Wednesday, October 23, 2013

Buy BA NSC (sell puts)

Buy BA via selling Dec 105 puts
Buy NSC via selling Dec 75 puts

I sell puts on Boeing and Norfolk-Southern Railroad on their earnings moves. Story is mostly the same, low risk, low reward, high probability worm trades.

Oil and oil stocks drops today, and my positions in APC and XOP move against me.

Long AMGN APC BA BRKB FDX GDX IWM KORS
Long LGF NKE NSC WHR XOP XRT
Net long GLD SPY

Tuesday, October 22, 2013

Buy WHR (sell puts)

Buy WHR via selling Dec 110 puts
Whirlpool up on earnings. I see chart support at 130 and 120. Elsewhere Amgen AMGN is up after good earnings.

Long AMGN APC BA BRKB FDX GDX IWM KORS
Long LGF NKE WHR XOP XRT
Net long GLD SPY

Monday, October 21, 2013

Buy APC BRKB IWM (sell puts)

Buy APC via selling Nov 80 puts
Buy BRKB via selling Dec 100 puts
Buy IWM via selling Dec 95 puts

I sell puts on Anadarko Petroleum, Berkshire Hathaway and the Russell 2000 ETF. Option expiration frees up a lot of buying power and I put some of it to use. Record highs in the stock market mean less equity exposure than I would like at this point in the option cycle. All of these are what I have termed worm trades, way out of the money, high probability, low profit. The fishing terminology is a catch so small that it isn't even a small fish, it is digging for worms.

Again, the caveat for newer readers excited by my high percentage of wins (12 and 1 for October). Most of my trades are at 80% to 90% probability to begin with. The payoffs are scaled to match. The folks buying the puts that I am selling have a low percentage chance of a profit, but hope their option is a big winner paying off 5-to-1 or better to compensate for the low probablity.

Long AMGN APC BA BRKB FDX GDX IWM KORS LGF NKE XOP XRT
Net long GLD SPY

Sunday, October 20, 2013

Protective puts and collars

There is a thread on the Vanguard forum (link) asking about protective puts. The rough outline is as follows:

Example of an 100k portfolio:
20k cd ladder (1 to 10 year with 5 year average duration)
79.2k SP500 ETF (example only)
0.8k put (2 to 3 month in duration) which gives me the right to sell my ETF if it drops below 55.4k (70% of 79.2k) before the put expires

The cost of protection with at the money puts is easier to find, it is the VIX. For example if VIX is 14 on SPY puts, the cost of insuring with at the money puts is 14% per year. For out of the money puts, the skew means the implied volatility is higher, typically about 25 if at the money is at 14. I know that I have lost almost all of you by now by keep reading the mud gets clearer.

The other problem with the strategy is that insurance is not at a fixed cost. When the market is in turmoil, the cost of insurance, doubles and doubles again. So what is projected as a 1% annual cost becomes 2% or 4% in volatile markets. Interest rate is another input for option pricing, and high interest rates would mean the same, much higher premiums.

Another point is that 10% monthly declines are rare. Back-to-back 10% declines even more so. Three in a row are even more so. Someone buying puts that far out of the money is only going to get to use their insurance maybe two or three times in a typical decade. Of course, if a person knows when the big banana is coming, they can do better--but we don't know. No one knows. Options try and price things according to the odds.

Right now, there has been some research into collars, selling calls and buying puts, as a profitable strategy. Like most strategies that get published, it has a recency bias (worked recently). Publishing also tends to make a strategy more popular, and less profitable as more people use it.

The bottom line, buying protective puts is a form of insurance, and it costs. In the example given the premium is about 1% a year in calm markets, with the caveat that the premium will expand during volatile markets. The protection is rather modest, with a 20% deductible so to speak, before a claim is paid.

Collars can be useful for people with special circumstances. The more famous examples are executives at high tech companies that have just gone public, but the stock they are given has a lock up period before they can sell. By doing a collar, the person guarantees a floor, and gives up some upside. For average folks, reducing the equity allocation is a simpler plan, with nearly the same benefits. Another possibility is that tax reasons mean a sale next year works out better than a sale right now. Same deal, give up some upside to get a floor, by doing a collar.

Friday, October 18, 2013

12-1 for October, grade B+ buy XOP

Twelve winners, one loser for the October option cycle, grade B+. I sell some XOP Nov 65 puts. XOP is the Oil Exploration ETF. I did okay this month. I avoided some possible losers such as IBM and EBay that I have traded earlier. 

My timing was so-so on most of the put sales. Most went deep into the red before recovering and expiring worthless for a win. So for the most part, I was on the right side of the markets. My recent forays into gold have been profitable, though it takes a lot of capital to sell GLD puts.
 
Long AMGN APC BA BRKB FDX GDX IWM KORS LGF NKE XOP XRT
Net long GLD SPY

Tuesday, October 15, 2013

Buy BA FDX (sell puts)

Buy BA via selling Nov 100 puts
Buy FDX via selling Nov 105 puts

I sell puts on Boeing and Federal Express. Some time back FDX had a nice break out at the 105 level and that is the strike price for the short puts. Boeing has been a strong stock, except when one of their planes has an incident.

The stock market closes near the lows, so these positions start in the red. However, they are more of the low risk, low reward, high probability put sales that I have been doing for some time now. None of my October positions looks to be in serious danger of assignment (when the stock moves below my put strike price).

Long AMGN APC BA BRKB FDX GDX IWM KORS LGF NKE XRT
Net long GLD SPY

Thursday, October 10, 2013

Sell GLD strangles (puts and calls)

Sell GLD Nov 106 puts
Sell GLD Nov 144 calls
A short strangle is a bet on a trading range. This one is far out with tiny premiums. Some may ask why bother? The premiums are tiny, but I have buying power and don't think I will find that many new positions to take before October expiration.

Massive rally in stocks today, thank goodness, as the red ink was getting rather deep.

Long AMGN APC BA BRKB GDX IWM KORS LGF NKE XRT
Net long GLD SPY

Monday, October 07, 2013

SPY backratio

Buy SPY Nov 154 puts
Sell 2x SPY Nov 151 puts
This backratio is for a net credit, is net bullish, theta positive, delta positive. It is a bullish trade, with an explosive profit potential on a decline to the lower strike. A decline below SPY 148 and losses get large. I've been doing similar SPY backratios for many months now, and so far I have collected the smallish premiums each time.

Long AMGN APC BA BRKB GDX IWM KORS LGF NKE XRT
Net long GLD SPY

Thursday, October 03, 2013

Buy XRT (sell puts)

Buy XRT via selling Nov 75 puts
 
I open a November position in the retail ETF. Again, I am selling puts far out of the money. Most of the other November positions are sinker deeper in the red. For now I am holding on.

Long AMGN APC BA BRKB GDX IWM KORS LGF NKE XRT
Net long GLD SPY

Wednesday, October 02, 2013

Buy KORS (sell puts)

Buy KORS via selling Nov 57.5 puts
 
This is after November earnings for luxury goods company Michael Kors, so there is added premium and added risk. I compensate, by going further out of the money.

Long AMGN APC BA BRKB GDX IWM KORS LGF NKE XRT
Net long GLD SPY