RIMM - Put -->Put Calendar - by Joseph

Trade not activated yet as market is up today.

Technical Analysis:

RIMM is currently price at 61.41. The price is in a downtrend, dropped below 50ma two days ago. It is also below 20ma. The price is sitting on the lower Bollinger band. The Bollinger band is showing a sign of expansion after contracting for two weeks. MACD history is showing sign of downward momentum. The price broke a neck line of a Head-and-Shoulder pattern.
Volatility is at 52 week low. Expectation is that it will go up.




Fundamental:
Earnings on 12/17/2009. The price gapped up the next day, but the gap is filled on 1/12/2010.


Expectation: The possible support is $58, and the next is around $55. $55 is also the measured move of the Head-and-Shoulder pattern. The price target should be hit in two weeks in the market is bearish.

Trade structure:

Leg into a bear put diagonal trade. BTO June 60 put at $5.7 first. When the price drops, STO either Feb 60 put or Feb 55 put, depending on the price movement.

Primary exit: 30 to 50% ROI.

Secondary exit:
Slightly bullish: Convert the trade to Put calendar (STO Feb $60 put).

Very bullish: Convert the trade to Bull put calendar (STO Feb $65 put)

Know what you do not know

Addendum to my post on "I am clueless to the market direction", I read the following this morning which is interesting. It is a quote by the great trading master, Paul Tudor Jones:

"I see the younger generation [of hedge fund managers] hampered by the need to
understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything.. There
are young men and women graduating from college who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. [At the end of a bull market or bear market] there's typically no logic to it; irrationality reigns supreme, and no class can teach you what to do during that brief, volatile, reign."

ITM Covered calls - Sprint

I noticed a good ITM covered call opportunity that can yield up to 40% annual ROI.
The company is Sprint. It has a market cap of $9.7 billion and revenue of $33.6 billion over the last 12 months.

In 2005 Sprint merged with Nextel to become the 3rd largest wireless company based on subscribers after ATT and VZ. However, the merger did not go well as the 2 management could not work together. Less than 3 years later, Sprint wrote off nearly $30 billion from the acquisition. This made it one of worst takeover in history. The company’s fundamentals continued to deteriorate with high debt, few new products pushing Sprint to a market cap of less than $10b.

But Sprint seems to be making a turnaround:

- Customer service has improved. Recently, its customer service ranked higher than ATT according to JD Power and Associates
- Sprint has been able to pay down $1.4b of its $21 b debt over the past year. Now it has $19.6 b in debt and $4.6 b in cash. The debt is still scary but on closer scrutiny, only $4.5 b is due within the next 3 years. Sprint has enough cash to service the debt. Sprint has generated $1.5 billion in free cash flow on first half of 2009. If the company is able to generate half that amount over the next five years, cash flow plus the current cash would cover debt payments until 2014.
- Spring is releasing new products. It sold more than 820000 Palm Pre phones and also release HTC Hero smartphone which uses google Android operating system.
- Spring launched “Boost Unlimited” in January. This prepaid Service allows customers to use a cell phone without signing long term contract. It costs only $50 a month. Management said it added 770,000 subscribers. It is the highest of prepaid performance by any US carrier. It is believed that Sprint is now gaining net subscribers after a long period of losing customers due to poor servce.

Sprint is trading at 60% discount to book value with a P/E of 4.5. This stock is cheap compared to similar stocks in the segment.

Finally, there were buy out rumours of a buy out last year which turned out to be false. It is my belief that this is a high probability. The possibility of a buy out and a big discount to the book values limit the downside of this stock.

There are few possible trades for this stock.

1. A married put which will capitalize on the potential upside
2. A ITM covered call with a SC in May which will give an estimated ROI of 40%


No (1) strategy is more aggressive. It will maximize profits if Sprint really sprint from this level. At the same time, it gives downside protection especially with earnings next month.

No.2 is a conservative strategy. If the trade is held till May, it gives an annual ROI of 40%.

I have decided to go for a conservative strategy. If the stock starts to breakout above 4.2, I will enter a new trade for an OTM covered call or married put.

Stock is showing some support at around $3.5

o BTO 10,000 stock at 3.63
o STO May 3.5 SC at .56

Cost basis: 3.07
ROI – 14% ( annual 42% )

PE: Let the SC be assigned at maximum ROI

SE: If stock falls below 3.07, roll down the short call to 3. If fundamentals change and deteriorate, add a protective put and convert the trade into a collar.

