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.

New Trade - Long Put for Palm

Considerations:

Fundamentals :

- Although demand for Pre smartphone is growing, it is still selling a small fraction of Pre phones to smart-phones users and most of them are already existing Palm customers.
- I expect the stock to underperform the market as RIMM and AAPL continue to expand market share, and phones based on the Android operating system enter the market.
- With the release of Nokia and RIMM results recently, it is becoming obvious that the smart phone business is not going to be an easy segment to compete.


Technical:

- Palm reached 2 years’ high on September 23rd after earnings announcement. Both RIMM and Nokia stocks were slammed down after earnings this quarter. It is no surprise that Palm will suffer similar fate in December when they released their earnings results.
- Short term indicators have signal negative and stock is testing its heavy resistance at 17.5

Bought a Long Put for Palm today

BTO LP Jan 15 for 1.7

PE :

- 30% ROI within 2 months. If bearish, I may roll the put and continue to play on the downside

SE:


- Stagnant – can adjust to a put calendar as we have a Jan put. Add a SP at a higher strike price in the front month

- Very bullish and breakout : adjust to a bull put. Add a SP at a higher strike price in the same month.

- Slightly bullish: adjust to a put calendar. Add a SP at higher price in the front month

All other adjustments can follow standard adjustments for bull puts and put calendar.

DOW broke 10,000 - what next?

The DOW broke 10,000 yesterday. The stock market has an incredible run since March this year.

This brings back to the memories of the pre Asian Crisis in 1997, dotcom boom before 2000 and housing boom before 2007.

Interestingly, the market is very similar to what I saw in 1997,2000 and 2007 before it broke down.

There was a great run like now. Everything is well and good. The stimulus has done its job. Obama has saved the nation from a financial melt down. The worst is behind us.

Don’t pay attention to the inconvenient truth of 9.8 % unemployment. It is a lagging indicator. Pay no attention to $12 trillion debts not counting obligations on pension and healthcare. If all obligations are included, total debt is $52.8 trillion. It is OK with the plan to have a deficit of > $1 trillion/year for the next 10 years as our good friend China will continue to buy our treasuries and support the ponzi financing. Declining income tax receipts, increased bankruptcy filings, increased bank closures, increased real estates foreclosures, depleting FDIC capital base to finance bank failure, declining dollar and increased commercial Real estates failures should all be ignored. Never mind that gold broke up recently which could be the canary of what is going to happen next – inflation and collapse of the dollar.

Lets join the party and enjoy the bull while it is here. Even my grandmother is recommending me to buy stocks! Do not miss the recovery.

This is fascinating. I am still riding the bull over the last few months but all my positions are FULLY hedged. I am clear about my secondary exits. Also, at the same time, I am maintaining some ITM / out in time bear calls, synthetic puts and reversed collars so that if the market breaks down, I can ride on it.

Most probably the bull will continue for another few weeks or even months. The market can remain irrational longer than you remain solvent. So do not fight the trend. If the Dow hits 11000, I will be very, very cautious. I will increase my downside hedge and positions.

In the last 3 crises, I made a lot of money from the downside. I intend to do so similarly – this time with more finesse and conviction.

Stock will not go straight up forever. Bubbles have a nasty habit of popping. If it breaks, it goes down real fast and messy.

JNJ Calendar Spread - By Joseph Wu

JNJ Calendar Spread

1. JNJ reported earnings this morning. Price dropped.
BOSTON (MarketWatch) -- Johnson & Johnson early Tuesday reported moderately higher third-quarter earnings, but its sales performance was tempered by declining sales of two of its top-selling prescription drugs, Topamax and Risperdal, due to increased generic competition.
The healthcare products conglomerate posted net income of $3.35 billion, or $1.20 a share, compared with $3.31 billion, or $1.17 a share, for the same period in 2008. Sales for the quarter slipped 5.3% to $15.08 billion, down from $15.92 billion.
J&J's (JNJ 60.87, -1.66, -2.66%) bottom-line was helped by lower expenses across the board and a favorable tax rate. The number of outstanding shares for the quarter was also reduced, to 2.79 billion from 2.83 billion.
According to a recent poll of analysts by FactSet Research, J&J was seen as posting earnings per share of $1.13, with revenue of $15.19 billion.
Investors appeared to be disappointed with the report, pushing shares of the world's largest healthcare company down almost 3% to $60.81 in mid-morning trading.
J&J also raised its 2009 adjusted earnings outlook to the range of $4.54 to $4.59 a share.
2. Expectation: JNJ will move sideway in the near future, with slightly bearish trend.

