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.