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Posts Tagged ‘puts’

After Options Expiration

This past Friday, there were several happenings with my retirement portfolio as options expiration happened.  I had several calls expire, a few that were exercised and some puts that were exercised as well.  So let’s quickly run through the activity and explain what I plan to do for each of the positions in the portfolio.  I will start with the simple and work toward the more complex.

Expiring Call Options

I had several call options expire.  Some of the outstanding calls for Seadrill (SDRL), AK Steel (AKS), Seagate Technology (STX), DryShips (DRYS), and Intel (INTC) expired.  The plan will be to sell some more on a day when the market is showing a little bit of strength.  I already have some outstanding in-the-money calls on SDRL, AKS, and STX from when I felt that I should be a little defensive and raise some cash.  So I will likely sell some out-of-the-money calls in case the market is able to hang on into May.  Right now it is a little difficult to tell which way it will go, but I have a few weeks to see what happens.

I will also need to sell some calls on INTC when I get a chance.  I am using the stock as part of my dividend plan for 2012, but want to enhance the return by getting a little extra cash.  I am thinking that the stock has made a great run since August when I first purchased it and may be in for some sideways action.  Again, it is just one of those things that it may be worth sitting back for a week or so to see what happens.  If the stock drops some more, I could add to my position and pick up more dividends in the process.

Exercised Call Options

I did have some call options that were exercised on Friday.  Some of my stock in DRYS was sold at $3 and in STX at $28.  I was already able to buy some of the DRYS stock back yesterday at $3 so I managed to keep all the premium and not change my position on those shares.  I still have to buy some more back, but will be seeing what happens this week.  If it shows some strength, I might be able to sell some $3.50 calls.  If not, then I will sell some May $3 calls and try to pick up more shares at $3.

With STX, I still have quite a few shares and am counting on the dividends so I will be wanting to re-purchase those shares in the next few days.  I will probably sell some calls right away when I do since I will want to lower my basis.  This is a volatile stock in which I have already locked in a profit by purchasing May $25 put options.  So I can feel confident that whatever decision I make will only help and not hurt me.

Exercised Put Options

This is one of the more interesting trades to discuss, and I suppose the most complicated although it really isn’t that difficult.  I own shares of Silver Wheaton and have been trading it up and down over the past 14 months.  I am currently negative in the position due to a few rolls that I made so I am working to decrease the basis.  I had some April $36 and $35 calls expire meaning I kept some decent premium.

However, the stock has performed poorly enough as of late that my April $30 puts ended up being exercised.  Yesterday, I bought some May $25 puts and began getting back into my previous position.  I purchase some shares at $28.50 and a few more at $28.  That means those shares were sold at $30, and I was able to buy back at a discount.  As long as I am getting shares below $30, I am making a profit on that portion of the transaction.

The plan is to purchase a few shares here and there while seeing what the stock will do.  When I have a decent sense of what is happening, I will sell some covered calls to profit on that portion of the transaction and buy some more shares.  Ultimately, I will likely end up with more shares than I had started with for the same amount of cash expense.  Plus I will still have protection below $25 in case the bottom drops out.

If I can sell some May $29 or $30 calls and fill out the remainder of my position under $30 per share, I should end up ahead of where I otherwise would have been.  I will retain some shares against which I haven’t sold calls just in case there is a big run up in the stock as well.  Ultimately, I am needing to trim about $6 per share from the basis to get back into the black.  It will simply require a little bit of patience.  In the meantime, I can collect a few dividends on the stock.

So, do you have any investing plans heading into the summer?  Feel free to share or comment.

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4 comments - What do you think?  Posted by Cash Flow Mantra - April 24, 2012 at 9:04 am

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How to Catch a Falling Knife

I ran across this post on “Catching Falling Knives” at The Market Capitalist and felt that it was a great topic for my first post on options here at Cash Flow Mantra.  Most people would be scared to catch a real falling knife, but if you do so with a little bit of practice and training, it can be done relatively safely.  It can even be entertaining as seen here:

Tommy Drake Knife Juggling

Now if I were to catch a falling knife, I might do so with a block of wood or a chain mail glove to keep from getting hurt.  But if I want to catch a stock in free fall, I would do so with put options.  Allow me to explain how to catch a falling stock by looking at a real life example.

Recently, Linked In (LNKD) issued stock in a much hyped IPO.  The stock opened at over twice the offering price and shot past $120 per share, but then immediately began falling.  There have been questions about valuation and earnings, but I am not interested in debating that.  Rather, I am interested in how could you get involved in the stock not knowing where the bottom might be and still not get hurt!

It didn’t take long for options to start trading on the stock so here is what I would have done had I been interested.  You could consider this type of strategy for Facebook when it comes out since it is likely to be a stock that will have some hype involved.

Let’s say that you would have wanted to get 500 shares of Linked In.  That first day of trading it would have cost $50,000.  But the stock started declining right away.  Within a few weeks, the stock is at $70 per share.  Is this a bottom?  How low will it go?  I have no idea, but I do have a plan.

When the stock is at $70, I could purchase 5 contracts of the $60 put that expires in November for about 25% of the value of the stock or about $17.50 per share.  Each put contract covers 100 shares.  The puts are very expensive for this stock since volatility is still high with real potential downside risk.  Then I purchase 500 shares.  So, what have I done?

