Closing out CSCO and TLVTF

I've got my first realized loss with TLVT. Remember when I said this:

"I don't know if I'm missing something on this deal, but everything I can find seems to indicate it's a done deal. I might end up regretting this one, but the returns are high enough I'm going to take a chance on this."

Well I was missing something apparently. The option contracts were cash-settled yesterday and just like that I was missing $646 from my account. After talking to my broker and looking the memo released by the Option Clearing Corp(http://www.theocc.com/) it appears the deductions are for Spanish taxes, withholdings, and conversion ratios. You can check out the memo by searching for TLVTF(the ticker changed when it was delisted as part of the acquisition process) on the OCC website. So I'll take a loss of $326 on this trade. I don't like losses, but all in all, I guess that's a fairly cheap lesson in foreign arbitrage trading.

On a brighter note, I went ahead and closed out my CSCO short options from last May and my rolling monthly puts that I extended in November. They were trading down to $0.08/option so almost all of the upside had been realized. I realized gains of $98/option on the original trade and $201/option on the rolling trade. I will almost certainly do more naked puts on CSCO, but unless it gets knocked down hard, it won't be until next year.

The Numbers

• Cash: -$678
• Short Option: +$678
• Available Margin: +$4,800

More Microsoft

Well I timed my exit from those SSO puts about perfectly. The market ended up drifting lower Friday afternoon and those puts would have finished in the money if I hadn't closed out that morning. Yesterday we finally got the bounce that I was looking for last week, but Microsoft is still hurting from the last few weeks. I'm down slightly on our original covered call position, and I'm going to take advantage to add some more exposure here.

• Sell to Open: 2 MSFT Jan 21 2011 24.0 Put @ $0.62

I doubt these will end up in the money, but I'm not afraid of owning MSFT at $24 with a 3.3% yield. With about $475 in margin requirements per option, this trade will give me a return of about 13% in less than two months.

The Numbers

• Cash: +$124
• Short Option: -$128
• Margin: +$950

Out of SSO

That trade had me a little worried. As is the problem with trading purely on extreme technical conditions, things can always get more extreme. After making a small bet on a bounce because of the S&P 500s divergence from it's 10 day EMA on Tuesday, Wednesday came along with more bad news out of Europe and after a hard drop in the last half hour, my SSO puts were in the money with only one day left of trading(Thursday was a holiday). So while I knew a bounce was likely coming soon, it could have easily waited until next week leaving me with a decision about whether to roll forward or take a loss. Luckily the futures reversed their early morning losses and we're getting a small bounce today. With this being the day after a holiday, volume is going to be weak, so instead of waiting around to see what happens today, I'm closing out now and shutting down for the week.

• Buy to Close: 1 SSO Nov 25 2011 40.0 Put @ $0.08

This wasn't a huge gain, especially considering the margin requirements on the options of leveraged ETFs(I closed it out with a 1.5% gain in 4 days), but despite the hiccup on Wednesday, these are typically fairly safe trades. When the technical conditions and available margin are there, I like these a lot.


The Numbers

• Cash: -$8
• Short Option: +$10
• Margin: -$2,380

Betting on a Bounce

When the S&P500 opened lower this morning I noticed that it was about 40 points below it's 10 day EMA. Extreme divergence(more than 30 points) from the 10 day EMA is usually a good indicator of heavily oversold(or overbought) conditions and usually leads to a short term reversal. The S&P reversed and went positive before I got into the trade. The reversal didn't hold though and the S&P dropped down near 1180(which was actually a critical support level according to one analyst I subscribe too). At 1180, it was around 50 points from it's MA and I managed to get into a trade within a few points of that.

• Sell to Open: 1 SSO Nov 25 2011 40.0 Put @ $0.44

When trading around the 10 day MA, buying options can be very profitable, but often times the bounce isn't enough to make up for combination of loss of time value and the loss of volatility as the market stops dropping. I'll usually just buy leveraged ETFs instead, even though the cash and margin requirements for holding ETF shares is quite large. It's a much safer trade than trying to time long options correctly(which I've never been very good at anyway). I don't always like to short options on the ETFs either because of huge margin requirements and timing/risk issues. Since they've started offering weekly options on most of the leveraged index ETFs though, the timing is less of an issue for me on short options.

