. Cost average down by buying another ITM Covered Call

BTO 100 stock at 68.85
STO Oct 65 SC for 5.66

Cost basis: 63.19
Potential Reward: 1.53

( Similar cost reduction could be done with another BULL PUT or even call calendars if you are familiar with the trade )

Oct 14th 2009



RIMM stabilized and the SC expired. Booked profit from ITM CC = 1.47

New Cost Basis: 71.23 – 1.47= 69.76


Oct 30th 2009



Stock continued to go down.

November put running out of time. It was end of October

Decided to roll the PP out and down.

· STC Nov 65 put for 6.61
· BTO Dec 60 put for 5.21

New Cost Basis: 69.76 – 6.61 +5.21 = 68.36 ( Cost is reduced slightly from credit of rolling down the put )

Nov 6th 2009



It was a difficult decision. On one hand, RIMM seemed to have some support at 60. But on the other hand, looking at it, there could be a potential head and shoulder. If RIMM dropped below 60, it could go easily to <50.

Nevertheless, it was decided to remove the put and make it a covered call again. It could be a wrong decision but a put can always be added back if it drop.

· STC Nov 60 put on Nov 6 for 5.35

Also, roll the SC down from Dec 70 to Dec 60

· BTC Dec 70 SC for 1.08
· STO DEC 60 SC for 3.66

New Cost Basis: 68.36-5.35+1.08-3.66 = 60.43



Add another ITM Covered call to reduce cost

· BTO 100 shares of RIMM at 58.01
· STO Dec 50 SC for 9.54

· Cost Basis = 58.01 –9.54 = 48.47

Note that a bull put can be used also to reduce the cost. If a bull put is used, one needs to be ready to take the share and collar it the SP goes ITM and converts it into a collar

So if the stock remains above 60 on expiration, the profit for this trade is:

200 shares * (60-60.43 ) = -0.86
100 shares * ( 50 – 48.47) = 1.83

Thus there is still a small profit of 1.03 if stock stays above 60 by Dec option expiration.


Nov 13th 2009 - Concluding Remarks


Today, the stock is trading at 62.69. It has not turned bullish although there were rumours that MSFT may buy out the company. So there was a rally yesterday. There is strong resistance at 65 which is the last gap down.

The stock could easily goes back down, breaks support at 60 and go down to 50 just as I indicated with the longer term Head and Shoulder pattern above.

If that is the case, more adjustments will be needed.

The process is similar. The key is to keep a constant vigilance to protect your cost basis. Find the right opportunity to ride the trend up when it reaches support. For a fundamentally sound stock like RIMM, it will get back again one day.

There are more aggressive plays to manage a collar like this. You can sell the puts when the stock goes down and convert to shares to average down without adding cost. Be sure to add a new protective put for the new total number of shares. You can buy more shares at the perceived bottom and add PP. But these are more risky moves as you may be catching a falling knife.

My preferred way is to manage and close it breakeven or with a slight profit. After that, I will enter a new trade if the conditions are right


Meanwhile, keep managing and hope to spot the right opportunity to ride it back up again. While doing so, ensure that cost is under control.

ANF Bull put by Joseph

ANF reports earnings today. It beats expectation, and expected to be profitable in the next 4-6 quarters by analysts.
Stock gapped up this morning now at $40.

STO Nov 39 put 0.55
BTO Nov 35 put at 0.05
=====================
Net Credit 0.5
Max Risk: 4 - 0.5 = 3.5
ROR = 0.5/3.5 = 14% in 7 days.

BE: $38.5
PE: let both options expired worthless.
SE: Accept assignment at cost base $38.5. Turn into covered call/collar trade.

Calendar trades by Ted

This has been a break-out day for calendar trades. Here are my trades today with fill price:

ADBE 36.21 April 36 LC Dec 38 SC 2.55

FCX 83.57 May 85 LC Dec 85 SC 6.85

CAT 60 May 60 LC Dec 65 SC 5.7

WLT 67.46 Mar 65 LC Dec 70 SC 6.9

MEE 34.32 Apr 34 LC Dec 36 SC 3.5

PE for each of these is 25% ROI. Check the charts on these.

REXX - additional analysis by Joseph

Rexx setup looks good.
Please see attached chart. It is my attempt to put Elliott wave number on the chart.

REXX - Covered Call

Fundamentals:



.Longer term I am bullish on oil. US$ has to go down and oil has to go up.

