question from Harvey on PG

March 30th, 2011

Harvey writes:

Merv:

I’ve been looking at PG. It pays a regular dividend about 3 or 4%, and is relatively lackluster in price.

If I sell puts about $2.5 OOTM every 2 months, I think I could double that. Ditto if I get put the stock and write calls.

It sounds like your typical deal. What do you think?

WHY I WIN WITH OPTIONS EVEN WHEN I LOSE

March 28th, 2011

A few months ago I thought Cisco stock would go up.  So when it was about 19 (if I remember correctly)  I sold 10 April 20 puts for $1,700.  I was wrong.  Cisco announced bad earnings and the stock did not go up.  It’s trading now just over $17.  At this moment it would cost me $2,900 to buy back the puts, so I would lose $1,200.

But it’s not over until the fat lady sings.  Maybe it will go up over the next month—-but I doubt it.  Assuming it stays around $17 and I have to buy it back, probably by then at only around $2,500 and take a loss of around $800 (my best guess based on performance so far) I will take the loss and sell a new $20 put and, hopefully, take in another $1,700.

That would put me into a positive cash position on the overall trades.  And, all this time I’ve invested the $1,700 I got at the beginning.

I still think it’s a good company, and probably a bargain at $17, but that doesn’t really matter.  Unless I’m even more wrong that I’ve been so far, if the stock doesn’t go down much further I’ll still come out ahead in the long run.

Aren’t options wonderful?

REMX IS A WINNER SO FAR

March 23rd, 2011

Last week I explained the REMX trade, where I sold a put to collect premium, and used the premium to buy a call.  The ETF was at about $22+ when I placed the trades, and is now $24.67—quite a move.  I placed 5 positions each way.

The call is now $325 profitable, and the put is now $175 profitable, for a total of $500.  Now bad for a small investment of $.05 per share for a week.  Of course it’s not over, they say, until the fat lady sings.

This week I bought another ETF, this time EWJ.  I bought 500 shares in each of three accounts.  I paid about $10 a share.  This is the Japan ETF, with it’s biggest holdings in Toyota, Honda, and similar companies (not all cars).  My hope is to take advantage of a temporary (6-12 month) decline in Japanese businesses followed by a sharp increase.  I have mixed feelings about this investment because the ETF price did not go down as much as I would have thought during the disaster.  But I think these leading Japanese companies are good companies, and this is a good way to invest in them for a long term.

merv

RARE EARTH METALS

March 18th, 2011

This week I decided to take a long position  in rare earth metals.   I sold 10 August puts on REMX, a diversified rare earth metals ETF, with a strike price of 20 (when the ETF was at about $22) and took in $730.  At the same time I bought 10 August Calls at a strike price of 25, and paid out $750.  So I’m about even cash wise, and I have a long position with the call.  If the position moves up in the next 2 or 3 months I’ll make a profit.  If it goes down below 20 I’ll acquire the ETF at what I believe to be a bargain price, and begin to sell calls against it for added income.  The ETF already pays a nice dividend of almost 4% at a purchase price of $20.

I’m watching EWJ, the Japan ETF, and plan to buy some in the coming days.  The option premiums are not sufficient at this time to warrant that kind of trade.

merv

I’VE RECEIVED A FEW GOOD TIPS

March 13th, 2011

I’ve received some good tips from some of you.

Ray called to suggest I look at REMX, a rare earth metals ETF.  I’m watching it, and looking at how to do the same thing here as I did with silver—write a credit put spread and use the proceeds to buy an at the money call.   So far the prices are not good enough, but……soon.  Meanwhile, it does look like a good long-term investment.

Peter emailed that he’s done well in silver, and is cashing out now.  His Brazil holding has not done as well as he had hoped, but hope springs eternal.  He is now selling calls against his silver positions.  He also writes that he is shorting  ANF, Abercrombie & Fitch.  I haven’t looked at that yet.

Anyone else have any good ideas?

WHY ARE PUTS SO GREAT?

March 8th, 2011

Since I don’t have any great trade ideas today (but I’m watching oil to see when to short it) here’s a tidbit from the tutorials that is worth remembering:

The sale of a put, by itself, is generally done in an attempt to acquire the stock at a price below the current market price. For example, if you want to buy 100 shares of IBM stock at 80, but the stock is at $90, you could (1) call your broker and place a ‘good till cancelled’ order to buy the stock at 80; or (2) sell an 80 put. If you elect the second alternative, you will be paid a premium, so it is clearly the better choice.

Suppose, again, that I would be willing (and am financially able) to buy 100 shares of IBM at $80. But the stock is now at $90. At 90 I don’t dislike it, but I don’t love it. At closer to $80 I love it, and I want it. So I sell the 90 day 85 PUTS at, say, 3 points (or I sell the 90 PUTS at say, 7′ points if I really want the stock.) This means I agree to buy the stock at the strike price (85) at any time during the option period, because my net cost, with the premium I receive, is a price I am willing to pay. In the case of the 85 Put with a $3 premium, that price would be $82. If I can get a $7.50 premium for the 90 in-the-money Put, my price will be $82.50.

sold one bought one

March 2nd, 2011

Silver finally went up to where I just couldn’t keep it any more.  I invested $300 (see prior blog) and the position went up to over $3,000 this morning.  I took my profit and ran.

Thinking that mid-cap stocks might now start to follow the big boys up, I sold two puts of MDY yesterday, netting about $870.  That’s because I am OK if I am put these 200 shares of a midcap ETF.  And if not, I’ll just keep the $870 and look for something else.

Your comments?

merv