The Numbers

• Cash: +$44
• Short Option: -$44
• Margin: +$2,380

Out of Gold

I would have like to stay in my gold trade longer, but after yesterday's drop DGP fell below my 10% stop so I sold it this morning. It's up slightly this morning and I was tempted to hang on since it never breached it's 120 day MA. It's likely that whatever ends up happening in Europe(and the US for that matter) will be inflationary and bullish for gold in the long term. This wasn't a long term trade though and in the short term, I'm less certain of gold's upside due to the potential of central banks selling their bullion and possible panic selling if European or US markets start getting hammered.

• Sell 50 shares of DGP @ $56.83

I exit this trade with a gain of 5.5% in one month.

The Numbers

• Cash: +$2,841.50
• Long Stock: -$2,841.50
• Margin: +$1,600

Closing out PPDI

I closed out my arbitrage trade on PPDI today. Same deal as the rest of the closed arbitrage trades; there just wasn't enough premium left to make it worthwhile to leave it open for another 2 months.

• Buy to Close: 1 PPDI Jan 21 2012 32.5 Put @ $0.10

I exited this trade with a return of 12% on margin in just 6 weeks.

The Numbers

• Cash: -$10
• Short Option: +$15
• Margin: +$650

Extending CSCO

As I mentioned this morning, I was looking at extending the naked CSCO puts that should expire worthless tomorrow. I ended up selling two January 16 puts this afternoon. As you might remember, I sold these exact same puts 6 months ago so the model portfolio now has 4 open contracts on CSCO for January. That's probably more than I should have in one position, but it's a safe enough trade that I'll go ahead and do it. If these options end up expiring in January(as I expect them to) I will drop back to just 2 contracts.

I did not close the November puts. They are far enough out of the money that I'm not worried about them being assigned and it's one less commission I have to pay.

• Sell to Open: 2 CSCO Jan 21 2012 16.0 Puts @ $0.32

This brings the total premium I've received on this trade to $2.09. If/when I get assigned the stock, my effective entry price will be $13.91. That's almost 25% below the current price and would have a dividend yield of 1.7%. Owning Cisco at those prices would be a fantastic outcome in almost any scenario.

The Numbers

• Cash: +$64
• Short Option: -$64
• Margin: -$380

Option Expiration Update

Tomorrow is option expiration date and I have two option positions that will likely expire worthless. First is the covered call on my Microsoft position. For the time being, I'm not going to sell another covered call on this trade. Microsoft dropped back down to the $25 in the last couple weeks and there just isn't enough premium available in the options to risk losing the stock. If MSFT jumps back up to the $27 range, I'll look again, but for now I'll just hold the stock.

Next is the latest set of Cisco puts. This has been a good trade so far with a total of $1.77 in premium collected per option. Cisco has had a good run lately though and it's ran away a little bit from the $16 strike I've been using. With the big drop in the markets today bumping up volatility and option premiums with it though, I'm looking at selling another series of puts on Cisco. If and when I do, I'll do another post. Otherwise I'll just let them expire and wait for a better trade.

Gold Update

My gold trade is working out perfectly so far. DGP dropped down and closed right at my stop shortly after I bought it and has been climbing ever since. Right now I'm up almost 20% in just 3 weeks. I'm going to increase my trailing stop to 10% from 5%. The orginal 5% stop was based on the 120 day MA which is farther away now. Even with a 10% stop, I'm locking in a profit of at nearly 10% and with a leveraged ETF like DGP, it makes sense to give the trade some more room to play out.

Closing out KCI

Today I closed out another one of my arbitrage trades. This time it was Kinetic Concepts(KCI). I'm locking in a profit of about 8% in just under 3 months.

• Buy to Close: One(1) KCI Dec 17 2011 67.5 Put @ $0.25

The Numbers

• Cash: -$25
• Short Option: +$25
• Margin: +$1500

Rolling Encana

So far, the Encana trade certainly hasn't gone in my favor. The weakness in natural gas stocks has continued, so I'm going to roll it forward. I'm not sure I'll be around a computer tomorrow, so I went ahead and made the trade today. Unfortunately, ECA has dropped so much that there is very little premium to be had, so I was only able to get an additional $0.32. That's a little over 1% in cash(based on the strike price of $27). Not great, but I'd rather hang onto cash right now.

• Buy to Close: 1 ECA Oct 22 2011 27.0 Put @ $7.12
• Sell to Open: 1 ECA Jan 21 2012 27.0 Put @ $7.44

I've now collected a total of $1.63 in premium on Encana.

