YOU WIN A FEW! YOU LOSE A FEW.

June 29th, 2010

I get emails from several web sites that promote options. It seems to me they always make a profit. When I see that I know that they are not reporting honestly. So when you look at merv’s trades, you will usually see some loss positions.

But one area where we have not lost in a long time, overall, is in our SPY spreads. If you have been following our trades you have seen a profit of almost $2,200 from the current sequence so far since we started on April 1st. Here are the trades:

4/1. Bt sep 129 to write calls against. -1,255
Sld may 121 calls. + 1,145
4/23 bt bk may 121 -1,905
Sld. Sep 124. +3,556
5/5. Bt back sep 124. -2,701
Sld jul 120. +2,325
5/25 bt back jul 120. -280
Sld sep 120. +1,515

That’s a nice profit so far. This week we will buy back the sep 120 at a nice profit and sell the sep 117 for about $1,115 because the market is down. I’ll keep you posted.

Next week: what are we losing on?

REALLY HOT STOCKS AND WHAT TO DO ABOUT THEM

June 24th, 2010

I have a friend with a lot of Apple stock.  As you might know until a few days ago it’s been running up like crazy.  My friend bought it at $60 not that long ago and now it’s at $270.

A few weeks ago my friend thought the stock would go to about 290 or 300, so he wrote calls against the stock, selling the 285 and 290 calls for a very nice premium.

Then the IPAD sales figures hit, and my friend’s estimate of where the stock would go to changes, and his new estimate is $330.  So he asked what he could do now to “readjust” his positions so as not to lose his anticipated run up of 30 points or more on the stock.  Here is what I replied:

“When you sell Oct 285 (averaged for ease of writing) calls, you are saying to yourself and your colleagues one of two things: (1) I do not think this stock will go over 285 between now and expiration in Oct; and/or (2) I will be happy if this stock is purchased from me at 285.

So that is what you said, in effect.  Now, sometimes when we say that, conditions change so we want to backtrack to accommodate the changed situation.  That seems to be what you are saying now: “now I think the stock will go to 320 or so and I don’t want to miss out on the 35 points I think it will go beyond my old thinking.

When you make such a new decision you trigger a philosophical aspect of option writing: if you believe that a stock is going to go up like a rocket, you should not write calls against it.  When you write covered calls, you are giving up a bit of the upside in exchange for a premium.  You should only do that when the premium is enough to satisfy your objectives, or your evaluation is that the premium outweighs the likelihood of increase in stock value.

So for Apple stock while it is so hot, ideally you would not have written options against it at all, and just let it ride.  But, before we got involved, you did.  So we find ourselves where we are.

There are two intelligent moves to make in light of your new assessment of the stock: (1) let the stock be called away at 280/90 (you want to sell it anyway this year because of the tax change) keeping the premiums to recoup earlier losses, and taking one nice gain on the stock.  At the same time, if you want to benefit from your expected increase above 285, buy some calls (doesn’t have to be as many as you have stock positions) and take the expected profit from the calls.  You can do that on margin without putting up more cash based on your stock holding.  (2) give back some of the premium you took in by “rolling up and out”.  This is the customary technique in covered call writing when you DONT want the stock to be called away.  In effect you backtrack by returning some of the premium, sell new calls at the new strike price (say, 315 or 320 to be conservative) and receive back SOME of the premium that you gave back (probably a fair amount if you go out far enough).  Read about rolling in my tutorials for more details.  You titrate the figures by making sure the anticipated profit in the stock increase above the original call price is substantially more than the amount of net premium you give back (net in the sense of paying to buy back and receiving when you sell the new higher, further out, calls).  The result is you might lose some money on the options but more than make it back on the stock price increase.

Since you plan to sell out the stock positions by the end of the year, if you write calls that go beyond that you can lease them in place by buying calls later with elevated strike prices, converting the covered calls into spreads until the time is ripe to close out everything.  The cost of the new long calls (protection in place of the old stock that acted as protection) should be less than the premiums which will be earned as time goes on.

I hope this covers it.  Don’t be like the guy that buys the insurance policy, and after one year when it’s time to renew, tells the agent “why should I renew?  I paid the premium for a whole year and lost the entire premium since nothing happened.”  Options are a process, not for the faint at heart, the short sited, the impetuous or the impatient.  But lots of fun.”

I hope this is helpful to any of you in similar positions.  And Apple is hot, but I’m also watching WAG as a potential hot stock for next month.

Mlh June 23, 2010

So Far, So Good

June 9th, 2010

On May 25th, when I thought the market was really low (boy was I wrong there) I bought back the 10 SPY Oct 120 calls at $.28, paying a total of $325 with costs. So there was a nice profit, pretty much as anticipated there.  Now I’m left only with the long Oct 129 position, on which I expect to lose $1,200 eventually, since it was purchased solely as protection.  But when the market rallies (when and if) I will sell another short position.  So far it appears that the plan is working and we will make a nice profit with very little risk.

