Options, understandings and tacticsAlan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
Cyndy-Please ask away…I am learning so much sitting on the bench. Thanks guyz and galz for sharing the ‘moves’. Best2ALL!-Benjamin
IN RE Hanergy energy,,,,,seems Li Hejun was shorting his own company………………………
http://www.businessinsider.com/li-hejun-shorting-hanergy-2015-5
Have decided to bite the bullet and transfer most of my TD Direct holdings to Interactive Brokers, despite the fact that the IB site scares me to death and I’m sure that sooner or later I will end up selling or buying shares I didn’t mean to! Unfortunately the switch doesn’t seem to be as simple as it would be if TDD were US based and not UK based, at least they don’t seem to figure in the IB list of delivering brokers, though its quite possible that my brain is so frazzled from trying to figure out IB’s obscure instructions ( who ever “designed” their website should be sacked) that I’ve misunderstood the whole process. Anyway I’m waiting for both brokers to come back to me to confirm what to do .
The dealing costs as you pointed out Benny are hugely cheaper but its also the fact that I can’t trade options using TDD. My thought , and it was no more than that as I don’t know enough about options yet, was that IF I can buy puts at the right price as a protective measure as far as I can see I’m not taking any risk beyond the possibility of the share price not falling enough to make the option exerciseable. To be honest I’m still not sure how to regard ARWR. I took a big hit on it and decided to hang on in the hope that it would go back up , but not completely blindly as there seemed to be enough enthusiasm out there for the science and for the prospects of eventual success to give me some hope that I wasn’t being totally stupid. Even after Dr K’s recent post I’m still in two minds because it sounds as though the company are really excited about what they’ve seen, but not yet disclosed, in the current trials and I don’t think they would be making such a big thing about what they’re calling Analyst Day if the results so far weren’t good. They seem to be hinting pretty strongly that they are seeing things in the trials which could fundamentally change certain assumptions about how the virus works . Even if this is correct , it shouldn’t really matter as Dr K’s view is that even if the drug works for HBV its not one he would get excited about prescribing but I’m wondering if the market will be as clued up as Dr K. If not I would be kicking myself for selling my shares at this stage which is why I was disregarding the sell and buy back strategy Frank and why I started to think of options as a way of hedging my bets. For the same reason Lawrence I’m hesitant about selling covered calls. I think I have to decide how I feel about ARWR first and then look at what to do, if anything, by way of options.
HM , yes I would be very interested in some advice on options strategies in relation to $ESPR thanks . I’ve also got a (very relatively) large $GILD holding. Until recently , while it was quite reliably stuck in a recogniseable price range, I was trading and making small but quite regular returns. I’m wondering though whether once I get them into an IB account I would be able use options to achieve the same thing or better.
Cyndy: I dont think TD is Uk based…its Canadian and HUGE. Dont take IB’s advice about using their complicated web trader etc platform. The Advantage Trader platform is quite simple…..all the others are for geek pro’s. BTW their help line is UK free ie its an 0800 number. Its v good and while the people are clearly exhausted, as soon as they hear an English (Scots?) accent, they are v helpful. Youll thank u later for this move. Mwah !!
U????= us
BTW IB have this OTT security system. You can turn it off for trading, but still keep it for access to your account. Its all all a learning curve.
Ah, I see now that parent company TD Waterhouse is in IB’s list of Canadian brokers ( ie the only one I didn’t think to look at) so maybe it will be straightforward after all Benny, thanks. I can’t see Advantage Trader in their list of platforms, would it be Web Trader you use? Glad the help line is free as I know half of any call will be taken up with them saying “scuse me?” as they try to understand the Scottish accent, happens all the time. What’s really annoying though is when I get comments about my accent from someone English who clearly doesn’t realise that they’re the one with the accent !
What are ya talking about hen ?….I dont have an accent (Im still laughing at your comment….so true)
My bad, yes its web trader and it does most youll want except graphs (?)…I open a separate tab for Yahoo!
Check with your phone company that 00800 calls are free….they are for plusnet but the Scots are notoriously stingy. 🙂 GL and happy to help. You can call me on 0 7956 2 10 2 10 or whatsapp for free
Hi Benny, have just recovered from the trauma of trying to get cash into my new IB account ( have you tried setting up a new payee? For the sake of your sanity I hope you never have to) and then accidentally buying $GILD shares at the market price rather than at my $2 lower limit price. At least I now know to press the Go button BEFORE I key in the limit price to stop the price reverting to market price and at least it was GILD which I know will go up again reasonably soon. And I think I have almost, nearly, possibly cracked the transfer of my US shares from TD Direct to IB, its actually TD Ameritrade who handle it for TD Direct.
And yes , being Scottish I have a number on my mobile which I dial when I’m phoning 0800, 0845 etc numbers and makes them free . I think Vodafone might now be doing 0800 calls foc but I’m going to carry on using the number as they also do the hanging on for you if the number you want is busy , and call you back . The company is called weQ4u , number is 03335432111 if you’re interested. It doesn’t work for every freephone number but it has for most of the ones I’ve tried. Thanks for your help so far , more will probably be needed!