The Numbers

• Cash: +$32
• Short Option: -$30*
• Margin: -$0*

* These numbers take into account the old option being removed from the portfolio.

Keep it going with CSCO

Barring a severe drop, my naked Cisco puts look like they're going to expire worthless tomorrow. I'm going to extend this trade again. I could roll them and pay the $0.03 or whatever to buy back the October options, but I'm not going to bother since they expire tomorrow.

• Sell to Open: 2 CSCO Nov 19 2011 16.0 Put @ $0.40

This brings the total premium I've received on rolling out these puts to $1.77 each.

The Numbers

• Cash: +$80
• Short Option: -$80
• Margin: -$541

VSEA Update

A couple months ago I sold some puts as a merger arbitrage play. It's time to close out the Varian Semiconductor(VSEA) trade. I originally sold a November put for $1.55 back on August 1. The option was trading down to $0.15 today so I closed it out. The model portfolio has enough margin available that this isn't necessary, but it's a habit. There's just no point in tying up the margin requirements for another month to make an extra $15(0.15x100).

• Buy to Close: One(1) VSEA Nov 19 2011 60.0 Put @ $0.15

I am recording a gain of almost 11% in less than 3 months.

The Numbers

• Cash: -$15
• Short Option: +$20
• Margin: +$1000

Berkshire Puts

Berkshire Hathaway(BRK.A or BRK.B) is the investment vehicle of one of the greatest value investors ever: Warren Buffett. Warren recently announced(or at least I recently heard about it...not sure when he actually said it) that he would buy back as much BRK stock as he could at or below 1.1 times book value. This effectively puts a floor on the stock price of about $108,500 per "A" share or $72 per "B" share since anytime the stock drops below that, Buffett will put Berkshire's cash to work(and Berkshire has a LOT of cash). Since I have no problem owning Berkshire long term, this gives me an easy option trade.

• Sell to Open: BRKB Jan 20 2012 67.5 Put @ $2.30

I chose the $67.50 strike just because it gives me a little bit of a buffer zone. It was only about $0.50 less than the $70 options, and saved a little margin space.

The Numbers

• Cash: +$230
• Short Option: -$230
• Margin: -$1050

Buying Gold

It's option expiration week and I'll have an update on what I do with the two October option positions in the portfolio later this week. First though, I have a couple new trades.

I'll start with gold. I'm very bullish over the long term on gold and purchase both gold and silver bullion as part of my long-term savings. Since it's mostly a long-term inflation/chaos hedge for me, I don't usually worry too much about the day-to-day price movements of gold, but yesterday I noticed that gold has been trading pretty close to it's 120 day moving average(MA). This gives me a chance at a low-risk play on the short-term gold price. I chose to use DGP, the 2x leveraged Powershares gold ETF(there is also a leveraged ETN that performs almost identically to DGP that uses the ticker UGL). The unleveraged gold ETF(GLD) would offer a lower volatility trade, but I would lose out on some of the upside. The trade is simple. I buy DGP with a tight(5%) trailing stop. I chose the 5% based on where the 120 day MA is now. I could just use a close below that MA as my stop, but this gives me one less thing to watch on a daily basis and offers more protection if gold shoots higher and gets away from its MA.

On trades like this, I also prefer to use the actual stock as opposed to options. It takes some of the timing and risk out of the trade. If gold were to stay in a tight trading range for awhile, I could lose a lot of the time value of any long options. I also don't want to sell puts like I might normally do. If gold were to drop below its 120 day MA, I could end up losing a lot more than 5% if I closed out a naked option trade. And I don't really have any desire to hold onto any gold ETF(and especially not a leveraged one) for an extended period of time since I prefer physical gold for long-term holdings. This isn't a long-term trade. It's simply a low-risk, high-reward trade based purely on current technical analysis.

• Buy 50 shares of DGP @ $53.86

If I had a larger portfolio(or a lower priced ETF alternative) I would look at doing a covered call. That requires a minimum of 100 shares though, and would put more than 20% of my model portfolio into a single, leveraged ETF...not something I'm interested in doing. Even 50 shares is probably more than I'd normally recommend, but with such a tight stop, I'm alright with it.