IEA senior claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply published on Nov 9th – which is used by the British and many other governments to help guide their wider energy and climate change policies.

· This is a semi speculative trade. It is speculative because it is a small company. I am bullish on oil over the next few months although I expect short term there will be some correction from current level of $79 per barrel to around $70. It is my intent to load up on oil companies once the oil price reaches close to this level
· But I cannot resist doing a covered call for this company when I saw the high premium it offers on the SC.
· REXX us $240m market cap company based in Illinois Basin ( 72% oil, 27% Natural gas and 1% natural gas liquid)
· It has $24m in cash and $17 m long term debt which is healthy for a small size company
· REXX belongs to the group of oil companies where the initial potentials of easy production is over. There is still 60-70% of oil trapped in the ground in these “depleted” oil field. Sophisticated enhanced oil recovery techniques can be used to recover another 25% of the original oil in place.
· With oil above $70, it is now viable to recover this oil again. Cost of recovery is around $25 per barrel. It is still cheaper than the cost of tar sand oil in Canada.
· So far the market has not recognized the value of the potential of recovery using newer techniques. The potentials are placed under “reserved”. The oil is definitely in existence. It has been there for years. It is a matter of time that the reserves will be “proven”. Once proven, price of stock can double.
· REXX released its results yesterday after being delayed for 1 day. It was a lower loss and better than analysts’ expectation.
· The company is resuming its oil recovery activities as oil prices resume its upside trend. As long as oil price hold above $50 per barrel, company can deliver good potentials for the coming months.

Trade – covered call

BTO 1000 shares at 8.98
STO 2010 March 10 SC at 1.25
Cost Basis: 7.73
Maximum Return: 2.1 or 27.2 % ( 81% annualised )

PE: Let the SC expired or assigned. If expired, continue to short call against stock. The stock has a potential to double in the coming months

SE: Add a protective put if it is below 7.5 to turn it into collar.

HTS - ITM covered call

Fundamental

- HTS borrows money at a low interest rate and invests it at a higher interest rate in an iron-clad safe, government-guaranteed bonds. It earns the difference – the "spread.". It is a virtual bank. A similar business is NLY – Annaly Capital. NLY is 9 X bigger.

- I like the business model. And when it's in its sweet spot, it makes a fortune. It is invested not toxic waste debt but government guaranteed bonds, just like treasuries.

- Recent financial statement shows that HTS borrowed money at 2% and invested it with no credit-risk at 5%. So it earned a 3% spread. With 8 times leverages – 3% spread becomes 24%. Most bank use much higher than 8X leverage.

- There is very little overheads. Thus Operating Margin is equal to Profit Margin equals to a hefty 54.35% Cash to share is a healthy 4.77. It is 71.6 % owned by institution.

- Interest rate is forecasted not to go up. It can invest the money at a higher rate. The Fed has maintained this week that it will not raise interest rate for near to mid term.

- Most attractive is that this company has a dividend yield of 18% annually.

Considerations:

- It is a longer term trade
- Company balance sheet must be solid enough to provide the dividends
- Goal is to capture the high dividend while controlling the risk. In this case, the risk is minimal. Probably of stock going below 24 is very low

Trade

BTO Stock 1000 at 28.8
STO 10 contracts May 2010 25 short call at 4.1
Cost basis: 24.7
Max Reward: 2.1 + 2.2 ( dividends for half year ) = 4.3 or 17.5 % or 35 % per annum


PE: This is an ITM covered call. Will allow the stock to be assigned.

SE: Stock long term support is clearly at 24. If stock goes down to this level, I will decide to add a put to make it a collar if the market is very bearish or just roll the call out in time if there is no real bearish factors for the stock to go a lot below this support.

A similar trade can be made for NLY which I have already some positions in my portfolio

I will consider to close the trade when the Fed is consider raising rates and take profit.

CPN - Covered Call

CPN is a power generation business. Instead of using coal, it is using natural gas as the energy source. It is the largest unregulated power generation company using natural gas – eliminate 99% of carbon based waste compared to coal fired plants

This is a green energy play. Currently, natural gas is still more expensive than coal. However, with the tax on carbon emission, it is expected that not only electric price will rise substantially.

Coal will be taxed heavily and thus CPN will become more competitive.

The company emerged from bankruptcy in Jan 2008. Current, it has $1.6b in cash, $7.5 b in current assets and another $11.9b in capital equipments and power plant.