Hi Cyndy
Meet me here http://www.stockgumshoe.com/2015/04/microblog-club-house-for-the-discussion-of-religion-politics-and-other-unmentionables-volume-4/
Cyndy,
What I have been considering and doing on occasion is selling puts or calls on volatile mid-cap biotechs I would like to own. My strategy is mildly bullish, in that the underlying thought is that I believe the stocks will go up, but I want a better entry price and want to protect myself if there is a reversal.
This strategy is only viable on fairly volatile, mid-cap or larger small cap stocks like $BLUE, $ESPR, $CLVS. (For a stock like ARWR, it is not really feasible because prices will be unreasonable the bid/ask spreads will be too high. )
Let me give you an example. The first strategy is called selling a cash-secured equity put, I have done this with CLVS. I was attracted to CLVS, the price was in the low $90s.
I wanted to get in lower, and that would obviously cut my risk. So last week, I sold a $ 90 put contract on CLVS that expires on June 19. The price I got for this sale was $ 7.50 per share.
What has happened ? The contracts are in multiples of 100 shares. So for the sale, I received $ 7.50 x 100 shares = $750 cash immediately (options settle in one day). In exchange for getting this money (the premium), I must be prepared at any time between now and June 19 to purchase 100 shares of CLVS for $ 90. So my broker requires me to have at least $ 9000 free cash in my account to cover the put between now and June 19. Alternately, I can close out (buy to close) the put transaction at any time (at prices then prevailing in the market).
What can happen ? Well, if CLVS stays above $ 90, nothing will happen. The contract will expire worthless and I have the profit of $ 750. Since I had to keep $ 9000 available,
you could say the return was $750/9000= 8.33%, for ONE MONTH. This is good.
What if CLVS drops below $90 ? Then the put holder puts the stock to me (exercises his right to sell). And I must pay $90 per share x 100= $ 9000. But I still have the $7.50 pershare x 100= 750, , so I am effectively buying at $ 82.50. Thus my risk is reduced because I am buying at 82.50 instead of $ 90, and I wanted to own the stock anyway.
Of course, if CLVS drops way lower than 82.50, I have a big loss, but it is reduced by the
$ 7.50 in my pocket from the sale of the put. So my cost basis will be $ 82.50, not $ 90.
On June 20, one day after expiration of the put contract, I am either going to own CLVS at $ 82.50, or pocket $ 750.
The second strategy is selling a covered call. To execute this, you must buy 100 shares of the target stock. Let’s use ESPR for the example: Last week, I bought 100 share of ESPR. My order was executed at $ 108. at the same time, I sold a June 19 call contract for 100 shares of ESPR, to be sold at a strike price of $ 110. The price I realized on this sale was
$ 7.00 per share x 100 shares = $ 700.
What has happened ? Well, I own 100 shares of ESPR and I paid $ 108 per share=10,800 cash cost. But I received $ 7.00 per share, $ 700, for selling the call; so my effective cost on ESPR is $108-7= $ 101. In exchange for the $ 700, I am willing to let the call holder “call away” (buy) my ESPR any time between now and June 19, for a price of $ 110 per share.
What can happen ? If the price of ESPR stays below $ 110 between now and June 19,
nothing will happen. The call holder will not exercise his right to buy at $ 110 because the stock is worth less than that. So I have the 100 shares, and I have the $ 700 profit.
Even if ESPR drops, my loss is reduced because I have $ 700 from the sale of the call.
If the price of ESPR goes above $ 110, my stock will be “called away” (bought) by the call
holder. I will receive $ 110 per share, and I get to keep the $ 7. So effectively I have sold out at $ 117. I cannot be too upset, because I paid $ 108; so my profit for ONE MONTH
is $ 9/108= 8.33%. Not bad, although if ESPR is at a really high price I will kick myself for having sold too cheap.
As I said above, this strategy is only valid on volatile stocks with high put/call premiums.
It will not work on the big caps, because the put/call prices are too low; and it will not work on small caps, because you will not be able to get prices that are reasonable and the bid/ask spreads will be too large.
Wow Hendrixnuzzles: this is SO good that not only did I pdf print it, I’m gonna kill me a little bit of tree and tape it to my monitor until I feel comfortable enough to take a plunge on this. I keep thinking about using puts and calls in this ridiculous market as a way to justify my non-dividend Gumshoe buys in a one step forward, one and a quarter steps back kinda market, create a kind of dividend equivalent, but I never feel I quite grasp the mechanics. I learn and forget, but somehow THIS just makes SENSE. THANK YOU Alley
Allison, you will need to get clearance from your broker to do options, so work on that in advance if you haven’t done so already.
You will need 100 shares of the target stock to sell a call; to sell a put, or you need to have free cash and be prepared to buy 100 shares at your strike. This can be a lot of capital; on a call, and you may kick yourself if your stock zooms up and is called away at a lower strike price. And if the stock drops under your strike on a put, you are obligated to buy at your strike price.