3. Put Calendar
BTO April 2010 60 Put at 3.05
STO Nov 2009 60 Put at 1.0
Debit => 2.05
BE: 57.62 and 62.22
PE: 20% ROI
SE: very bullish – roll the short put up/out
Very bearish – roll the short put down/out

TBT

I charted 4 key directions at the beginning of this year which I deemed very high probability of success.

1. Gold will go up and surpassed $1000/-
2. Bullish on oil. Oil was < $40 at that time.
3. US$ will weaken. My favorite currency is Canadian dollar.
4. Interest rate will go up and there will be inflation instead of deflation. Therefore, I bought TBT which is a short of the 30 years Lehman Brothers treasury.

So far, the first 3 directions were wildly correct. This is one year that I had many >100 gains on my trades. Living in Canada, I sold huge amount of US$ for CD$ in March.

I stated that CD$ will reach parity by the end of the year. Looks like it is going to be a reality now.

However, I have only a slight profit on TBT. It is not going in my direction.

What am I doing with my TBT position?

I am still bullish!

I believe that TBT will go up eventually. It is currently not moving up because:

1. Treasury yield is being held artificially low by the government. There is manipulation. I do not believe that countries like China, Japan and Middle East will continue to buy from the US government at this yield. The government is buying back a lot of the treasury.

2. It is assumed now that TBT is low because there is still a flight to safety by investing in long term treasuries. I believe very soon investor will pull out money from the treasury for fear of dollar decline and better investment opportunities elsewhere.. This will force Treasury to increase rates.

3. This week, Australia was the first country to increase interest rates. This is the first country to fire off a rate increase. More will come as countries faces inflationary pressure.

I will continue take the bias that after so much money pumped into the system, there is no way for interest rates to go but up.

Thus it is good time to buy more TBT.

Currently, I have a naked OCT Put 45 for TBT. If it is assigned, my position size is doubled. I have take ownership of the stock and collar it. If it is not assigned, my cost basis is reduced as I will be keeping the credit.

For my current position, I have a PP. Although I am bullish, I still protect my position. I will continue to sell call to reduce cost.

At the right moment, I will sell my put and ride it on the way up.

TBT could be one of the best trades I ever made!

GS - an alternative trade to Strangle or Straddle

I like to consider an alternative to the strangle trade on GS proposed by Joseph.

I have entered a ratio put backspread for GS for 185/180

It is a very speculative trade. There is little time to react after the earnings event. It will suffer greatly from time decay. It is a contrarian trade as it is against the general sentiment of the market.

Thus this will be only a paper trade for education purpose to learn how a short term ratio spread reacts to an earning event.

In essence, you want the stock to move. If the stock does not move after the event, both the straddle / strangle and ratio back spread will be in a losing position.

In this case, I want to use the example of a put ratio backspread. My direction is bearish bias. A similar trade can be structured for a bullish bias trade using a call ratio backspread. You need to decide your bias before deciding on the trade.

The trade can be structured in 2 time frames:

1. Short time frame – if you just want to capitalize on the reaction to a specific event and then get out.
2. Long time frame - if you are longer term bearish and believe that the stock will break down eventually.

For this trade, I will be placing a very short time frame trade i.e. Oct 185/180 back spread. I have only a few days to react to the trade.



Considerations:

· Earnings for GS is on 10/15 – it is confirmed

· GS seems to be hitting a top. But the whole market is bullish. Longer term, I believe the GS has hit a short term top. It will react negatively to its earnings. The trade has gone up too fast and too much. I will structure the trade such that any correction more than 10%, trade will be profitable.