IMAX - Put Calendar

Have you watch the latest James Cameron movie? It is the 3D adventure show, Avatar. I watched it in an IMAX 3D theatre on boxing day and I was thoroughly impressed. It has continued to smash box office records and so far rallied $1.8 billion – second highest grossing movie ever made after Titanic – also a production with Cameron as director.

One company benefiting from the movie is IMAX. It has ridden this year with the market price from $4.15 to a high of $14.6. You also pay 20-25% more to see 3 D movies on a larger than normal IMAX screen.

IMAX operates in more 44 countries with 400 theatres. The company has a market cap of $900 million and sales of $145 million over the last 12 months.

10 out of 12 analysts who cover IMAX gives a buy rating. The other two are neutral. Not one analysts believes the stock is going lower.

At CES, it is receiving a lot of hype. Apple and Microsoft use the event to launch some of their most important products. It was the talk of the town.

Expectation for the stock is very high. The big question is whether the stock can meet the market expectations.

I think not. As an experienced short seller, my gut feel is that it is time to short when sentiment and expectation are at its peak. I am mildly bearish now on the stock. Let me explain why:

1. Over the last 6 months, insiders sold 288,000 shares of IMAX. I think there will be more selling over the next 12 months. The CEO and chairman plan to sell 1.62 million IMAX shares over the next 12 months.
2. It is over valued. At $14, IMAX is 35 times next year’s earnings. This is double the industrial average. It is trading at 20 times book value of 75 cents and more than 75 times cash flow. Anything more than 10 is expensive.
3. It has limited capacity ( number of theatres ) and movies line up to get the kind of expected revenue for 2010. The company needs to open more theatres. There are some potential blockbusters but no line up worthy of generating $200 m in revenue.

I decided to enter a put calendar on the trade:

BTO Jun 12.5 Put for 1.52
STO Feb 12.5 Put for 0.52

Cost : 0.9

Primary Exit : 20% ROI.

This is a trade for a slightly bearish to stagnant trend. If trade goes bearish and Feb put goes ITM, I will roll down the put or even remove the put until the stock finds support if it is moving down bearishly.

If trade goes bullish, I will roll up the put if it breaks the previous high of 14.6 and hopefully close the trade for a slight profit or breakeven.

I am clueless on the market direction!

Honestly, I am lost as to where is the market direction. I have a directional bias but I could be easily wrong. The market has a way to make one humble!

Sometimes a trader does not need to know which way the market is going to move. My technical indicators give me some directions. It works nicely quite a lot of the time but I am prepared if it is wrong. There are times when I say the market "should" continue to trend to this major support or resistance, it is because I really don't have a clue. I am making an educated guess.

In this kind of trading situation, you can still trade even you are quite clueless. In that way, you can't be wrong, and pride and emotional attachment are not an issue. I trade on a statistical edge, a technical system where I get my bias and proper money management.

If it goes in my direction, I will make good money. If it goes against, I am prepared and will manage it to profitability.

While it is good to have a bias, it is bad to be totally convicted in one direction. Your dogmatic conviction of a market direction could be your biggest liability. That's how many traders make good money and lost it all.

I use options as part of the core strategy in my trades. I have a very clear strategy before I start any trade. I start with the fundamentals. I believe technical trumps fundamental in the short term but fundamental trumps technical in the long term. Once I choose the stock, I use technical to set up my entry and exit signals. Finally, I apply options to give me a statistical edge.

One of the keys to option strategies is to survive long enough keeping your cost basis in control and eventually succeed.

"Justice," the taciturn turtle said, "the exponential curve that is trading returns cares more about your ability to stay alive than the absolute rate of the return. If you are good, and stay in this game long enough, everything takes care of itself."

Sun Tzu said if you sit by the river long enough, you'll see the bodies of your enemies float by. The key is "long enough." If you live long enough, you have to be the survivor.. A question was asked to a very old man "how did you get to be the world's so old?" And he says, "Simple. Don't die." How do you get to be the world's oldest investor? The answer is don't crap out. As long as my fundamental is intact, I will manage the trade to profitability.

I keep good record of EVERY trade. If I am wrong, I have secondary exits through adjustments. I have stopped using stop loss since I started using options 6 months ago. There are little emotions of fear and greed. I try to leverage volatility to be playing on my side.

In the last 6 months, I have been directionally wrong 40% of the time. But I am 90% profitable on all my trades when I close it.

This month is the first I lost control of one trade that I lost more than 30% it happened to be GLD ratio trade! I deviated from my plan. For most of the trades, I seldom lose more than 10%. But I must have more than 5 trades that give me >100% gain. For the rest of the trades, I have an average gain of about 25%.