Good post. Selling covered call options is great because most options expire worthless to the buyer position. I did, however, get burned a few times by choosing bio stocks that had huge premiums on their options. They had huge premiums because the company involved was set to release clinical data during the time of the option. In my case, all of the bio companies I chose released bad data. So the price of the stock crashed, but I couldn’t sell the equity before I had purchased back the options I had sold.
OK, I hear you ask. So you had to buy back your call options – they are going down in value just like the share price of your stock. Why would this process matter? Well….
The valuation of options are a little different than they equity they represent. In options, time represents value. For example, an option that gives someone the right to purchase shares in XYZ Corp for a $6 strike price next month might be selling for 40 cents. The price of a $6 strike price whose contract expiration is due next February might be $1.60. In other words, given enough time, the price of the equity has a greater chance of increasing. That is why option premiums increase when expiration dates are further out.
So you still may be wondering why I brought this up. Well, let me give an example on one of those bio stocks I bought that released bad data. I bought a company at $6 a share and sold a one month covered call option receiving $1.50. I thought I was so cleaver getting 25% in one month. Then the stock gaped open down to $3, and I knew it was heading lower. When I tried to purchase back the call options to close the position, I saw the options were $1.10. The price of the stock went down $3; why didn’t the price of the call option go down farther? Because the option still had time, and time valuation in options equates to monetary valuation.
So I bit the bullet, bought the option back and sold the stock. Good thing – the stock went down to around $1.
Bottom line: increased premiums on short term options may indicate that there are larger risks involved for the person positioned long on the underlying equity the option is written. Caveat emptor….
I tried selling covered calls on CLDN before the last binary. When CLDN collapsed,
I lost big but the call premium softened the blow. No more binaries for me…the
error was not in the call strategy, the error was trying to play a binary event.
Thanks for that clear detailed explanation HM and for your post 757 on GILD options, very much appreciated. Within the last few days I’ve got my IB account up and running . I now understand the very basics of puts and calls, what I need to do now is start to understand how to identify the ones that are worth buying/selling. All of my theoretical understanding seems to disappear when I’m confronted with a string of options! I’ve missed the boat on the July114 suggestion but intend to keep an eye on GILD and ESPR in particular as I have them both and am familiar (as far as that’s possible with biotech stock!) with their trading patterns. I hear and understand what what you’re saying about ARWR, thanks
Hi Cyndy,
These prices are from the weekend, but since you are up and running, let me illustrate a few examples that might interest you. Obviously you’ll have to adapt them to new prices levels as of this week.
1. A stock you already own: GILD you said you were already long GILD, so this might be useful. On Friday GILD closed at 113.96. The bid/ask spread on GILD July 2 $114 calls was
2.40 bid, 2.48 ask. You could probably have sold one of these call contracts for $ 2.45 per share, realizing $ 245 immediately.
If GILD goes above $ 114 before July 3, the holder will exercise and call your 100 shares
at $ 114. So you have 114+2.45= 116.45.
If GILD stays below $ 114, you have the $ 245 and you still have the stock, since the call buyer will not exercise. It’s not a home run but you are getting a 2% return in one month if the stock goes nowhere…and that’s not bad on an annualized basis. Since you are long anyway, you are also $ 245 ahead of where you would be otherwise, if the stock price were to drop.
2. Stock you’d like to own, covered call: Let’s say you would like to own ESPR. The closing price on Friday was about $ 103. The June 19 105 calls were $ 3.90 bid, 4.80 ask. Say you could get $ 4.40. What can be done here is a buy/write, you buy the ESPR at 103, and at the same time sell the June 19 105 call for $ 4.40. Your cost is $ 10,300 for the stock; but you get $ 440 from the call.
If ESPR goes above $ 105 before June 19, your stock will be called at 105 and you will get
$ 10,500. But you have the $ 440 also…so your cash is $ 10,940 compared to cost of 10,300. You have made $ 600 in 10 days.
If ESPR stays under $ 105, you keep the $ 440 and your stock. In this case you can consider your entry price of the stock to be $ 98.60 ($ 10,300-440= $9860, =$ 98.60 per).
3. Stock you’d like to own, cash secured put: Instead of doing a buy/write you can also
sell a put under the current price. (The fancy term is cash-secured equity put; for us, the brokers will insist we have cash coverage). Taking ESPR at $ 103 again, an ESPR June 19
$ 100 put was $ 3.80 bid, or 4.50 ask. You offer to sell one of these at, say 4.25. If it fills you get $ 425. You have to keep free cash of $10,000, in case you are put the stock.
If the ESPR price stays above $ 100 between now and June 19, you will not own any ESPR, because the put holder will not exercise, that is, he will not put the stock to you for $ 100. But you have $ 425 to console yourself with. Your return is 4.25 % in one month.
If ESPR drops below $ 100, the stock will be put to you, and you will have to pay $ 100 per share. But since you also have the $ 4.25, your cost is effectively 95.75 per share
($100-4.25); and remember, you wanted to buy this stock anyway when it was $ 103.