MY ACTUAL SPY TRADES OVER ONE YEAR

June 8th, 2010

Below are the trades I’ve made on the Spider ETF, that tracks the S&P 100, over the last year.  It’s only been mildly profitable because in general the market has gone up strongly over most of the period.  Writing calls on SPY is not as profitable during periods of strong upticks in the market as when the market trends down.  That’s one of the reasons that it is a good strategy: when the market goes down these positions act as a hedge and make a profit while the underlying portfolio loses value.  And when the underlying portfolio goes up in value, the SPY strategy either doesn’t make a profit or makes a small profit.  That’s what’s happened here–as the market has gone up, I’ve made a small profit.  Twelve thousand dollars in the year–not bad!  mlh”

Summary of SPY Spread

Client:

Date:

Mervyn Hecht

05/24/10

Price/

Account

Position

Shares

Share

Gain/Loss

SPY Spread Call Strategy
Options
05/13/09 CALL STANDARD & POORS $105 EXP 09/19/09

BUY

20

1.06

$2,178

05/13/09 CALL STANDARD & POORS $95 EXP 06/30/09

SELL

-20

1.50

($2,920)

6/11/2009 CALL STANDARD & POORS $95 EXP 06/30/09

BUY

20

2.25

$4,618

6/11/2009 CALL STANDARD & POORS $99 EXP 08/22/09

SELL

-20

2.28

($4,441)

7/6/2009 CALL STANDARD & POORS $99 EXP 08/22/09

BUY

20

0.33

$708

7/15/2009 CALL STANDARD & POORS $95 EXP 08/22/09

SELL

-20

1.63

($3,173)

7/23/2009 CALL STANDARD & POORS $95 EXP 08/22/09

BUY

20

4.04

$8,242

7/23/2009 CALL STANDARD & POORS $99 EXP 09/19/09

SELL

-20

2.76

($5,377)

7/30/2009 CALL STANDARD & POORS $99 EXP 09/19/09

BUY

20

3.61

$7,376

7/30/2009 CALL STANDARD & POORS $101 EXP 09/19/09

SELL

-20

2.54

($4,948)

8/3/2009 CALL STANDARD & POORS $110 EXP 10/17/09

BUY

20

0.79

$1,635

8/3/2009 CALL STANDARD & POORS $105 EXP 10/17/09

SELL

-20

2.04

($3,973)

8/3/2009 CALL STANDARD & POORS $101 EXP 09/19/09

BUY

20

2.92

$5,986

8/3/2009 CALL STANDARD & POORS $105 EXP 09/19/09

SELL

-20

1.30

($2,530)

9/15/2009 CALL STANDARD & POORS $112 EXP 12/19/09

BUY

20

1.83

$3,754

9/15/2009 CALL STANDARD & POORS $110 EXP 10/17/09

SELL

-20

0.63

($1,205)

9/15/2009 CALL STANDARD & POORS $105 EXP 10/17/09

BUY

20

2.49

$5,110

9/15/2009 CALL STANDARD & POORS $108 EXP 11/21/09

SELL

-20

2.49

($4,850)

10/13/2009 CALL STANDARD & POORS $108 EXP 11/21/09

BUY

20

2.50

$5,124

10/13/2009 CALL STANDARD & POORS $110 LT EXP 12/19/09

SELL

-20

2.53

($4,928)

11/16/2009 CALL STANDARD & POORS $110 LT EXP 12/19/09

BUY

20

1.43

$2,937

11/16/2009 CALL STANDARD & POORS $114 EXP 12/19/09

SELL

-20

1.44

($2,803)

11/16/2009 CALL STANDARD & POORS $122 EXP 03/20/10

BUY

20

3.52

$7,195

11/16/2009 CALL STANDARD & POORS $112 EXP 12/19/09

SELL

-20

2.35

($4,577)

12/21/2009 CALL STANDARD & POORS $113 EXP 01/16/10

SELL

-20

1.16

($2,257)

1/4/2010 CALL STANDARD & POORS $113 EXP 01/16/10

BUY

20

1.48

$3,039

1/4/2010 CALL STANDARD & POORS $115 EXP 02/20/10

SELL

-20

1.95

($3,797)

2/22/2010 CALL SPDR S&P 500 ETF TR $113 EXP 03/20/10

SELL

-20

1.03

($2,003)

4/1/2010 CALL SPDR S&P 500 ETF TR $129 EXP 09/18/10

BUY

20

1.20

$1,255

4/1/2010 CALL SPDR S&P 500 ETF TR $121 EXP 05/22/10

SELL

-20

1.20

($1,145)

4/23/2010 CALL SPDR S&P 500 ETF TR $121 EXP 05/22/10

BUY

10

1.85

$1,905

4/23/2010 CALL SPDR S&P 500 ETF TR $124 EXP 09/18/10

SELL

-10

3.65

($3,556)

5/5/2010 CALL SPDR S&P 500 ETF TR $124 EXP 09/18/10

BUY

10

2.63

$2,701

5/5/2010 CALL SPDR S&P 500 ETF TR $120 EXP 07/17/10

SELL

-10

2.39

($2,325)

Total for Options

$2,951

Stock
3/24/2010 SPDR S&P 500 ETF AS OF 03/18/10

SELL

-2,000

113.00

($225,437)

3/25/2010 SPDR S&P 500 ETF

BUY

2,000

116.69

$234,331

Total for Stock

$8,894

Total for Strategy

$11,845