Market cap is current 1.2 of book value.

The company has its gas price hedged till 2010. So a sudden increase in Natural gas price will not affect the company for next year.

Last 2 quarters earning reports show that they are gaining share and generate a free cash flow of about $520m. The company’s balance sheet is in good position

My target is that it will reach 2X of book value and equivalent to $18 per share. With the impact of carbon tax, the stock could even go up to $25.

Nevertheless, I am making a conservative trade with all the odds on my side.


BTO 1000 stocks at 10.15
STO 10 DEC 12.5 SC at 0.35

Cost Basis : 9.8
Max Income: 2.7 or 27.55% in 2 months. ( I am bullish on the stock )

PE: Let the SC expired or stock assigned. I will continue to short call as long as it is not assigned as stock has the target of reaching $18.
SE: If stock drops below 10 which is a clear support, may roll down the SC or add a put and turn it into a collar.

Car - New Calendar trade by Joseph

Fundamental:
1. Earnings report on Nov 2, 2009, AMC. Better than expected. Shares up today.
2. This is not a company with “solid” fundamental. However, all its competitors are in similar situation.
Technical: Current price 9.4.
Support around $8
First resistance at $10, Second resistance at 11.5 (50MA)
MACD tilt up, RSI up, coming out of oversold area.
Trade:
BTO Feb 2010 Strike 7.5 Call at 2.85
STO Nov 2009 Strike 10 Call at 0.55
Net debit $2.30 Maximum Risk : $2.30
Break even $8.79
Delta 32.9 , Theta 1.63, Gamma -12.18, Vega 0.77
Expectation: Price is between $10 and $10.50 at Nov 2009 expiration
PE: 20-25% ROI
SE: Bearish roll down SC to Dec 2009 strike 7.5.

Interesting tests on Strangle - Straddes before earnings

Straddles and Strangles are delta neutral and speculative trades. They are expensive but can be very profitable if structured correctly with the right timing and considerations.

I have been testing on straddles and strangles. Recently I tested it on a very volatile stock that normally moves a lot during earnings. – FSLR. The results were very interesting!

Considerations:

· Trade were placed one week before earnings where IV was reasonably low.
· Bollinger band was narrow and stock was trading at a narrow range – a low ATR
· It was 1 week before earnings
· When choosing the strangles, I tried to find trades where the delta were balanced i.e. the delta of put should be roughly equal to the delta of call
· I placed 4 kinds of trades

1. A longer term call and a short term put : bullish bias calendar strangle
2. A longer term put and a short term call: bearish bias calendar strangle
3. A short term straddle of 30 days
4. A longer term straddle of 95 days

As seen from the results above, the following observations are made:

· The best ROI is a short term straddle.
· IV increased made both the put and call profitable without movement of the stock. Stock price was around 152 on Oct 28th. When I placed the trades, the stock price on Oct 21st, the stock price was around 152.5.
· Even the stock gapped down, return of the bearish bias diagonal calendar strangle was only marginally higher than the bullish diagonal calendar strangle.
· The cheapest trade was the short term straddle and thus it gives the best ROI. As long as the stock moves, it makes the most money. It also makes most money in absolute value.

This may be contrary to the idea that straddle must be placed a little way out in time to minimize theta decay. The gamma, VEGA and IV effects more than compensate the theta decay. Also, this trade is meant to be a short term trade and thus may not be necessary need longer time. Unless you need more time for the trade to work, it is not necessary to place a longer term straddle.

IBM Put calendar - by Albert

Below is a trade by Albert. This is the first time he is placing a trade. Please comment.



BTO Jan10 (74dys) 120 Put@5.75 (may be changed when filled)
STO Nov09 (18dys) 120 Put@2.64 (may be changed when filled)
Net Debit / Cost Basis / Max Risk 3.02
Max Gain : around 206/302 = 68% in 18 days;
To achieve 20% Gain:
- 116.8(3.1% drop) < Stk range < 123.3 (2.3% rise)
BE right limit : 125.15 PE : Hold till Nov09 exp in 18dys
BE left limit : 115.25 SE : if stk to $124, roll up SC to OTM Dec09
Success Prob (according to TOS) : 44.9%
if stk to $116, roll down SC to OTM Dec09 & add DITM LP for neccessary period