4. Collecting on a loser, or selling it out: You went into ARWR, and you are agonizing over whether to stick it out or blow it out and move on. I don’t think you should buy or sell puts in this situation. What you could do, is sell ARWR covered calls against your stock. ARWR closed below $ 7.00 Friday. A September 18
$ 7.00 call was $ .90 bid, $ 1.15 ask. Lets say you could sell this call for $ 1.00.
If the stock wanders around below $7.00 between now and then, you make $ 1.00 per share and you still own it. If the stock goes above $ 7.00, it will get called…but you are effectively selling out at $ 8.00.
This is an effective way to deal with the emotional distress of a losing position. At least if the stock goes nowhere, you are collecting something; and to get a dollar on a six dollar stock is not bad.
Sorry HM, I somehow managed to miss your post. I’ve just read it and I’m very grateful for your suggestions, particularly 3, writing ESPR puts , as it reassures me that I have not been completely stupid this week – I decided to bite the bullet and trade my 1st option , which happened to be selling one June 15 95 ESPR put, I can hardly believe what bad timing that was! I thought I knew the ESPR trading range well enough and anyway , as you say, I was quite happy at the prospect of being assigned at that price. So to say that I was a bit put out by the sudden price drop is an understatement! In a bit of a panic I then sold a June 80 put for $6 . At first I was horrified to see the price keep on going down but I’ve been reassured by Dr K’s comments and now that I’ve calmed down I reckon that being assigned at an average price of $83 per share is not so bad. I haven’t been assigned yet but I assume I will be on Monday.The main problem is making sure that I get enough money transferred to my IB account quickly enough to be able to pay for them. It certainly has been a baptism of fire!
Re your suggestion 1, selling GILD calls, that’s exactly what I was considering doing . Its one thing to work out what seems right in principal though and quite another to have the confidence to do it , so its good to know that I’m thinking along the right lines. Re 2, selling covered ESPR calls , as I wouldn’t mind having to sell some of these shares, this is something I’ll definitely look at. I’m not sure though if its better to wait until the price recovers? Re ARWR, I’m still reluctant to run the risk of having my entire holding called away as I think there’s at least a chance of the price spiking considerably after what they’re calling Analyst Day (some time in Q3 2015, possibly 31 Aug) I may look at selling covered calls on half of my holding.
Once again I really do appreciate the time you’ve taken here, thank you!
Just be sure you are comfortable that you may have to buy at the put price.
And remember even if it drops, the put proceeds cut your losses that would have occurred if you bought at market.
I have a position in BLUE and sold November 200 covered calls for $ 27.
If BLUE goes up, I lose gains over $ 227…but from $ 180 its hard to complain.
If BlUE goes down or sideways, I keep the $2700.
HN Excellent explanation of a strategy I also employ and have had good results with.
frank
Ditto, Arch! And thanks for the detailed explanation, HN!
The best part of these strategies is that you can wash, rinse, and repeat – subject to market conditions, with possible strike price adjustments (as warranted). Even if your shares are called away (by a covered call holder), it is generally economically feasible to buy another 100 shares and “do again.” The only unspoken downside is that the covered call may somewhat limit your ability to liquidate the shares (locked up by the covered call) – but that’s part of the price one willingly pays to earn the premium income; and you can “buy to close” the call option early (thereby removing the functional “lien.”)
Arch, Larry: I’ve used this for BLUE, ESPR, CLVS. Thinking about RCPT and RARE.
Any other good, Doc-backed tickers you think could be approached this way ?
HN I have reached about the top of the comfort zone for at risk$$ so have not been watching closely,but I did ok with $achn and $gild but last I looked I saw no appeal there
now. I at times will jump in just before a binary event planning on being out for the event itself,,,,a week or less,,,to try to get the spike which often occurs a day or two before the event.. On occasion I look at chart to see if trading has been flat/sideways for some time if possibility of good news looks likely,,,,,usually still no longer than a month or two. Win some,lose some.. Have not seen much lately but have not been paying much attention.
Couple words, keep your eye on IV and compare 52 week IV, where it has been last 52 weeks when selling premium. Buying premium you will loose 2 out of 3. Selling when IV is low … you will be hurt.
In low IV environment spreads, verticals, calendars, condors, seem to work somewhat better than I have expected. Spread bid ask is crucial for us as independent investors , volume, liquidity. Easy to get in, easy to get out. Options are strategy instruments you need duration to be right.
Love gummies smartest people around.
T
Hey T. Take a look at BLUE. I have been sorely tempted to sell an out of the money call
way out, like November; the premiums are just huge. Trouble is BLUE just keeps going straight up…and like I say, I’ll kick myself if the thing zooms up to $ 300 after I sell a 225 call…
T – “Selling when IV is low … you will be hurt”.Could you maybe expand a bit on that please, am trying to learn as much as possible, thanks
Team, what free programs (links) are available that provide historical fundamentals of option contacts (prices (high, low,close), volume, avg implied volatility etc.)? Best2ALL!-Benjmain
Cyndy Duff: I took a look at GILD’s chart and option prices, and in my opinion it is a reasonable stock to sell covered calls against. I say this because you like the stock and are already long; it does not pay a dividend; and like you said, it has been a trading range; plus it is pretty liquid.
