Friday, July 11, 2014

QUICKIE

In my latest DITM trade the good news for FCX - Freeport Copper- is that the annualized return, net of commissions, spreads, and other slippage, was 11% - too bad it only lasted 3 months! Buying it in April and having the August call (the 31 ITM) exercised on my, with the stock over $38 it was too ITM to be rolled out in time.

Since this 200 share trade was in my small IRA, I shall probably do another DITM trade soon to keep this statistic "pure", not mingled with the LEAP Strangle plan, which I now prefer, with Volatility as low as it is these days.

Per my Schwab account statement for the semi-annual 2014 period, what with above slippage and sloth, Reg T-3 (3 day settlement of funds, etc.) the IRA gained 3.40%, making it an annualized 6/80%, unless the VIX picks up, and premium returns.

Keep the Faith!

Monday, June 23, 2014

Winner Winner, Chicken Dinner

This past weekend being option expiry (Saturday after the third Friday of each month), another stock was called away in DITM - since the Bull market increased the price of STX (Seagate Tech.) too high  to roll out another six months. Of course the appreciation would have been nice, had I just owned the stock, but the comfort of the cushion was pleasant as well.

Also nice to see was the overall profit for this 8-month holding period:
200 shares were bought at $9,636, ITM calls were immediately sold for $1105, and dividend received were $258, for a total profit  of $918, including the takeaway amount of $9191 (after all commissions).  
That amounts to 14.29% annualized to 12 months, making my 2014 total of 9 completed trades - 12% if annualized from YTD.

Wednesday, May 28, 2014

Semi Annual Update

Those of you still tracking the DITM strategy, as an alternative to Zero Interest rates (stocks with safety and yield), a pleasant surprise after six months of 2014.
Although the steadily upwards rise, thanks to the Fed ex Machina, has flattened option IV (volatility), which results in the price of the calls, after only 8 closed out trades in 2014 (not including rollouts) the results are in. With only one minor (-$57) loss, the average "annualized" gain was just over 10% - 10.22%.
The last one, today, was a call-away of LO, which jumped so far a rollout was not do-able - too far ITM (in the money) for "extrinsic" premium in the call option. The best measure of volatility - the VIX- is now at a recent record low - sub-12 (11.51), which is a bit worrisome if one looks at the 1-year and 5-year charts of the VIX when it breaks down below 12!
More data at:
  
http://mktsentiment.blogspot.com

Despite a fool's errand of trying to time the market, I'm waiting through the seasonally weak June to enter new positions. Possible candidates could be - CSCO, INTC, KKR, STO, even AAPL7 - which is the 10 share lot of APPLE.

Wednesday, May 21, 2014

LEAP OF FAITH


"Into every life a little rain.....". Or - Why I like hedging stocks with LEAP options (Longterm Equity AnticiPation) calls and puts that expire in January of future years - 2105, 2106, etc.
The strategy involves buying a stock of better than average quality ( A or B in the Schwab rating system), with or without dividend, with a price usually between $8 and $20; then SELLING a LEAP put and call, out of the money (called a LEAP Strangle - the same option price would be a Straddle- using the decay of the option to bring in money to hedge any losses. The trade-off or liability of selling these options is - the call limits any profit above the higher OTM (out of the money) "strike" price; the lower OTM put makes one liable to take on more stock, for which sequestered money must be set aside - Cash in an IRA, margin from stocks in a taxable account.

Here is an example of a major loss in one of my accounts, which should be offset with the double-digit returns of successful LEAP trades:

Just Energy was bought in November of 2013 at just under $7 ( 1000 shares for $7000 plus commission). It recently tanked from just above $8 to its current $5 level, a $3000 drop, or loss - $2000 from its original price.
However, by selling 10 calls at 7 1/2 for 2016, and 10 puts at $5, much of this loss was wiped  out.
The call was bought back at: $312; it was sold originally for $1,042 (all commissions included). At the same time the 5-strike put was sold at $1.55 each - 10 cost $1,533.
Due to time decay of the options , the put can be bought back at $1.20 ($1,200) for a $333 profit, despite JE's dramatic fall. The stock can be sold ( a stop loss has been put in at $5.70) for $5700.
So instead of a $2000 loss ($3000 from its top), the numbers are:
Call: $730
Put:    333
Dividends: 6 times $50 (after foreign taxes): $300
Sold stock: $5700
Actual profit (if JE goes lower and gets stopped out) +$63 - not bad for a Torpedo!!


As for the total LEAP portfolio in this account (6 stocks including JE), as of May 1 - six months into the strategy ( excluding NOK, which was bought a year earlier), it is up 12%, or, if annualized for 12 months, using a 5 month average holding period, 29%. 

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As for MY personal accounts using LEAPS, also stating with one position in Dec. 2012, adding ladderlike monthly up to over 20 positions currently, I recently closed out my first and only position - as it turned out, prematurely - Trina Solar, a rather risky, Chinese company that looked technically weak, declining fro its recent high of over $18/share to $10! Today it jumped up over $3.

Still the potential "Loss" was ameliorated by the LEAPS, as follows:
Bought 500 shares in August of 2013 just under $9 a share ($4500), selling a 10-strike call and a 7-strike put. When TSL jumped from 8 to 18, I tweaked, or fine-tuned it by rolling both the put and call higher and farther out in time - 2015 to 2016 for more "insurance" money, which I returned when it dropped to 10.

Bottom line, the numbers went:
Stock cost: $4500, sold at $10.45 for $5215 - net $715
Unfortunately, by buying back both puts and calls after a downturn, the IV (Implied Volatility - which is the key in deciding what to sell - or buy back)  was so high, I actually paid more to close out the options - $450- despite the rollup, out and time decay !! Another negative of TSL is the wide Bid-Ask spread; wise to avoid in case of buybacks.
 So after holding TSL for 9 months (no dividends) my net profit (no loss) was $260, or 5.8% - annualized if held 12 months, 7.78% - not bad for a loss - better than MMFunds or CDs.

In conclusion, what I really like about the LEAP Strangle is the high reward with a hedged risk, and very little monitoring until the Leap expires. If the stock then settles lower (or higher) another "Collar" of Leaps can be put on for another two years.


Thursday, May 15, 2014

Leap Update

Back from vacation - time to update the DITM and LEAP trades.
On May 15 I closed out the Trina Solar, as it looks weak, chartwise, plus I'm not big on China accounting or green/eco stocks with a pending major downturn on the way.
Metrics on TSL (Trina) were as follows:
                                                DEBIT                         CREDIT
Bought 500 at $8.97               4494
Sold calls -2015 10-strike                                                                  1211
Sold puts- 2015 7-strike                                                                     937
Rolled Up puts to 10                                                                          493
Rolled up Calls-2016 -15       597     
Rolled up Puts-2016 -13                                                                    1333
Bot Calls to close                   1199
Bot Puts to close                     2638
Sold stock                                                                                           5216
TOTAL:                                  8928                                                    9190

Profit: 262   5.83% for 9 months, or 7.78% annualized. Not bad for a "loser".