GREETINGS FROM NYC

April 25th, 2011

Greetings from the Big Apple. Still watching the market, including the incredible decline of the VIX and VXX, but not taking any action right now. More next week. Mlh

HOT TRADE TODAY

April 20th, 2011

I just bought 1000 shares of VXX at around 27 (I missed the low) and sold 10 calls of the Sept 29 strike for $3.20.  So my net cost with commissions is about 24.  The stock is down to 25.80, so I’m still ahead.

The VXX is a complex ETN that measures volatility in the market.  The reason I bought it is that it is near its low point for the year (about 25).  Since this ETN typically reverts to the mean, statistically it should go up sometime between now and September.  If it does I stand to make over $4,000 on a $24,000 investment in 5 months which would be an annualized return of about 35%.

As they say, “hope for the best, prepare for the worst.”

LUCKY PROFITS SO FAR

April 16th, 2011

Since I wrote my combination on REMX it has become more and more profitable.  The short put, the Aug 20, for which I received a premium of $750, shows a profit of $600, and the long call, for which I paid $775 shows a profit of $1,175, so I’m about $2,000 ahead for a $25 investment.  Of course August isn’t here yet, but it’s looking pretty good.  I think a similar bullish combination is still available for any of you so inclined.

My short put on MDY expires next week.  This was an April 20 at a strike of $175, and the stock is at $178.47.  Unless something bad happens, I will earn $889 on that trade next week, with no investment (but assumption of risk).

A good example of how options help when you make a mistake is my position in BP.  I bought it during the oil spill crisis at about $47.50, and it is now about $45, so I am down $2,500 on my 1000 shares.  But I sold a July 47.50 call and collected in $2,500 in premium.  So if it stays below $47.50 I’ll break even.  If it goes over $47.50 by the expiration date my stock will be called away at my cost.  It’s another no-lose situation for options.  Unless of course the stock goes down again.

Any comments or suggestions?

merv

TIME TO SELL INDEX CALL SPREADS

April 10th, 2011

I think the market is cooling down now.  During normal times, I generally have an index call spread in place. I typically put on a spread based on the S&P at around  4-5% above the index.  If the market goes up, my underlying stocks go up as well, and I just buy back the short position and rewrite it.

With the SPY at just under 133 now, tomorrow I plan to sell the July 137 call and buy the July 142 call for a net credit of approximately $2.  My risk is theoretically $3,000 (5-2) but as a practical matter I would never lose that much because I would keep rolling up if the market went up and up, and would take in some more premium.

Most of the other positions I’ve written to you about are doing well (except for Cisco).  RIG has been very profitable, and I’m just waiting for the short positions to expire.  WAL is laggard but I’m continuing to write calls against the stock and that is producing a nice return.  PG has moved down a bit, so the calls are showing a small profit.  BP has not done as well as RIG but while the stock has not quite gone up to my cost, the premiums on the calls are more than the loss on the stock if I were to sell, so I’m continuing with that strategy.

merv

TRADES THIS WEEK

April 5th, 2011

This week I took the following actions, which you can track on “merv’s trades.”

I rolled out the Cisco puts. Rolled out means that I bought back the existing positions and sold the same positions for a later month.  In this case I bought back the May positions and rewrote them for July.  This was to prevent the holder of my contract from calling it in which case I would have to buy 1,000 shares of Cisco at $20 a share when the current price is just over $17.  Obviously this has not been a good trade, as Cisco stock went down when it announced bad earnings.  But I still think the company will come back so I am continuing to take in some premiums on the puts and watching the stock.  I took in $1,700 in the initial sale, paid $3,000 to buy back that position, and received about $3,000 from the new sale.  So I have cash in my pocket although I remain at risk for a $1,200 loss if the stock doesn’t rebound.

I closed out the RIO positions when the portfolio showed it in green.  As you recall, green means that substantially all of the profit from an option position has already been taken, so you might as well close out the position and take the profit.  In this case the profit was about $825, and the maximum profit would have been $850.

I bought 500 shares of PG at below $62 a share (waiting for the confirm) and sold 5 calls at $62.50.  This is a short-term play to get the April dividend and the call premium.  More on this later.

merv

REPLY TO HARVEY RE PG

April 1st, 2011

Harvey

I think it looks like a pretty good idea.  Of course you might not want to risk the downside of any particular stock, even one as presumably safe as PG, so perhaps it would be a good idea to buy a put well below the put you sell in order to hedge, and to require less capital in the account.  This will reduce your profit somewhat but it’s still the right way to go.   “lackluster” might be too strong a word for this stock, but the price is down right now which makes it particularly attractive for this strategy.   Merv