The Numbers

• Long Stock: +$2,693
• Cash: -$2,693
• Margin: -$1,600

More Arbitrage Trades

A couple more merger arbitrage trades popped up on my radar this week. First up is Pharmaceutical Product Development(PPDI). PPDI is being bought out by two private equity groups: The Carlyle Group and Hellman & Friedman. They have offered $33.25/share and are expecting to finalize the deal late this year. I sold a January $32.50 put for $1.06 this morning. With margin requirements of about $800, this will give me better than 13% return...not too shabby for less than 4 months.

• Sell to Open: 1 PPDI Jan 21 2012 32.5 Put @ $1.06

Telvent GIT(TLVT) is being bought out by Schneider Electric(SU.FR) for $40/share. The options prices are very attractive despite the stock being up almost 5% this morning. I don't know if I'm missing something on this deal, but everything I can find seems to indicate it's a done deal. I might end up regretting this one, but the returns are high enough I'm going to take a chance on this. I sold the February $40 put for $3.20. That comes out to about 28% return on margin in about 5 months.

• Sell to Open: 1 TLVT Feb 18 2012 40.0 Put @ $3.20

There's another one I've got my eye on as well. Temple Inland(TIN) being bought out by International Paper(IP) for $32/share. Right now the option premiums aren't very attractive and the deal isn't expected to close until next February. Rather than tie up margin for that long, I'm going to wait and see if I can get a better option prices down the road.

The Numbers

• Cash: +$426
• Short Option: -$525
• Margin: -$1,900

Update/New Trade

I'm not very good at this regular updating thing apparently. And since these aren't the only trades I make, it is tough sometimes to keep track of the model portfolio as well. I will try to get that up-to-date this week and hopefully there should be more regular updates.

A couple updates to make. In my last post I was looking at different ways to handle my LZ naked puts. I ended up buying those back for a nickel instead of rolling them out, so that trade is closed out.

I also entered into a couple new merger arbitrage trades. The first was Motorola Mobility Holdings(MMI) which is being bought by Google for $40.00/share. The other one was NetLogic Microsystems(NETL) being bought by Broadcom for $50.00/share. The recent volatility has widened the spread on both of these, but I will list the prices I got for them.

• Sell to Open: 2 MMI Apr 21 2012 39.0 Puts @ $1.60
• Sell to Open: 1 NETL Apr 21 2012 49.0 Puts @ $1.50

I realize that's a bit of revisionist posting, but since I could likely get even more for both of those today, I'm not going to worry about it too much. I will use the current market value for the short option and margin values.

The Numbers

• Cash: +$470
• Short Option: -$1100
• Margin: -$3600

Option Expiration Update

I've been out of town working again and haven't been making any published trades. But option expiration is coming up, so there is one trade I need to update.
The September LZ puts I sold as a merger arbitrage trade a little while ago is coming up on expiration and since the merger hasn't been completed yet and the stock is trading below the strike price. The puts for future months are exremely illiquid at the moment, so I may not be able to roll them out. If that happens, I can either buy back the puts or take the stock. Unfortunately, with the high bid/ask spreads, there's a good chance I wouldn't be able to buy them back for a reasonable price. Here is what I am going to do: I will put in a good-till-canceled order to roll them out for a small credit, most likely to the January or March expiration for $0.05 or $0.10 credit. All I really want to do with the credit is cover my commissions for the trade, anything above that is a bonus. If that trade doesn't get executed, I won't worry about it and will take the stock and wait for the merger to be completed to get the $135/share in cash. I'm not sure when I'll be able to post again as I'll be down here in Texas working until right before I leave for vacation in Germany(Oktoberfest baby!!). When I get a chance, I will post an update with how the trade played out.

More MSFT Calls

I've been waiting for MSFT to rise enough to be able to sell weekly calls against it at $27 or $28, but it's just not happening. Instead I'm going to take advantage of the higher volatility in the market to get a higher price on some further out calls.

• Sell to Open: 1 MSFT Nov 19 2011 28.0 Call @ $0.47

This will give me an immediate 1.8% return in cash. Given the market weakness and Microsoft's price action the last year or so, I don't expect the stock to get called away from me by November, but if it does, I'll close out the trade with over 10% capital gain(plus the 2+% I got in covered call premium) in just 6 months.

The Numbers

• Cash: +$47
• Short Option: -$48

Rolling CSCO Again

My latest set of CSCO puts will expire this week. CSCO has been hanging right around the $16 strike price and normally I'd wait until Friday before rolling them forward, but I'm heading on vacation for a week. Instead of possibly getting put the stock, I'm going to take advantage of the recent volatility and just roll them out now.