Last year was an exceptional year. I set some market directions on how I will trade for 2009 in the blog. I was right on my directional bias for oil, gold, silver and Canadian dollars but was slightly wrong on shorting treasury. It did not went up as high as I expected. It was stagnant. Fundamentally, I still believe that shorting treasury will be a great trade. I am still holding on to my trade. Although I was wrong, my trade for TBT has returned 30% because I continue to reduce cost via credit spreads. I know that once it moves in my direction, I should see good profit.

I was also initially wrong on the market direction at the end of Q1 but by April, I turned bullish. Although it remains stubbornly bullish against many of the bad fundamentals and my basic understanding of the market, I continue to trade the bullish trend with some fear and trepidation. There are many perma bears with very sound reasons why the market will collapse anytime. They have been wrong since April this year. But the market has defied logic and reasons. If you stick to your conviction, you have lost opportunity of a 50% upside on your portfoilo. Also, there were the Elliot cycle practitioners warning of the end of wave 5 and the S&P will go down to 600 in the next cycle. All of them were wrong so far. They will be right one day. As for me, I continue to hedge my trades and neutralize any excessive bias assuming that anything can happen while trading with the trend. I continue to remember the fundamental will trump the technical longer term. But as long I am not going to see a sell signal, I will keep my bullish bias.

Lets see whether I can do just as well in 2010.

House keeping on Expiration Week

Today is Jan expiration.

During this week, it is busy time especially during the last 2 days.

There are a number of housing keeping tasks to keep in mind when you approach the end of the week. Volatility will start to ramp up by Wednesday and then crashed on Friday afternoon one hour before the close. Also, time decay accelerates and gamma goes chaos and tends towards 1 at expiration.

For those who love to trade Iron Condors and Butterfly, these are best time. Also, it is good time to trade OTM strangle or straddle especially when it coincides with earnings period now.

More aggressive and skilful traders will lookout for pinning for stocks like AAPL, RIMM, GS and GOOG betting that the stock has a tendency to expire at a specific price.

For me there are few things I do:

· Evaluate all bull puts and naked put to decide whether I like to keep the stock. If not, I will take profit if it is close to the money.

· If there are short puts with imminent assignment, I will normally add a short call instead of a long put. I will decide whether it is necessary to add a long put to convert to a collar on Monday if the trend continues to trend down.

· Evaluate all calendars. Any short options that are ITM should be rolled out. The delta goes greatly against you once it is ITM especially when you are trading a calendar.

· Need to decide to close any short term straddle or strangle trades before 1 pm.

· Look out for credit spreads for the following month. This is probably the best time if the set up conditions are correct. The volatility is high.

· Finally for covered calls, if you intend to keep the stock, roll out the short option if it is expiring on Friday whether it is ITM or OTM. If ITM, if you are happy with the profit, then just let it expires. If it is a stock you intend to keep for longer term because of the relatively high dividend, then roll out the short option. You may have to take some loss on the short options but you are making money on the stock. It is probably a good time to roll as you ride on the relatively expensive option.

Mid Air Crisis with Boeing - but safely landed.

On 12/21, I went bearish on Boeing. It was just 1-2 days after the inaugural flight of their newest jet, 787.

I thought the market will sell on the news. I anticipate delivery problems. Technically, Boeing was showing signs of breaking down. It was hitting resistance, MA, stochastics and MACD are all turning bearish.

So I entered a put calendar on Boeing

BTO May 55 Put 5.28
STO Jan 52.5 Put
Cost: 4.3

PE : 20-25% ROI

2010 started with a bullish bang! BA did a reversal on me within 8 days. MACD reversed and a bullish signal was issued.


On Jan 4th, I quickly roll my Put from Jan 52.5 SP to Jan 55 SP for a credit.

o BTC Jan 52.5 Put for .5
o STO Jan 55 put for 1.2

It was apparent that my roll is not good enough. It broke out of 52 weeks high.

So I closed my short put and go for a Calendar strangle.

o BTC Jan 55 SP for 0.66
o BTO Feb 55 Call for 3.25. I also intend to carry this trade through the earnings period on first week of Feb.

The trade was profitable early this morning. I decided to get out for a 10.6% profit.

o STC Feb 55 Call for 5.1
o STC May 55 Put for 2.9

Not bad for a trade for less than 2 weeks.

I could have held the trade and get out at the end of the day for >15% profit. Or if the market is bullish, I could probably end up with my target 25% ROI. Boeing continued to ramp up today.

But I decided not take the risk. Since I was wrong in my direction in the first place, I am happy that I got out with a profit.

It was an exciting journey. I have safely landed!