· It is ideal time to place the trade as VIX is at record low. There is no fear in the market right now. As we approach the peak of the earning season, I expect volatility to pick up in the next 10 days

· I am not structuring a long time frame ratio put spread. It will be more expensive and thus return will be lower. The advantage however, there will be more more time to work if we use a longer time frame like 3-4 months. It will be a lot more expensive.



Trade:

Put ratio backspread for 185/180

· BTO 2X Oct 180 Put for 1.94
· STO 1X Oct 185 Put for 3.75

Debit: 0.13

This trade is also Bull Put + Protective Put or ( 3.76-1.94)+ 1.94 = 0.13


RISK:

Risk in Put ratio backspread:

· Bull put risk = difference in strikes ( 185-180) – bull put credit ( 3.75 – 1.94 ) = 5 – 1.81 = 3.19
· Protective Put risk = debit of protective put = 1.94

Maximum Risk ( loss ) = 3.19 +1.94 = 5.13





From the chart:

· Stock has potential to hit 204.75 – the next fin. retracement level at 78.6%
· On the reverse, MACD is peaking. I believe the trade may move in my direction.
· I will bet that GS will move down after the earnings event. If the stock moves up after earnings, my risk is limited to 0.13 debit. If I am right, the profit is high. In addition, I am convinced technically the stock has a good probability to move down despite the bullishness of the market. It is a contrarian bet.
· Interestingly, GS was downgraded this morning before the earnings event! This adds support to my bearish bias

Breakeven Calculations


· Theoretical Lower B/E : Srike of PP minus the risk of the entire trade
( 180 – 5.13 ) = 174.87

· Theoretical Upper B/E: Strike of the Short Put – net credit of the entire trade
( 185 – net credit of entire trade ) -= 185+.13 = 185.13

If stock rises above 185 after earnings, the trade will lose 0.13

If stock goes down and crosses 175, the bull put will expire worthless and PP will make money. This is not a bad probability.

Worst scenario – if the stock does not move and stay at 180, the trade will hit its maximum risk of 5.13

PE:

If trade moves bearish after earnings, take profit. If very bearish, buy another long put.

SE:

· Close the trade a 20% to 30% net loss within 4 days after earnings event. Do not wait as this is a very short term trade.

· Roll the entire trade further out in time for trade with short time frame. If you believe that you are still bearish, then roll it out ( will lose some credit and thus not preferable unless the market shows some signs of exhaustion. )

· Add short positions against the additional long option - not applicable as this is a very short term trade.

· If GS shows some support after the earnings event, we may want to take assignment of the stock and collar it. Sell the Long puts. Add a longer term put and BTO a SC.

Profit taking strategy for covered call

I entered a covered call for AMZN buy 300 stocks at 80.89 and selling an Call 90 Jan 09 at 4.43.

Cost Basis : 74.46
Max Income: 13.54
Aggregate Profit : 4062 or 17.1 % in 4 months or 51.3 % annualized.

The reason, I bought a Jan SC because I was not sure where the market is heading. It seemed toppish after rising since March. AMZN also did not exhibit a lot of bullish bias.



The market turned bullish. The SC went ITM a couple of times.

I decided not to wait for Jan to capture the full profit of 17.1%. I exited the trade today for a profit of around 10% or $2258.

My risk of waiting to make 17.1% for 4 months is much higher than the reward of taking 10% in just 6 weeks or 87% annualized. So this is simple maths. Just exit and look for another new trade. My annualized profit target is exceeded.

Final trade by Joseph on GS - Oct 13th

Straddle on GS
Price 190.15. (Close of 10/12/2009)
Earning date: 10/15/2009 (Thursday) BMO
IV is around 2 year low.


BTO Nov 16, 2009 190 call at $8.95
BTO Nov 16, 2009 190 put at $9.05
===========================
Net debit $18.00

BE - $172 and $208 at expiration.
PE: 10% - 20% profit

SE:
Slightly bullish (price slightly above $195)
Watch the movement and convert to LC + Bull Put (STO Nov 16, 2009 195 put)
Slightly Bearish (price slightly below $185)
Watch the movement and convert to LP + Bear Call (STO Nov 16, 2009 185 Call)
Stagnant – (Price between $185 and $195)
1) Close the trade for slight loss
2) Convert to double diagonal
Roll both LP and LC out in time, and sell short term put/call.