• Buy to Close: 2 CSCO Aug 20 2011 16.0 Put @ $0.23
• Sell to Open: 2 CSCO Oct 22 2011 16.0 Put @ $0.96

This brings the total premium I've collected on these puts to $1.37. If I do end up getting assigned the stock, it brings my purchase price down to $14.63...over 7% below the current price. If they expire worthless in October, I'll have made about 32% on margin requirements in just 5 months(going back to the original June 03 puts).

Update: Expired!

Natural Gas and Encana

Damn, the market has been a bit surly lately hasn't it. On the plus side it's knocked about 10% off the price of Encana(ECA). Encana is a large natural gas producer that has been on my list of buys for awhile. If you're bullish on natural gas in America(and it's hard not to be with the fuel as cheap as it is right now), ECA is a great play. Instead of buying the stock outright though, I'm going to conserve some cash and take advantage of the current volatility by selling puts. Standard naked put trade here...if it recovers I keep the cash for a decent return on margin. If it keeps falling, I get to buy ECA at a discount to today's price.

I sold an October 27 put for ECA this morning for $1.31. At that price, our breakeven point for ECA is $25.69...an additional 7.5% below today's price. At that price ECA's dividend yield on my cost would be above 3%. If it expires worthless, I keep the $1.31 for a 21.4% return on margin in just 3 months. That's over 80% on an annualized basis!

• Sell to Open: One(1) ECA Oct 22 2011 27.0 Put @ $1.31

The Numbers

• Cash: +$131
• Short Option: -$135
• Margin: -$611

Back at it

I had to be out of town for work for a few weeks on short notice, so the blog has been idle. My trades did well during my absence, although there's been some pullback with the recent debt ceiling debates. On a side note, I'm definitely not an economist, but I'm not too worried about the debt ceiling...I see it as all political bullshit. The real problem(spending way more than we can ever get in tax receipts) isn't going to be solved this year, next year, or probably ever. It's going to take a major financial crisis, like the dollar losing it's place as the world's reserve currency, for any real change to happen. I have absolutely no idea when that would happen, but by then it will probably be too late to do anything anyways. But I can't control the US economic and monetary policies, so my plan is the same as it always is: Make hay while the sun is shining. I'm gonna keep doing my thing and making money until it stops working.

Today I took on some merger arbitrage trades. This type of trade is one of my favorites. The returns can be a little smaller, but they're very safe. I find companies that are being bought out and sell naked puts with strikes near the buyout price. In order to control my risk, I only do this with cash-only deals. If a deal includes stock as part of the purchase, the final purchase price can fluctuate with the buyers stock price. The liquidity of these options can be very low, so the bid/ask spread tends to be very wide. This makes patience and limit orders an absolute necessity. I see three quality plays, but one of which(Lubrizol Corp: LZ) I've been in since before the blog and I already have a decent unrealized gain. I'll include it at current prices for the purpose of the model portfolio though.

1. The first one is Varian Semiconductor(VSEA). VSEA is being bought out by AMAT for $63.00 cash. With VSEA currently trading around $61.00 I can get approximately $1.55 by selling the November $60 puts. With approximately $1300 of margin requirement, this comes out to about %11.92 in just 3 months.
• Sell to Open: One(1) VSEA Nov 19 2011 60.0 Put @ 1.55
2. Next up is Kinetic Concepts(KCI). KCI is being acquired by a private group called APAX Partners for $68.50 cash. KCI is trading around $67.00 and I got $1.50 for the December $67.50 puts. The return on margin on this trade is about %9.4 in 4 months.
• Sell to Open: One(1) KCI Dec 17 2011 67.5 Put @ 1.5
3. Finally, Lubrizol Corporation(LZ) is being acquired by Berkshire Hathaway for $135 in cash. LZ trades just under $135 right now and the September 135 puts are going for about $0.65. I originally got $1.45 for this trade a few months back. If I was entering it for the first time today, I'd probably go with the December options to get a few extra bucks. The return on this one is also smaller because of the unrealized gain I already have on it, but with about $2800 in margin requirements the model portfolio will be %2.3 in just over a month.
• Sell to Open: One(1) LZ Sep 17 2011 135.0 Put @ $0.65

Some of these trades may need to get rolled out a month or two depending on when the buyouts are finalized(especially the LZ trade), but that shouldn't be an issue.