Right now it is near the top of the range, so the call premiums will be relatively advantageous. The downside is you will be foregoing any profit over your strike price if the stock breaks out to the upside and gets called away.
If this is a new strategy for you, you might want to try just one or two contracts that expire in the near-term, with a strike price just a little over the current market price of the stock. Like say a 114 July contract. That way if you get called you will pocket the premium plus a few bucks on the difference between today’s market (about 112) and the strike
(114).
In your situation, I would not accept the option “bid” price, you can at least split the bid/ask on your offer as you are not in a situation where you must sell. If you don’t get filled then you can try again the next day.
On ARWR: This stock is not really suitable for options as I have described. My thinking is that Doc has offered too many other highly rated companies to
stay with ARWR. I was long also, but anytime Doc changes his opinion, I just go with it and
move the money, win or lose, into something Doc is still enthusiastic about. You are losing too much opportunity cost not to have your assets in his best picks. While you are fretting over ARWR, there are bargains in other stocks that have no discernible problems
(other than the usual risks !).
No position $GILD or $ARWR
HI HN,
$GILD just started paying out Div.
Ex/Eff DateTypeCash AmountDeclaration DateRecord DatePayDate
6/12/201 5Cash0.43 4/24/2015 6/16/2015 6/29/2015
Gotta scrape something together and get some. Thanks for the correction, Vijay.
CSX Corp. (CSX – NYSE)
By Bottarelli Research
Published Monday, June 01, 2015
One of the great things about stock options is the way you can manipulate them to fit your exact risk parameters and predictions of how the stock will trade in the future.
Railroad company CSX Corp. CSX – NYSE skyrocketed higher at the end of April as buyout rumors swirled around it. But as these rumors dwindled, so did CSX’s stock price — and now it’s given back almost all of these gains.
One trader still thinks big things are ahead for CSX, and he’s positioned himself to make a killing if CSX does indeed get bought out — but he could even profit if the stock sells off a bit. Earlier today, this trader bought 27,600 January 37.5 calls while simultaneously selling 27,600 January 31 puts. For this transaction, he collected $0.20 per spread.
Bottarelli Research Translation: This is a very sharp trade with a number of possibilities. At $0.20 per spread, this trader is collecting $552,000 in premium and he won’t lose a dime until CSX hits the break-even price to the downside at $30.80 (-10%). However, below this level things get ugly in a hurry as he’ll lose $2.76 million for each $1 drop.
Absent a 10% fall though, this trader is assured a profit. The real money is if CSX is able to stage a breakout to the upside through the $37.50 strike (9.5%). Above $37.50, this trader makes $2.76 million for every $1 move higher, on top of the $552,000 he’ll get to keep in premium.
Best2ALL!-Benjamin
Gotta put this trade on right away. I’ll call Schwab and see if I can get moved from level one options to level 29. This is a little over what I am used to doing and I may have to wire a few bucks into my account. Love ya Ben.
I love this Keynesian economics math….. Using figures given by Ben; It would require $855,600.00 to be held in reserve to cover put sale if assigned less $552,000.00 for a total outlay of $303,000.00.
Old style thinking/math you would however only collect $5.520.00…..27 600times 20 cents.
Adjust your thinking on going to level 29 and instead apply for a Federal grant to study the feasibility of options trading to fund Obamacare. Should be good for at least $50million..
Offer to share with the Feds only retaining 3% for yourself ..one dollar to the Fed= a percent,,,,$3 for you would be 3 times a percent so 3% for you. Reasonable right?
If you get your grant I would be happy to help transfer the wealth,,,for a very small percentage. 🙂 🙂 🙂
As may be expected from the full state scenario, these transmission zeros will appear as poles of the dynamics in the sliding mode.
Hungry and angry are two words that end in ngry. There are three words, in English language. If you read carefully you should know the third word. What is it?
2 others –
gngry, as in, this Canada Dry is too gngry, which makes me angry,
and
vngry, as in, these fries are too vngry, so I’m still hungry!
Something else I’ve learned tonight, by reading more carefully than usual – there’s an override for the spellcheck, such as to prevent both the above entries appearing as ‘angry’.
…don’t have the nrgy to figure it out
Ken and HN Good answers to wrong question= no cigar. The first sentence has nothing to do with the second but to confuse you. If I put it in brackets it may help. There are thee words, {in English language}. So of course the third word is language. Sorry 🙂
[not really]
A trade for the pondering and or refining over the weekend By Bottarelli Research:
Restoration Hardware (RH – NYSE) Published Friday, June 05, 2015
Like many stocks in the market, speciality retailer Restoration Hardware RH – NYSE has been trading in a tight range for some time. But for better or worse, things are likely to change here soon as the company announces earnings after the bell on Wednesday, June 10.