New Trade - XOM put diagonal by Joseph

Fundamentals:
1. XOM released its earnings report on 10/29/2009. The stock drops after the earnings.
2. EX-date for dividend on 11/11/2009. In the past year, after the dividend date, the stock drops $2- $6.
Technical:
1. MACD sell signal, RSI at 49, and 5ema below 20ema
2. 50 sma at 70.6. Might serve at support
Expectation: Price is between $73 and $70 at 2009 Nov expiration.
Trade: Stock at $72.43
BTO 2010 Jan 75 put at 4.83
STO 2009 Nov 70 put at 0.86
Net debit 3.97
BE at $73.2
Delta -28.
Maximum risk: $3.97. Max profit: $2.1.
PE: 20% gain
SE: Roll short call up/out if very bullish

Volatility Collapse after earnings - good day trades? - by Joseph

It has caught my attention that stocks with big drop after earnings have the tendency to rebound on the next day.
Recent examples are ISRG, BIDU, FSLR.
If we check the options of the ATM put, we found that the value of the put drops a lot. Need to find out what are the causes of the decrease in value.
IV drop could be one of the reason.
For example, this morning, the high of FSLR Nov 09 strike 125 put was 8.3. It dropped to around 5.
If one has enough margin in the account, he can sell the put and buy back later for profit (3.3/8.3 = 39%.)
Another choice is to sell Bull put (125, 120), the best entry price is 2.7 and the best exit price is 1.5. (1.2/1.5=80%)
Of course, the above is the ideal situation. The gain will not be so much in real trades. However, 10-20% should not be impossible.

One other thing we need to do before doing this type of trades is secondary exit.
The obvious answer is stock ownership. The issue is that whether we want to own a stock with bad earnings.
Please give your thought on this type of trades. It could be very profitable.
There are still earnings next week, let's get prepared for them.

PNC - Roll SC

Ted has rolled the PNC SC from Nov 55 to Nov 52.5.

The respective risk profile are shown above.

By rolling, it has added cushion from the trade profitable range from 51.2 - 67 to 48.3- 66.4. This is executed with discipline as was planned on the secondary exits

It will still be a very profitable trade with target ROI 25% still a high probability.

He got a decent 1.8 credit for the Dec 52.5 SC

Trades by Ted: APPL PNC - Call Diagonal - 10-26

AAPL

AAPL stock Price 204.

STO SC Nov 210 and BTO LC Apr 200 for a debit of 18.5 ( Risk )

PE: ROI 25%

If bullish, roll the short call up and out ( BE: 228)
If bearish : roll the short call down ( BE: 200.5)
If stagnant, Let the short call expire, take profit and short another call


PNC

PNC stock Price =52.79

STO Nov 55 SC
BTO Feb 50 LC

Debit = 4.9 ( Risk )

This is a bullish trade.
PE : 25%

If bearish ( below BE : 51.15 ) roll the short call down
If very bullish ( price > 1 to 2 strike above SC price of 55, roll the SC up )

Trade by Joseph - AAPL ITM bull call - Oct 26

ITM bull call on AAPL:
BTO April 10 strike 175 call
STO April 10 strike 180 call
The mid price of this trade is 3.73. ROI is 1.27/3.73 = 34% in 6 months.
The natural price is 4.45. ROI is 0.55/4.45 = 12.3%
If we can get a fill at (3.73+4.45)/2 = 4.09. The return is 22%.

MCD an unconventional call calendar - 10-23-2009

I have a trade for MCD Calendar.

I am trying out a ITM Call Calendar. This is a new idea. Probably there are some loopholes I am not aware as I am still learning calendar. The reward versus seems too high to be true. Please post comments if you find any loopholes


BTO Jan 55 C = 4.75
STO Nov 55 C = 4.45

Debit ( Risk ) = 0.3

PE: Target at 200% ROI

SE: - If stock becomes bearish ( < 52), exit with a small profit or breakeven
- If stock becomes bullish ( >60 ) roll the short call up.
Considerations:


· Expectation: MCD is expected to be short term bearish moving down from current price of 59. It has hit a temporary resistance. I expect the stock to end by Nov expiration to between 51 and 58. If it does, I will make money.