The Numbers

• Cash: +$370
• Short Option: -$470
• Margin: -$5630

VSEA closed out
KCI closed out

AMZN Calls

Alright, I'm gonna do another one with Amazon(AMZN). AMZN is another one that is always a risk to run away from me, but that volatility also leads to better option pricing.

• Sell to Open: 2 AMZN Jun 18 190.0 Call @ $0.16
• Buy to Open: 2 AMZN Jun 18 200.0 Call @ $0.02

This is more typical of a expiration week trade for me. Often times, I'll add another leg with an out-of-the-money Bull Put Spread(something like a 175/165 strike - ). This type of trade is called an Iron Condor. Since in the worst case scenario, you could still only lose on one side it can be a nice way to bring in some extra premium without adding any margin requirements. The bears seem to have some control at the moment though, so I don't like being exposed to the short side of an overvalued momentum stock like Amazon or First Solar.

The Numbers

• Cash: +$28
• Short Option: -$34
• Long Option: +$2
• Margin: -$2000

Expired!

FSLR Calls

Since it's option expiration week, I'd normally be trading a lot more, but since I've been busy with non-trading work, I haven't had much of a chance. This morning(or afternoon if you're on the east coast) I sold some FSLR calls at the $125 strike though. Normally I would turn this into a spread by buying some $135 or $140 calls as well, but the volume and pricing wasn't there today. These sort of trades are my bread-and-butter. Less than two days until the options expire and the stock would have to rise by almost $7 in that time for me to lose money. FSLR is one of my favorite shorts, and when it gets up closer to $150 a share I'll sell longer term calls. At under $120 though, it's got too much potential to shoot up if it catches a bid.

• Sell to Open: 3 FSLR Jun 18 2011 125.0 Call @ $0.11

I'll keep an eye out and see if I find any other quick trades for the week as well. Since I haven't done any screening/tech analysis on possible trades yet though, they'll probably won't be many worth the risk.

The Numbers

• Cash: + $33
• Short Option: -$42
• Margin: -$5100

Expired!

Keep on rolling

Well, we're finally getting some downward pressure in the market. I'm going to roll those CSCO puts again near the close today. The stock price has fallen enough that there isn't much premium in rolling forward one week, so the next series I go with will be the August puts. I should be able to get about $0.40 in credit for the swap. This isn't the way I expected this to play out when I entered the trade, but here we are, so I'll take what I'm given.

• Buy to Close: 2 CSCO June 10 2011 16.0 Puts @ $0.90
• Sell to Open: 2 CSCO Aug 20 2011 16.0 Puts @ $1.30

Rolling out CSCO

As I mentioned on Friday, I was looking at rolling over the naked weekly puts if they were going to finish in the money. I ended up rolling them up one week for a net credit of $0.17.

• Buy to Close: 2 CSCO June 03 2011 16.0 Put @ $0.02
• Sell to Open: 2 CSCO June 10 2011 16.0 Put @ $0.19

That brings the total premium we've collected on the CSCO weekly puts to $0.24. That comes to about a 1.5% return on the stock price or about 3.5% return on margin if the options expire. That's in only a week and a half and brings our break-even price on CSCO to $15.76.

I haven't updated the model portfolio recently, but I will try and do that this afternoon after the market close.

CSCO Update

The market weakness over the last couple days has hit CSCO as well. I currently have some naked CSCO puts at a strike price of 16 that are close to being in the money when they expire at market close today. Rather than get assigned the shares of CSCO, if the puts are in danger of being in the money, I will roll these puts over with the next weekly puts at the same strike.

Trade: Doubling up on CSCO

I know I'm already short a couple long-dated puts on CSCO, but today I can't resist selling some more. This time I'm staying short-term.

• Sell to open: 2 CSCO Jun 03 2011 16.0 Puts at $0.07

These are weekly options that expire next week. I'm only collecting $14 upfront on this one, but there isn't much margin requirement and it's only 8 days til expiration. If CSCO remains above $16 at expiration, the options will expire and I'll close out a 2.27% gain on margin requirement in just 8 days. It doesn't sound like much, but trades like this can really add up over time. It's one of those trades that doesn't work with a lot of brokers because the commissions eat up most, if not all, of the profits.

