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.