· It is actually a short term bearish calendar. It is like shorting the stock for 1 month but in this case the upside risk is limited to 0.3. Also, if the stock goes really bearish and gap down a lot <50, I will also lose 0.3

· You can also place a LC Jan 60 and a SC 57.5. As long as the stock stays below 60, you will not lose money even if the stock goes to zero. The flip side is that if the stock goes above 60, you will lose more money than the 55/55 call calendar proposed

· In my case, I believe the stock will not go down below 51 by Nov expiration and will not go above 59. My risk is limited to a small amount of 0.3 but my maximum reward if the stock finished at 55 is 1.25.

GS Put Calendar - additional analysis

I did a detail analysis of the put calendar trade for GS yesterday, Oct 21st.

First, I define the level for the various trends. I use theta and delta to estimate the gains and losses as the stock moves in each direction. This will define the points that adjustment will be made.

In additional, I added a spreadsheet for automated calculation for future calendars. For those who are interested in getting a copy of the spreadsheet, please place a request on the comment section or email the post to me and I will send it to you.


Considerations

· Stock bounces off resistance despite good results
· Overall trend of stock = bullish
· Overall market trend = Bullish
· Credit ( 4.4 ) > time decay ( .09*30=2.7) = Good

Comments

· Note that Calendar wins 4 out 6 trends. While you can lose 100% if the stock goes very bullish or bearish, your gains are substantial in between.
· I am using theta and delta to project my ROI. I left out GAMMA but it has the effect of increasing my profit in a bearish or slightly bearish trend as it increases the delta as volatility increases towards expiration. GAMMA will benefit my long put.
· Maximum profit is achieved when stock is slightly bearish at 180
· Interesting to note that if trend is slightly bearish, LP may gain value but the time decay actually offsets the gain and results in a loss of –0.3
· Watch out for prices as it goes too bullish or too bearish and adjust accordingly. Execute your secondary exit without hesitation.
· Adding a protective call at 190 if the trend gets very bullish. The trade is effectively turned into a strangle once the SC expired
· Roll down

GS - Put Calendar Trade - Oct 21 by Joseph

· GS reported earnings on 10/15 and price fell afterwards. Current price is 184.96
· Technical analysis: MACD bearish cross on 10/15. RSI near 50, and 5ema slight above 20ema, with down slope. 20ema flat. 50sma at 175. BB goes sideway, Upper BB band at 191.5, and Lower BB band at 177.5.
· IV is around 30%, near the low point in 2 years.
· Expected Price movement: Slightly bearish, with target of between 175 and 180 for the coming month


BTO Jan 2010, strike 180 put at 9.35
STO Nov 2009, strike 180 put at 3.9
Net debit 5.45
BE: 171.41 (down side) and 189.68 (upside)

PE: 20+ percent profit.
SE: If very bullish roll the short put up/out
If very bearish, roll the short put down/out

GMCR - a diagonal call calendar - Trade by Ted on Oct 13

Considerations:

o GMCR has been on a bullish run from September. Fundamentally, it is enjoying good sales. With the positive retail outlook towards the end of the year, GMCR should benefit as consumers increased their shopping before Christmas
o Stock is very bullish and it broke all time high.
o Green Mountain owns Keurig and the K-cups are very popular. If you like coffee you may want to consider buying a brewer. Every friend I recommended it to are enjoying their brewer and the variety of teas, coffees, cocoa etc that they sell


Trade:

BTO Jan 2010 70 call for 8.34
STO Nov 75 call for 3.74

Debit: 5 ( Risk )

PE: Exit the trade with a target ROI of 25%

SE: Roll the SC 75 if it goes ITM
If stock drops below 75, will convert the trade to a bear call calendar

Innovestor's comments:

o Today the stock gaps up before earnings. You should be ready to roll the SC up to 80 as any upside you will not make a lot of money. This stock is pretty bullish and thus a roll now make sense to ride on the momentum

o With hindsight I am placing a diagonal call calendar for this stock at 80/70



o STC Nov 80 SC at 3.25
o BTO Mar 2010 70 LC at 13.2

Debit : 9.95 ( Maximum Risk )

PE: Exit at 25% ROI or 12.43

SE: Roll the SC call up if it is ITM
If stock breaks down and hits < BE point of 72.85, I will convert the trade to a bear call calendar.
If stagnant - continues to sell call for another 2-3 months and hopefully get a risk free trade

GE - a decision on my trade!

Finally, I cannot resist on adding a bearish trade on GE. I know it is stupid or even crazy to go against a bullish trend or to be so bearish on GE.