The Numbers:

• Cash: +$14
• Short Option: -$18*
• Available Margin Equity: -$616

*The difference between the cash and option values reflects the bid/ask spread

Blog Update

I haven't made any published trades recently. With the bulls and bears fighting it out in a fairly tight range(1310-1350) over the last couple weeks I haven't seen many opportunities. I'm still bearish overall, but the bulls keep fighting back and I know all to well from the last year or so that getting too aggressive on the downside in the current environment is a good way to lose money. I'd rather wait and see some confirmation that the bears finally are taking control.

We still have open positions in Cisco and Microsoft. Cisco hasn't shown any strength the last couple weeks and I'm down a bit on the naked puts, but I have plenty of time for that one to play out. The same goes for Microsoft. The first covered call expired last week as expected and the stock hasn't been able to get any traction. It's dropped down near $24 and trying to sell any near-term calls against it will put me at risk of a capital loss if the stock rebounds. I'll probably look at some longer term calls this week, but the option premiums are so small that it's hard to justify the risk of getting the stock called away from us. In short, it appears I was about 2 weeks early on both these trades.

Model Portfolio

Balances as of market close 1/4/2011
Total Portfolio: $26,160.50
Cash: $24,515.50
Stocks: $2,740
Long Option: $0.00
Short Option: -$1,095
Available Margin Equity:* $4,795

Open Trades:

• CSCO Uncovered Puts
• MSFT Covered Call
• MMI/NETL Arbitrage
• TVLT Arbitrage
• BRKB Uncovered Puts
• CSCO Uncovered Puts
• MSFT Uncovered Puts

Recently Closed Trades:

• SSO Puts
• Leveraged Gold
• PPDI Arbitrage

* Available Margin Equity is only an estimate. Actual equity may be different depending on daily price changes and differences in margin requirements between brokers.

CSCO Uncovered Puts

Last night Cisco(CSCO) beat expected earnings, but after warning of weakness in their conference call, the stock is getting hammered today. I'm going to take advantage of the weakness to sell some uncovered puts on CSCO. Since I'm still leaning bearish on the overall market I am using a more conservative strike price than I might normally.

• Sell to open: 2 CSCO Jan 21 2012 16.0 Puts at $1.06

Since this is my first uncovered option post, let me explain how the numbers work. This trade earns me a total of $212(2*1.06*100) in option premium income. The margin requirements are 20% of the strike price which comes to a total of $640(2*16*100*20%). I expect these puts to expire worthless giving us a return on margin of 33.13%(212/640) in just over 8 months. If CSCO is trading below $16 next January, I'll have the option of either rolling the options forward or being assigned 200 shares of stock at a cost of $14.94(16-1.06). With that stock I will be able to either write covered calls against it or hold the stock long-term(I expect being able to buy CSCO at less than $15/share would be a very profitable trade).

The Numbers:

• Cash: +$212
• Short Option: -$212
• Available Margin Equity: -$640

Trade #1

Alright folks, let's get this party started. I'm going to start simple with a basic covered call on Microsoft(MSFT). I am currently a bit bearish on the market, so I don't want to get too aggressive. MSFT however, is a stock that absolutely gushes cash. At just over $25/share and yielding 2.49%, I have no problem buying it here and holding long-term. In order to generate a little extra income though, I'm also going to write some short-term calls against this position. Here's what I did:

• Buy 100 shares of MSFT at $25.41: -$2541.00
• Sell 1 May 21 2011 $26.0 Call at $0.07: $7.00
• Total Cost: $2534.00

 I could have sold a call with a longer time frame, but since this is position I'd like to hold long term, I don't want to risk it racing higher and getting called away from me. Instead, I'm going take advantage of the weekly options available for MSFT and try to sell near-the-money calls every week or two. In this case we grabbed a measly 0.275% of income. But if I do that every two weeks it will end up being an additional 7% each year, which added to the 2.5% dividend, comes out to nearly 10% cash yield. That doesn't even account for a growing dividend(something MSFT does regularly) or any capital gains.

Update:

1. On June 9, I received a dividend of $0.16/share for my Microsoft position. I added the $16($0.16x100) to the portfolio cash balance
2. On September 9, I received another dividend of $0.16.
3. On December 9, another dividend was paid. Microsoft raised their dividend 25% so the dividend is now $0.20. I am now receiving a yield of 3.1% on my original purchase price.  My yield is actually slightly more since I'm reinvesting the dividends, but I'm not tracking that for the blog right now.

Welcome to Stumptown Trader!