RH has traded higher on four of the last five earnings reports, and one big trader is betting that will record will improve to five of six. Earlier today, this trader bought 5,000 RH June 95/100 bull call spreads for $1.30 each.
Bottarelli Research Translation: At $1.30 per spread, this trader is putting up $650,000 in pure option premium. And with a break-even price at expiration of $96.30, this trade won’t make any money unless RH trades higher by at least 5.5%.
Normally, this would be a huge move in just two weeks, but with an upcoming earnings announcement it could easily be accomplished in one fell swoop. Over the last five earnings announcements, RH has moved an average of 8.1% so 5.5% is well within reason.
An 8.1% move this time would take RH to $99.14, which is the sweet spot for this trade. If RH were to trade at that level into expiration, these spreads would be worth $4.14 apiece, good for profits of $2.84 per spread — or a total capital gain of $1.4 million.
This trader can max out his profit if RH trades to or through $100 (+8.8%). At that level, these spreads are worth $5.00 each, and total profits would be $1.85 million. These scenarios all sound great, but let’s not ignore the downside. If RH comes in light on earnings and can’t rally 5.5% (or actually trades lower), then this trader will be out his entire $650,000.
We’ve Now Hit 63 Winners On Our Last 66 Trades: The winners we’re hitting in Bottarelli Research Options continue to pile up at a fast pace. If you’re not part of our trading group, you’re missing out. With a track record showing 95% trading accuracy, what are you waiting for?
Best2ALL!-Benjamin
Benjamin, thank you. My current option play is June 19 TAXI $10 Puts. Working well so far, as are the MET calls you mentioned previously. With RH I am leery of the short ratio of over 13. Stay tuned.
Oil play: Heres one thats being HEAVILY touted lately. I assume its some sort of strangle play. Anyone know summat? http://pro.moneymappress.com/ECLLEV/EECLR5CA/?email={emailaddress}&h=true
Benny, Travis cracked this one in the last couple weeks: Have a gr8 weekend! Best-Ben
Thanks . http://www.stockgumshoe.com/reviews/energy-inner-circle/the-electricity-crisis-that-dr-kent-moors-says-could-bring-100000-returns/
Nope this one 🙂 : http://www.stockgumshoe.com/reviews/energy-inner-circle/kent-moors-trade-just-hit-green-light-status/ Best2YA-Ben
Benny –
I played the oil arena for three or four years before I got into biotech. Far and away the best source of news on the U.S. oil picture was a fellow named Michael Filloon, who writes once in a while for SA. He is kind of like the Dr. KSS of oil.
I hope this is helpful.
jk
Jihn K: Thanks….Ill tune in
FXI-Betting Millions on the China Large-Cap ETF
iShares FTSE/Xinhua China 25 Index ETF (FXI – NYSE)
By Bottarelli Research Published Thursday, June 11, 2015
While most Americans focus on investing in this country, often times the best opportunities lay abroad. Case in point, the S&P 500 SPX is 2.8% higher on the year, but the iShares FTSE/Xinhua China 25 Index ETF FXI – NYSE is up an impressive 17%.
At least one trader thinks the China large-cap ETF will be heading even higher, because earlier today he bought 18,000 FXI November 50 calls for $2.59 each.
Bottarelli Research Translation: At $2.59 per option, this customer is outlaying $4.7 million in pure option premium. With a break-even price at expiration of $52.59, FXI has to rally 7.8% from its current level for this trade to pay off.
Nearly 8% is not a small move for an ETF, but just in the first half of 2015 China has shown that it’s more than up to the task. You’ll notice on the chart that FXI topped out earlier this year right around this $52.59 level. Going forward, that price should serve as some resistance, but if FXI is able to break through to the upside then it would have plenty of room to move even higher. Best2ALL!-Benjamin
Stansberry True Wealth really likes FXI
Hi Sheldon,
Most of the analysts I’ve seen who like China recommend FXI, it’s a major big cap play.
Have also seen ASHR (China A shares), CBON (bonds) as China/yuan recos.
Individual stock plays that I have considered are CEO (oil) and CHL (telecom).
No position at the moment in Chinese stocks.
How’s Stansberry likin’ FXI now ?
HRB-Sometimes Taxes Can Be a Good Investment H&R Block (HRB – NYSE)
By Bottarelli Research Published Friday, June 12, 2015
Given that we’re in the middle of June, it seems like an odd time to be talking about tax preparation company H&R Block HRB – NYSE. While most people only think about this company in March and April, HRB offers investment opportunities to intrepid traders twelve months a year.
HRB had a weak start to 2015, down 9% year-to-date. Going forward though, one trader thinks the bottom has been set and big things are in store for HRB over the second half of the year. Earlier today, this trader bought 4,500 HRB January 29/31 bull risk reversals for $0.40 apiece.
Bottarelli Research Translation: A risk reversal is an advanced option strategy that involves trading both puts and calls. In this case, the customer has sold to open the January 29 puts, and bought to open the January 31 calls. He sold the puts for $1.70 each and bought the calls for $2.10, thus outlaying $0.40 per risk reversal.