As I said, I do not like the fundamentals at all. Although the company has many good profitable divisions, the $518 billion debt is going to be a heavy burden on the stock. The most probable scenario over longer term is that they have to sell their profitable divisions to pay the debt of the financial group.

I decided to put is an order for a ratio back spread


BTO 20 contracts March ’10 14 put for 0.73
STO 10 contracts March ’10 16 put for 1.54

New Credit received : 0.08

Risk

Bull Put Risk = 2 – ( 1.54-0.73) = 1.19
Long Put Risk = 0.73

Total put ratio risk = .73+1.19 = 1.92

Reward

Upside : 0.08

Downside : 14 – 1.19 = 12.81 ( This is assuming GE goes to zero! )

Potential reward if the stock goes down is HIGH

Lower BE = strike of LP ( or protective put ) – Risk of entire trade
= 14 – 1.92 = 12.08

Upper BE = Strike of Short put – Net credit of entire trade
= 16 – 0.08 = 15.92

PE: Wait for stock to drop at >20% to profit. If the stock goes up, collect the credit and let the trade expire

SE:

This is a patient, stupid or even crazy trade! I do not plan to do a lot of adjustment. I just wait it out for GE to trend in my directions. If GE drops below 12.08 in the next 6 months, I will make a lot of money from my long put. It has a bearish bias but if the stock moves up, I do not lose money. The stock needs to drop through 2 supports. In a bearish environment, this is possible.

If GE continues to trend up, I will still collect a small credit of $80.

If GE stays between $12-16 – I will lose some money. During this stagnant period, I may decide to sell some put to reduce the cost basis of this trade. Nevertheless, I expect GE to gap up at least 20% up or down at any time during the next 6 months.

I am not fully comfortable with the trade as I am very biased in my bearish direction. But, I was proven right in the past when I take such long term positions. I was very bearish on GM and bullish on GLD before. Both trades worked in my favour over time.

I am only placing a small position to see how it goes. The maximum risk at 50% is probably around $300 loss. In the meantime, when the trend becomes clearer, I may add some other trades like ITM bear call further out in time

Will keep the blog readers informed on the subsequent results and any adjustments.

Bear Call - An unusual adjustment

This is an out-of-the-box trade.

If one is bullish on a stock position, it is common to first buy a bull put. If the stock continues to go down, you take ownership of the stock and convert it into a collar by buying a LP and selling a short call to contain the short term down trend.

With this strategy, you assume that the stock will eventually reach bottom and rally because it is fundamentally sound. You buy time by adding the LP and reduce your cost basis by selling the short call.

As the stock reaches support, you sell the Long put. You are left with a covered call.
You can continue to sell call to reduce your cost of the long stock until such time that it is assigned or you decide that it is time to let go of your bullish position

I believe a similar strategy can be applied if you are bearish on a stock especially if it is fundamentally bad and it is only a matter of time for it to go down.

I have an example in the trade for GE

First, I can start with a bear call. Because the market is still bullish, I hope to be able to hold the short position of the stock if it is assigned. With a bull call I get to own the stock if it is assigned at reduced cost. With a bear call, I get to short the stock at a reduced cost.

Upon getting the short position of the stock, I will add a protective Long Call. In the case of a collar, you add a protective Long Put. I will sell a SP to reduce my cost. Effectively, I have a “reversed” collar position.

At the right time, I will sell my Long call and hold on to my “covered put “ position.

When the stock finally shows real signs of turning around, I will close my positions.

The disadvantage to this position is that you will have to pay dividends instead of receiving dividends in the case of a standard collar.

Also, in some cases, you may have to pay some interest to hold on to the short position as you are borrowing the shares.

But often stock goes down faster in a downtrend. So you should be able to close the position for a good profit in a shorter time frame once the downtrend has started.

So the process is this:



This is an unusual trade. Proceed with caution. Suggest you start with paper trade to get comfortable with it before using actual money!

GE - bearish Trade?

Surprise! I am doing a bearish trade for GE.

After today earning release, I have increased my negative bias for GE.