Risk Profile

GS - straddle - by Joseph Wu

I was looking through the list of stocks that will report earnings this week.
Surprising, I found that GS might be a good trade to enter.

Straddle on GS
Price 189.30.
Earning date: 10/15/2009 (Thursday) BMO
IV is around 2 year low.


BTO Oct 16, 2009 190 call at $4.1
BTO Oct 16, 2009 190 put at $4.85

Net debit $8.95

BE - 181.05 and 198.95.
The movement required for profit is around 5%.
Primary exit: 10% profit
Secondary exit: Take a loss 20-30% loss due to time decay

GS Historical Earnings price Movements

Earnings date Pev. day close Movement with onetray day
Jul 14, 2009 $149.44 +1.14%
Apr 13, 2009 $130.15 -11.56%
Dec 16, 2008 $66.46 +17.36%
Sep 16, 2008 $135.5 -14.29%

SHLD - straddle?

I look at the charts and thought that this is a good straddle trade.

Will keep you informed if I place the trade.

Any comments or thoughts?

Fear and Greed

Let me share something from investopedia.com on something that defines a good trader:

"The best traders can adjust to whatever the markets throw at them. Rather than focus on what they think or expect to happen, they plan for multiple scenarios and adjust as the opportunities present themselves.

As a trader, it is important to not to lock yourself into only one possible outcome, as the markets are not always rational or logical.

Fear and greed are two of the most powerful emotions we have as humans. If you think of the markets as a huge pool of extreme emotions, than you can understand why the markets often move in ways we could deem improbably or logical.

As stock chart shows price objectively, but traders in turn must be objective in reading them. "


To me, the last 6 months, the market was irrational but I am sticking with the bullish trend. The market can remain irrational than you can remain solvent.

If you need to trade, make sure it is hedged. Buy covered calls and bull puts.

GLD Calendar - submitted by Joseph

Technical analysis: GLD broke the resistance of $100 on 10/06/2009. The expectation is that it will keep go up. The target price is around $130



2. GLD movement is not very bullish. Expected trend is slightly bullish.
3. Monthly premium for selling call is between $0.8 to $1.0.




4. Trade structure:

BTO Jan 16, 2011 Strike 110 call at 11.28
STO Nov 6, 2009 Strike 110 call at 1.28
Net debit 10.00
Maximum risk 10.00
BE: 101.9 and 121.2
PE: Options expired worthless. Or 20% gain.
SE: Bullish – if the short call is ITM, roll up and out
Bearish – Roll the short call down.





Innovestor's Comments:

I had been bullish on gold since 1 month ago when it tested 950.Since then it broken up the last few days.

I commented previous that this current rise is the result of a short squeeze by the commercial ( institutional traders ).

Take a look at the following chart:



The numbers on this chart display the net futures contract positions of commercial gold traders. In March 2008, as gold powered above $1,000 per ounce and as mom-and-pop investors were chasing the price higher, the smart money was selling. Commercial traders were net short a total 253,000 gold futures contracts. At the time, that was one of the largest net short positions ever recorded.

Two weeks ago, the Commitment of Traders report disclosed the commercial net short position was 285,000 gold futures contracts – perhaps the largest net short position ever recorded. But look at what has happened since then...

The commitment of traders report is published every Friday on www.321gold.com. If the smart money increase their commentment this Friday, that means a decline may be imminent. If the commercial traders are covering their shorts, price will surge higher.

For the time being I am bullish. I will wait for this Friday to place more trades. But meanwhile, I am selling calls to take some profit from my long positions.

Another comment on gold before I get specific on your trade. I believe gold is in a head and shoulder pattern and it has consolidated for many months. If it is true, then $120-$130 for GLD is reachable. But it will not happen immediately. It will probably reach this target by Q 1 next year.

This chart was taken from www.Kingworldnews.com. This guy is extremely bullish:



Have said all this, fundamental rules. The main reason for gold to be strong is the weakness of the US$ and inflationary fears. There is a lost of confidence in paper currencies.

Specific comments on your trade:

I am not good at Calendar spreads. Personally, I will not place calendar spreads for GLD as it moves violently up and down.