The reasons for making this type of trade are really quite simple. This trader doesn’t think HRB will drop below $29, and probably doesn’t mind owning the underlying stock at that level. At the same time though, he thinks the stock will actually head much higher.
At $0.40 per risk reversal, this customer is outlaying just $180,000 in option premium, but he has much more at risk here than just the premium paid. On top of the $180,000 premium, this trader will lose $450,000 for every $1.00 HRB moves below $29 — a 5.5% drop.
Clearly, our customer thinks HRB is headed higher and he’s likely selling the puts as a way to offset some of the premium paid for the calls. To actually make money, this trade has a break-even price at expiration of $31.40, which requires HRB to gain just 2.4%. HRB traded as high as $35.80 in February, so just a re-test of this 52-week high could net this customer somewhere around $2 million in profit.
Thanks for the continuing education 🙂 Best2ALL!-Benjamin
$ESPR
Re: Cyndy’s Post re ESPR puts
Not sure what happened to your post, Cyndy. My email feed shows that you submitted it 3 hours ago, but it’s not showing up on the Options thread. I wanted to tell you not to feel like the Lone Ranger with your ESPR put writing. I will have to bite the bullet next week on a $105 ESPR put that I wrote when it seemed unlikely that the SP would ever again drop below $100. In the words of Gomer Pyle: “Surprise! Surprise!” (TIB). Fortunately I had sold off some other positions and have cash at the ready when the put is assigned. Although technically, I’m looking at a $3,000+/- paper “loss,” I remain sold on ESPR in that I am confident that new study data will eventually cause the ESPR SP to catch up with my high level purchases, and keep rising. In that context, the only true loss that I am incurring is the lost opportunity cost associated with the unplanned commitment of $10,500 capital next week. Hang in there kemo sabe!
Hi Larry, similar situation for me. Bot at 108, sold June 19 $ 110 call for 7 which cushioned the loss. Looks like the call will expire worthless next Friday, will repeat something similar
for a month or two out.
Hi Lawrence, I thought my post had disappeared too but it actually appears after hendrixnuzzle’s post of 8th June because I pressed Reply to that post, I now know its probably better to make a new post unless I’m replying straight away. Thanks for the encouragement, because it was my very first options trade I was feeling a bit of an idiot to begin with as I was convinced I had messed up but knowing I wasn’t the only one caught out has made me feel better (if you know what I mean), and I agree that it is , hopefully, only a temporary paper loss. Hi Ho Silver, Away!
Hi Cyndy,
If you are speaking of the ESPR put sale, keep in mind that the put holder may exercise at any time prior to expiration. It is their option.
Yes , thanks, HN , that’s what I’m expecting to happen tomorrow, which is the expiration date
$ESPR
Cyndy,
Check your account records carefully. The expiration date should be “19 Jun 15.” That is June 19, 2015. Options invariably expire on a Friday. Unless it’s a weekly option, the expiration date is the 3rd Friday of the month. Having said that, HN is correct – you need to be prepared for an early put assignment. The holder of the put can exercise the put option at any time prior to expiration.
Cyndy Forgive me for correction but expiration date is always the third Friday of the month
which is the 19th this month. Normally buy and sell prices get closer together even toward the end of Friday and at times it is advantageous to close a position before it expires.
Probably not the case here though. frank
As addition I did not mean to imply that you should not close your position through buying puts to close if you do not have the funds or otherwise do not wish to accumulate shares now. If you are happy with more shares you can just let them be assigned to you.
Lawrence, Frank, you’re right of course !Thanks for taking the time to point this out
June option results…a few weeks ago I outlined a strategy for selling covered calls and cash puts on volatile stocks for which I was bullish, with the intention of reducing risk.
The results this month were pretty good and the suggested trades were as follows:
Sold RARE June 19 $90 put for 7.50. Expired worthless, +$750
Sold CLVS June 19 $ 90 put for $6.00. Expired worthless, +$600
Sold BLUE Nov 200 call for $ 27.00. On June 19 this trade is up $600.
Sold ESPR June 19 $ 110 call (on entry at $ 108) for $7.00. This expired worthless, +$700. ESPR dropped, of course, but my loss is reduced by the proceeds of the call.
I intend to repeat similar trades next week, possibly doing something on RCPT. On ESPR,
I am leaning towards a near-the-money cash put instead of a call.
July options, possible actions:
Before sharing some specific ideas on July options, I’d like to reiterate my intentions, conditions, and strategy, so others can better decide if such ideas are suitable for them.
1. I am using these strategies to acquire stocks I would like to own, at better entry prices.
2. I am using these strategies to reduce risk of price reversals on stocks I am long.
3. I am using these strategies to generate income, as opposed to large leveraged gains
4. These strategies are not suitable for big caps, because their option premiums are small; nor for small caps with extremely wide or unattractive bid/ask spreads.
I will re-evaluate these ideas based on Monday price action.
Prices listed are approximate as of Friday.