Considerations:

· GE was considered a triple A blue chip company. It met earnings expectations year to year with uncanny accuracies and delivered consistent dividends. It had its list of legendary CEOs like Jack Welch that gave the company reputation as an innovator of productivity, efficiency and management.
· The financial crisis last year exposed GE’s vulnerability. Without a government bailout, GE would have gone bankrupt.
· GE owes its creditors $518 billion. Its own tangible asset now is only $17 billion. It currently has a leverage ratio of 30:1. I do not think I can find any other big industrial company with this kind of leverage. This is GM in the making. Last quarter, GE produced $2 m in operating income with $17 billion and spent $4.3 billion on interest in the last quarter. Clearly, there is no way it can service its debt. Even if it qualifies as an investment grade company, GE will need to pay $41 billion in interest annually for its debt at 8% per year.
· GE earned $45 billion before interest and taxes last year. $33 billion are spent on capital expenditures and investment to keep the business running. This left $12 for interest payment. Even with government backing, there is no way this debt can be serviced.
· Feb 09, GE cuts its dividend payment which it cannot afford by 70%. Its creditors will soon wake up and demand it. Today GE is valued at $171 billion market capitalization. But the company is worth nothing.

I intend to structure a bearish trade for GE at the right time. My main problem now is that I will be fighting with a bullish market trend. I am not sure when this market will break down. It may last another 3-4 months! The way it is going, this bull run may run till the end of the year with the DOW hitting 11,000.

These are my options:

1. An ITM / 6 months Bear call of 15/14. This will give me plenty of time for the stock to drop over the next 6 months. Once it drop below 14, I will keep the full credit. There is a high probability for this trade to work.
2. A bear put with 6 months out in time except it is a debit trade
3. A ratio put backspread with at least 6 months in time. If structured at the right time, I may even get some credit for it. If GE drops anytime below the put strike price, there will be unlimited profit. If GE gaps up, the lost is hedged by the SP. Also, I have time on my side to wait for the trade to work in my direction.
4. A front month bear call and get the credit. If Short call is assigned, converted to a synthetic put and "reversed" collar. Manage the trade like a collar over longer term.

I have not decided on what kind of trades to make.

Anyone has any suggestions?

Once I make the trade, I will update the blog.

UNG - calendar by Joseph

Calendar Spread on UNG (Date 10/16/2009)
Technical: UNG goes sideway (btw $11 and $12) in the last month. Implied volatility is low.
Expectation: UNG will go sideway, with slight bullish bias.

BTO JAN 11 strike 12 call at 2.34
STO Nov 09 Strike 12 call at 0.42
Net Debit 1.92

PE: Let the short call expired worthless, and sell another call for the coming month.
SE: Roll the short call up and out when it is ITM. Might need to roll the long call if the stock gets too bullish.

Return: 20%+ in a year.

This a long term play. Since we 13 months that we can sell call on UNG, if we can sell call for only $0.15, we will not lose on this trade. If we can sell $0.20 each month, we’ll have 30-40% gain for one year.
The Sep 09 strike 11 call option price on 9/1/2009 was $0.1 where the stock was at $9.01. It is high possible that we can get $0.2/share per month by selling the call.

GOOG - Iron Butterfly

I entered this trade as this is expiration Friday for October,

This is a highly speculative trade. I was hesitant but decided to enter the day after Derek skyped on the possibility.

Trade: Iron Butterfly 540/550/560 for a credit of 6.11

PE: Exit at ROI of 10% before 3 pm today
SE: Exit at a % loss before 3 pm today

I exited the trade at noon for a profit 6.8 for a profit of 0.69 or 11.5 % within 2 hours.

This is the second time I did this trade. In September, I entered a similar trade and made about 15% within 4 hours.

JNJ Bull Put - New Trade

Considerations:

· JNJ is one of the strongest companies in the world. It is in the league of MCD and WMT with positive cashflow, profit, revenue growth and a steady dividend of around 3% currently. It buys back the same amount of stock. It is the biggest healthcare company in the world, second biggest pharmaceutical, largest consumer health product and medical devices. It is a cash generation machine! PE is only 12.
· The biotech sector is in an uptrend
· JNJ has consistently paid dividends for more than 45 years. If there is a break down in the index, this is the stock that will hold. I intend to keep this stock for income purpose.
· Now that JNJ has moved to its intermediate support at 60, I decided to place a bull put


Trade:

BTO 10 contracts Nov 55 Put for 0.08
STO 10 contracts Nov 60 Put for 1.07

Net Credit or Reward: 0.99
Risk: 5-0.99 = 4.01

PE: Option expired worthless and keep the credit

SE: If SP goes ITM, take ownership of stock and collar it. I am happy to own the stock and continue to keep it as an income generating stock for the dividend and continue to use SC to gain credits.