If gold break up or down, you will be forced to adjust.

IV is getting high. Momentum is up. A short term credit trade will work.

As for me, I believe there will be a correction. I will wait till it goes down to around 1000-1020 and see how it behaves. If it hold, I will enter some covered call trades for GLD and other gold stocks. For now, I have enough trades in my portfolio to enjoy the bull run. Almost 40% of my portfolio are in gold related equity and etf. I will need to slow down and take profit!!

If it does not continue to go up, I will wait for the correction and see how deep it goes. Often commodities are actively traded and it moves up and down a lot. Covered calls, bull puts and ratio spreads work better. It is not a stagnant trade - so why use calendar.

Straddle - Key factors for high probability of success

I was intrigued by my back testing that there is a high probability of success if we follow certain criterion.

You can place a straddle or strangle. Strangle will be a cheaper but in this case I decided to enter the trade as straddle as it saves all the guessing on where the stock will be heading. I find that 9 out 10 trades can make >15% over a period of 6-8 weeks.

The criterions for the trade are:

- It must react to earnings – before and after
- IV must be low.
- Bollinger Band should be constricting
- ATR must be low

Let the trade run for at least 8-10 weeks. Place the trade 2 weeks before earnings. Basically, the most important that affects the price will be the volatility change. Note that implied volatility collapses after earnings but you can still make money from realized volatility on the few days after the earnings release.

It is noticed that the price of the options will fluctuate wildly as we move into earning seasons. I set an order to close the trade GTC at ROI of 20%. Anytime, it hits 20%, I am out. I may adjust my exits if the market shows some clear direction and go for a higher or lower ROI.

Below are 3 trades which I placed today

ATVI




BTO Jan 12.5 Call for 0.80
BTO Jan 12.5 Put for 1.15
Total Risk 1.95
Reward: unlimited but target 20% ROI
PE : Exit 3-5 days after earnings at 20-30% loss

A GTC order of 2.35 is placed for a target ROI of around 20%.

SE: Close the trade 3-5 days after earnings if it does not hit the target ROI

AIG


I expect the earnings of AIG to be very critical this quarter. It will determine whether the company will survive. Thus price is expected to gap up or down. I expect a gap down but who knows. The market can give you all kind of surprises especially with AIG!





BTO Nov 45 Call at 6.55
BOT Nov 45 Put at 7.6

Total Risk: 14.1

Target : ROI 30% ( it is more volatile and I expect a higher ROI ).

SE: Get out 3-5 days after earnings announcement.


NVDA




BTO Dec 14 put for 1.2
BTO Dec 14 call for 1.2
Total Risk : 2.4
Reward: unlimited but target
PE: 20% ROI
SE : Exit 3-5 days after earnings at 20-30 % loss

A GTC order of 2.9 is placed for a target ROI of around 20%.

From losing money to profit - NYX

This is an example of the discipline applied on how a real trade was turned from losing money to making profit.

To adjust the trade, the following guidelines were followed:

STAGNANT TREND: - adjust to Call Calendar or Bull Call Calendar

BEARISH Trend

- STOCK NEAR RESISTANCE : synthetic collar

- STOCK NEAR SUPPORT: -à bear call or Calendar Strangle

- STOCK DROPS >20% à Dollar cost average or buy more calls

The following trade followed the above guidelines:

1. NYX Long Call - April 02 buying Jan 09 95 LC( 20 months ) for $22.5




- Trend is bullish
- Trade placed in April 2 for Jan 09 – 20 months for trade to work

2. April 13 - Trend is stagnant



Stagnant - adjust to Call Calendar

- April 13 – Long call -à Call Calendar
- Sell April 95 ( 1 week left before expiration ) for 1.75 and at RESISTANCE
- Note that stock had dropped, MACD had turned but it is not time yet to make a bearish adjustment. Trend was decided to be STAGNANT

Call Expired.