$RCPT RECEPTOS I would like a position in Receptos, but it has shot up recently and I am nervous about entering at the current price, Friday close was $ 186.
–RCPT Covered call, buy/write: Can buy RCPT on Monday at $ 186 and simultaneously sell a July 17 $190 call for $ 18. If RCPT goes over $ 190 before July 18, my stock will called away at $ 190. But I have the $18 premium so the proceeds are $ 208. ($ 208-186 cost= $ 22 profit , 11.8% in 26 days). If RCPT stays under $ 190, I keep the $ 18 premium and still own the stock. As long as RCPT stays above $ 164 (186-22=164), the transaction does not lose. If RCPT drops below $ 164, I lose; but on a straight buy of the stock, I would lose below my entry of $ 186.
–RCPT, Cash secured put: I can sell a July 17 $190 put for about $ 22. I will need to keep
$ 190 free cash so that I can pay $ 190 per share if the stock is put to me by July 17. If the stock stays above $ 190, the put option expires worthless on July 17and I keep the $22. Profit is $ 22/190= 11.6% in 26 days. If the stock drops below $ 190, the stock will be put to me at $ 190, but I have the premium in hand so my cost basis will be $190-22= $ 168.
$ESPR…Friday close about $ 82…this situation is different as I am already long ESPR.
–I could sell a July 17 $ 85 call for about $ 4. If my stock is called, I will have $ 85+4=$ 89, a gain of about 8%. If ESPR stays below $ 85, I keep the $ 4 premium and my stock.
I do not like the strategy in this case because I do not want the stock to be called, my basis is over $100, and I consider it more likely that ESPR will rebound in the near future.
— I am more inclined to sell a July 17 $ 80 put, for about $ 5. I will have to keep $ 80 free cash in case the stock is put to me. If ESPR stays above $ 80, which I think is likely, I will pocket the $ 5 for a 6.2% gain in 26 days. If ESPR drops below $ 80, I will be assigned the put and will acquire the ESPR for $ 80…but I have the premium, so my cost basis on the new stock is $ 75. Since I am OK acquiring more ESPR at $ 75, I am OK with this strategy.
$RARE…$ 100….The stock has shot up and I am a little reluctant to enter at
$ 100. But I can buy at $ 100 and sell a July 17 call for about $7. So I make 7% in 26 days if my stock is called. If the stock drops, the $ 7 reduces my loss since my basis will be $ 93.
Alternately, I can sell a RARE $ 100 July 17 put for about $6, or a July 17 $ 95 put for $ 4.
If I am put the stock, my entry prices will be $94 or $91 respectively, instead of $ 100.
$BLUE…the option premiums are huge on BLUE, you cannot buy them at reasonable prices. A lot of people think something dramatic is gonna happen…and it may.
In the meantime, you can buy for $ 170 and sell a November 20 $190 call for
$ 22. That is 13.9% on your $ 170. If the stock goes over $ 212 by a lot between now and November 20, you will kick yourself…but you will still have a gain of $212-170= $42, which is 24.7%.
If you think BLUE has way big upside and is going to stay up, then you can sell a Nov 20
$ 170 put for about $ 27. If it stays over $ 170, you make $ 27. You may have to acquire it at $ 170, but you have the $ 27 cash premium to help out. If you are lovin’ it at $ 170, what’s not to like at $ 143 ?
I did not mention but it is important to remember that options may be exercised before expiration, at the option of the holder (buyer); and you can buy to close any options you have sold, at the prevailing price, at any time up til expiration or notification of an assignment.
HM, I’ve also just discovered that although the ability to trade an option ends at close of business on the expiry date, it can still be exercised between close of business on the expiry date and 12 noon the following day. The ESPR June 19 $95 put which I sold last week just hours before the price dropped was assigned on Saturday morning just before noon. I was expecting assignment to happen but could have been caught out with not enough cash in my account if I had assumed that I was safe because no notification of exercise had been given on Friday. The other vital fact I now know about options is that , at least with Interactive Brokers, in the money options are automatically exercised. You can opt out( presumably so far as calls are concerned) but if you don’t you could be surprised to find yourself with shares you don’t want and not enough money to pay for them
Cyndy You are correct and most if not all brokers require that they be advised if you do not wish to exercise an in the money option,,,each time,,otherwise you may buy something you do not have the money to cover and be forced to immediately resell frank
It’s good to have your thoughts HN. I had already done exactly the same as you suggest
by selling an ESPR July 17 $80 put , for $600. I’ll be happy to be assigned at that price if it happens. Selling a Blue November 20 $170 put sounds like good financial sense for anyone prepared to acquire another 100 shares, I would jump at it if I didn’t already have some and it wasn’t such a highly priced share . If it was GILD I would probably go for it as that’s my core holding and I want to add to it.
I like the BLUE trade, but like you I already have some. Another 100 shares is too heavy.
More inclined towards RCPT, I don’t have a position and would like one. Hope it works for us. Best regards
Bought RCPT @ $ 187….sold July17 $ 175 call at $ 23
Profitable in 25 days unless RCPT drops below $ 164