Welcome to Stumptown Trader. I am a self-trained investor/trader. I’ve been investing in stocks for the last 10 years and trading in stocks/options for the last 5 years. I still have a regular day job, but my passion(and future full-time job) is the stock market. As an independent, self-funded trader with no one(other than myself and my brokerage account balance) holding me accountable, I’ve found that it can sometimes be too easy to ignore my own rules and forget about past trades. They say a good trader is only as good as their last trade, and it’s vital to not get hung up on past trades(both good and bad) and missed opportunities. But at the same time, it’s important to be able to see what is and isn’t working for me so that I can focus on my strengths and maximize my profits. That’s why I’m starting this blog. I believe that making my strategies and trade ideas publicly available, I will be able to enhance those ideas and become a better trader. I also think a lot of people can benefit from these ideas and that I can benefit from your ideas. So feel free to comment or email me if you want to.

For now, this blog will focus mostly on short-term option trades as well as occasional commentary on the markets and financial news. Although I say option trades, this may include holding stocks that we’ve purchased through option strategies(such as uncovered puts and covered calls). Not every trade I post will be a trade I actually make in my brokerage account. This might happen for a couple reasons: I may not have the available margin, I might be trying a new idea out, or it might just be too risky of a trade for an account of my size. I will try to make sure that I include this information in my posts.

Most of my trades will be during the week of expiration to take advantage of the rapid time decay. Because of this strategy, the majority of trades will happen during the main option expiration week(3rd Friday of each month). We’re seeing more and more stocks with weekly options available as well though, so there should be good trades available every week. Examples of trades you will see are:

• Uncovered(naked) calls/puts - selling OTM(out of the money) options.
• Example: Sell a INTC put with strike price of $20
• Credit spreads - selling a put or call while simultaneously buying a further OTM put or call. This is useful in limiting margin requirements and risk. These are also called bullish put spreads and bearish call spreads.
• Example: Sell a INTC put with strike price of $20 while buying a INTC put with strike price of $17.5.
• Short Straddles - selling an uncovered put AND a call at the same strike price
• Example: Sell a INTC put with strike price of $20 while also selling a INTC call with strike price of $20
• Short Strangles - similar to a straddle except that the put and the call are at different strike prices
• Example: Sell a INTC put with strike price of $17.5 while also selling a INTC call with strike price of $22.5
• Iron Condor - This is a combination of the credit spreads and the short strangle/straddle.
• Example: Sell a INTC $17.5/$15 bullish put spread and a $22.5/$25 bearish call spread
• Covered Calls - A combination of buying shares of stock and selling calls against it.
• Example: Buy 100 shares of INTC at $23/share and selling a $24 call against it.

You will notice many of these trades carry high or unlimited risk with comparatively low reward. Focusing mostly on expiration week and using short term technical analysis I have an extremely high winning percentage(75%+) which greatly reduces this risk. Remember, the large majority of options expire worthless, so selling them is much like being the house in a casino: You might lose big now and then and wipe out some of your gains, but over a relatively short time frame all those small gains add up to keep you in the black. I’ve been using these strategies for the last 4 years and have made money in every one of those years.

I will be maintaining a model portfolio as well to keep track of all my trades and track gains. It will begin as a $25,000 margin-approved cash portfolio and grow from there. I don’t expect this to track these trades perfectly as option prices can and do change rapidly, especially as they get closer to expiration, but I think over time it will be an accurate representation of the returns you can achieve with this strategy. For the purpose of the portfolio, I will not be including commissions and fees in the trades since these can vary widely from broker to broker. I will be shooting for 15% annual returns to start with. This is actually less than what I’ve been able to do in my personal account over the last several years, but I will probably be less aggressive with the model portfolio, at least to begin with. We’ve also been in an extended period of low and falling volatility, which if it continues will negatively affect returns on option-writing strategies. I'm also not sure how many trades I'll be able to post to begin with. If this little experiment works out, I'm sure the number of trades I post will grow, but for now I'll shoot for 5-10 per month.

The model portfolio will usually keep a high percentage of cash available. For the purpose of tracking, I will assume a 0% yield on the cash balance. In my personal account, however, I usually keep at least some of my cash in US Treasury and/or foreign currency ETFs in order to earn a little interest and diversify currency risk. 

I'm sure I'll find easier ways to do things as I go along, so bear with me while I work out the kinks. If you have comments or suggestions, please don't hesitate to email or comment.