New Cost : 22.5 –1.75 = 21.05 (First cycle of cost reduction )

3. April 20th - earnings next week



Stock starting to trun bearish and near RESISTANCE --> Adjust to SYNTHETIC COLLAR.


o Add protective Put and
o sell a call ( SYNTHETIC COLLAR ) – near RESISTANCE )

- add LP May 90 for 3.1
- add a SC Jan 08 110 FOR $6 ( This is far out in time to get enough credit because EARNINGS IS NEXT WEEK ) .This is easily paid for the put.
- SC is made far out in time as stock had potential to go down


New Cost Basis : 21.05 +3.1 ( put ) –6 (SC ) = 18.15

On Monday, it gap down in high volume ( downgraded and 2 days before earnings )

4. April 30th - gap down after downgrade



Have to do something to May 90 put as it is April 30th ( getting close to support at 77.5 ). Will lose extrinsic value fast. Need another put but further out in time.


- STC May 90 put for 4.5
- BTC Jan 08 110 SC for 4.4


New Cost Basis : 18.15 –4.5 +4.4 = 18.05

Roll the synthetic Collar ( price around 78 and resistance at 90 )


- BTO Jun 85 put = 3.5 ( lower strike and shorter time because price is near support)

- STO May 90 Call = 1.2 ( because price is near support and could have upside potential and thus short term call – so as not to cap the profit )

NOTE:
- PUT is now longer time than SC
- SC is short term because price is at support because you do not want to cap profit


New Cost basis : 18.05 +3.5 –1.2 = 20.35 ( new synthetic collar )

Trade is one month and cost has drop from 22.50 to 16.25 = 6.25without spending any money. Stock has gone from 90 –80.

5. May 18th - stock finding support at 85



- Stock finding support on the first half of May
- BTC on May 20 for May 90 Call = 0 ( call expired )
- Sell June 85 put for 4.1 as put was deemed no longer needed


May 90 SC expired on May 20 = 1.2

New Cost basis : 20.35 – 4.1 +0 = 16.25

Now you have a LC at 95 strike at cost of 16.25 ( no put and SC )

6. May 31st - Stock moves sideway --> adjust to Calendar



- Waited two weeks and stock ding dong around 75-80 ( stagnant )
- STO the 90 June Call = $0.8 ( a cost reduction for a front month with 19 months of time left ). This is converting into a CALL Calendar.

- Call expired worthless on Jun 18th

New Cost basis: 16.25 – 0.8 = 15.45

7. June 18th - Stock broke down



- Stock broke down support on June 18th after option expiration on June 15th
- Instead of buying a PP, sold another SC at Jul 85 for 1.05. The reason is that stock may bounce back from support and this break down may be temporary. Can add PP later.
- STO July 85 call = 1.05


New Cost : 15.45 – 1.05 = 14.4

8. June 20th - stock continued to drop



It went down even more. It is not bouncing up. Forced to add PUT

Add a put Aug 75 on June 20th = 2.75

9 July 10th - Sold the puts



- Beg July stock touching 20 MA, going up 2 days on high volume.

- Get out of the puts on July 10 = 2.3

New cost basis: 14.4 +2,75 –2.3 = 14.85

10 July 24th - Stock went down again after selling put!



- Stock went back down. It was unexpected.
- But stock did not breach support. So use bear call calendar or calendar strangle ( buy puts )
- Since stock has gone down > 20%, it was time to cost average. Also stock is nearing support
- BTO 3 contracts NYX 2009 95 call for 10 ( total 5 contracts now )

o new cost basis: (( 14.85x2) + 19 x3)) /5 = 11.94

- BTO 5 contracts of Sept 75 put converting into a synthetic married put ( long call + put ) or a Calendar strangle. Also, stock was closed to earnings.
o BTO 3 Sept 74 for 4.4
o BTO 2 contract for 3.4

12. August 16th - Stock broke and gapped down



- Sold puts even there was no support or bullish signal. But the MAIN REASON is that the cost of put had gone up a lot from around cost of $4 to $10 = $6 of cost savings
- STC Sept 75 put for $10.42
- Cost was reduce A LOT to only $11.94 – $6 = $5.94
- To increase protection STO Sept 80 Call for 0.92 to reduce cost


11. Sept 21st ( option expiry)




- For the next one month, no trade was made.
- Call expired worthless on Sept 21.
- New Cost basis : 5.94 – 0.92 = 5.02
- Stock went up after option expiry with high volume

MADE over 100% profit on this trade