I own LNKD and can brag to everyone at work.  But my cost for the stock and the put options is  $87.50.  If LNKD is trading at $30 in November, then I can sell it for $60 but I will still lose $27.50 per share which is better than $40.

Alternatively should LNKD increase to $100 again like it did today on July 11,  I will make a profit of $13.50 per share on the stock plus whatever value the puts may hold.  Could LNKD go to $150?  Sure.  That would be great if I owned the stock.  Could it go to 30?  Sure.  That would be terrible if I owned the stock.

The point is that puts can be used to limit the downside and allow you to pull the trigger on a falling knife.  Puts are that chain mail glove protecting you while you practice juggling those knives.  No sense losing a finger or a lot of trading capital.

There are even techniques that can be used that might even allow you to profit from a falling knife, like buying 8 or 10 put contracts on those 500 shares and selling off the puts one at a time as they increase in value and you wait for a bottom.

I use puts in my retirement accounts to double down and buy into a declining stock.  I sold EMC from my account last November after holding for 3 years.  My original purchase price was $25.37 in October of 2007.  I watched it drop into the low teens but because I made money on the puts and was able to purchase additional shares with confidence knowing that it would eventually recover somewhat.  I sold at $21.82 but made 8.7% annualized return over those 3 years because I averaged down.  My basis ended up being $15.78.

I was able to invest without fear knowing that I couldn’t lose all of my capital.  Plus, I made a better return than buying and holding in which case I would have lost money.

So reader, have you traded options?  Do you think options are risky?  Have you any idea what I was saying?  Please offer your comments below.  I will be working on another site that will start at the beginning and explain options in a simple manner so that anyone could understand and appreciate them.

16 comments - What do you think?  Posted by Cash Flow Mantra - July 18, 2011 at 10:10 am

Categories: Investing   Tags: , , , ,

A Win-Win on the Million Dollar Silver Bet

If you have been following my blog at Options Dude, I shared an interesting story about a million dollar bet on the silver ETF (SLV).  Essentially, a large trader purchased 100,000 July 25 put contracts on SLV for 10 cents each.  Since each contract represents 100 shares, the trader was wagering $1 million dollars that the price of silver would fall.  This occurred as the price of silver was trading close to $50 per ounce.

Well, today is expiration day for those July contracts, and as I explained, both parties in this trade won.  Whoever sold the puts collected one million dollars for insuring against a collapse in the price of SLV.  Put contracts serve as insurance for stocks (I will be explaining more about options in later posts and on a new site).  Since the price didn’t fall below 25, the seller of the put options is no longer under any obligation and the contracts have expired.  The seller gets to keep the premium.

The buyer of the put contracts likely also won as well.  Shortly after the purchase of the puts, the price of silver began to decline and actually has traded down into the mid-30’s.  Even though the price didn’t reach 25, the value of the puts increased from 10 cents per contract to as much as 30 cents per contract that I saw.  So the buyer of the puts could have sold them for a $2 million profit.  As you can see, both parties won.

So Who Loses?

It would seem that for every winner, there must be a loser.  Money can’t be created out of thin air, unless you are the Federal Reserve and United States Treasury.  And you would be right.  The difference is that in this case, there are likely several small losers.

It would seem that the traders involved in million dollar transactions represent big money and smart money.  On the other hand, someone had to purchase all those puts at 30 cents that the original buyer got for 10 cents each.

The likely scenario is that the financial media attention for such a large trade got some people to thinking that maybe it would be worth a small bet on the same trade.  Maybe they saw the silver price start to collapse and thought that it would decrease to 25.  To them, it might be worth spending 30 cents each for 100 contracts or $300 for a lottery ticket.  All it takes is 1000 greater fools and the smart money has $2 million profit.

So options become risky to 1,000 individuals because they lost money.  It is not that options are necessarily risky, it is that the individuals were uneducated, unexperienced, and lacked a true plan for investing.  They were throwing darts at lottery tickets and lost.  Plain and simple.  That is no way to trade.

Thinking Like a Pilot

I am not a pilot, but I know several.  I also know that you don’t jump right into a 737 and begin flying.  You start out in class and learn some things first.  You learn about the physics of flight and terminology used to communicate with other pilots and aviation professionals.

You learn about safety and begin flying in a single engine plane in daylight under visual flight rules with individualized instruction.  You practice take offs and landings.  Only after sufficient levels of experience and passing certain requirements are you able to move on to instrument flying, night time flying, and multi-engine aircraft.

Putting me in the cockpit is risky not to mention suicidal.  And maybe options trading for you is risky.  But options themselves aren’t risky.  They are certainly less risky than flying.  I know that I won’t die trading options.

People simply refuse to take the time to learn about and practice trading and investing.  The same holds for real estate or stocks or precious metals.  Individuals simply don’t take the time to educate themselves and learn about what they are doing with their investments.  The information is out there.  Their are willing mentors.  I urge you to find someone you can trust and who has the experience and willingness to teach.

I will be starting a new blog entitled at OptionsDudeAtoZ.com.  It will be a complete tutorial on options, one post at a time from a self-educated but passionate everyday individual who simply loves options and sharing his knowledge.  Feel free to learn about options trading and know how to trade options safely.  We will be starting at the very beginning with a single engine.

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8 comments - What do you think?  Posted by Cash Flow Mantra - July 15, 2011 at 4:00 pm

Categories: Investing   Tags: , , , , , ,

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