CRM: I rolled up my short options for more time value.

Posted on May 20, 2011 by admin

CRM reported good earnings.  My covered call (short May 21 $125 call) is due today.  CRM is a good stock with good time value and I want to keep it.  So I bought back the call (strike 125) and sold Aug. 20 call (strike 130).  This spread has a different expiration date and different strike prices.  It is called diagonal spread.  The price difference of this diagonal spread is $0.3/sh.  So I made $0.3 x 100 = $30 for each pair of contract (1 contract =  100 shares).  But my new strike price is $5 higher (at $130) than the previous strike at $125.  This means that when the option is exercised (when the call buyer buys my CRM stock), the buyer now has to pay me $130/share, instead of $125/share before.  Or in other words, I am making $5/sh more in the stock.  The total profit = $0.3/sh (option spread) + $5/sh (strike price difference) = $5.3/sh.  ($5.3 x the # of shares I own)/$ of margin requirement (the money that I have to have in my margin account) = 16% (in 3 months), or 54.3% annualized.  My option strike price is now 12% in the money (ITM).    This 12% ITM means that CRM has to drop >12% of its value (down to below $130/sh) for me to start making less money.

Take home lesson:

  • CRM has gone up a lot.  We are still in a bull market.  I expect CRM to stay at this price level or go higher.  Therefore, my previous strike price at 125 is a bit too deep in the money.  Although safer, it’s not as profitable.  So I wanted to gradually go up on the strike price, but not too fast to put myself in harm’s way.  That why I rolled up from 125 to 130.  Why did I choose Aug expiration at 130?  Because Aug 130 options were selling at slightly higher than the prices of May $125 options.  When I rolled up my spread, I didn’t have to pay any money.  Instead, I received $0.3 per share.  This way, in case CRM prices come down, my value in CRM stock per se will come down.  (But if I hold CRM long enough, I expect CRM price to bounce back. )  But I won’t lose any money on the options, since today’s roll up I made money ($0.3/sh).  Should the options expire worthless by Aug 20, I won’t lose any money.  Consider another scenario: rolling up from 125 to 135.  If I bought back my May $125 options and sold Aug $135 options, instead of receiving $0.3/sh, I’d have to cough up $3.2/sh.  This is higher risk with higher potential gain.  If CRM stays above 135 by Aug expiration, the extra profit would be $1.8/sh (5 – 3.2).  But if CRM drops below 135, particularly if it drops below 130, my potential would even higher.  Should this happens to me, not only I’d lose money on CRM stocks, but also on options.  So one lesson I learned: Do not pay extra out of pocket when you roll up (with exceptions). Better be safe than sorry.
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OPEN: A case study of how to roll up.

Posted on May 19, 2011 by admin

OPEN: We started a position on OPEN on 3/21/11 with a covered call (April 16, $90), cost 86.8.  On 4/14/11, OPEN was above 104.  We rolled up the April call to May 21, $90, for an additional profit of $2.7.  This effectively brought our purchasing cost of OPEN down to $84.1.  After disappointing earnings of yesterday, OPEN is trading around $90 now.  With options expiring tomorrow, I rolled up OPEN options from May 21 to June 18, same strike (90), with a credit of $3.38/sh (i.e. the profit of selling next month’s options at 90 – the cost of buying back the short options due tomorrow).  This effectively brought my purchasing cost of OPEN down further to $84.1 – $3.38 = $80.72.  The monthly return is profit/cost (the margin requirement)=12.51% (in one month).   Obviously, this trade shows a pretty high return.  This is because the option is near or at the money (=strike price is pretty close to the stock price now).

OPEN stock price was 92.15 on 3/21/11 when I started my positions.  During the past 3 months, OPEN went to as high as $115.62 on 4/25/11, but today it closed at $91.3. If you owned OPEN shares only, you would have lost about $1/sh.  But using covered calls, I have gained ~$11/sh so far.

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This week’s trades

Posted on May 16, 2011 by admin

I set up the following trades today.

  • A put spread for NFLX today (long 230 put, short 235 put, exp this Fri), $50/pair of contract.  NFLX’s 20 day SMA is 237.   I chose put, b/c of higher profit.
  • A call spread for PCLN (long 500 call, short 505 call, exp this Friday), with $120/pair of contract.  PCLN’s 50 day SMA is 504, which has been a strong support for PCLN for at least the last 2 years.

 

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Cautiously bullish.

Posted on May 16, 2011 by admin

Both Chartadvisor.com and Schaeffersresearch.com have a bullish view long term.  Near term choppiness is expected, however.  With fear rising, Greek issues and the ramifications of IMF turmoil (its ability, or lack of it, in helping Greece out of its financial problems), we will be embraced with a bit more volatility.  This is actually an opportune time for visionaries to start taking advantage of.

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Weekly trading summary and account update

Posted on May 15, 2011 by admin

The past week was, again, profitable.  Our 3 spreads trades were all successful (NFLX, PCLN and LVS).  This week’s investment return is 8.3% for the trading account.  The total return for this trading account for the last 7 weeks is 60%.

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PCLN was a bit scary today.

Posted on May 12, 2011 by admin

Glad to see the market first fell, then recovered and gained by closing, confirming that the market is trading in a range.  Especially of interest today is PCLN, falling to as low as 515. My setup of PCLN spread was long 510 put, short 515 put. I should not have done this trade, as it is too risky. Due to low volume of 500/505 and 505/510, I got a bit complacent and did the 510/515. It seems that I may be lucky this time. But I should stick to the principles: do not gamble, invest.

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Why covered calls?

Posted on May 12, 2011 by admin

I use covered calls as my main trading strategy.  I do so for several reasons.

  1. Steady profit
  2. Less risky than owning stocks alone
  3. Guaranteed profit from premium selling.

What is a Covered call?  Covered call means that you buy certain shares of a stock and then sell equal number of options at a certain price (called strike price, or simply strike) with certain duration (called expiration).  When you sell the call, the buyer pays a premium that is above the current stock price (this premium is called time value).  Covered call sellers primarily make money by selling time value.  The main feature of time value is that with the time goes by, time value decreases.  Every thing on the Wall Street changes.  One thing that never changes is that Time Value always decreases with the time going by.  This is the where I make my money.  Covered call, in essence, is similar to gambling house.  In Vegas, gamblers lose money, but the house always comes out a head.  In covered call, there are gamblers who bet that certain stock will increase in the future.  The covered call sellers then make it possible for those people to bet.  The gamblers may make money or they may lose money.  But the covered call sellers always keep the time value.  Covered call has its pros and cons.  The main disadvantage of covered call, some of you may argue, is that when a stock goes up, I make only a small portion of the increase in the stock price.  This, indeed, was the problem I had.  But then later, I figured out how to deal with this problem: rolling up.  With the rolling or rolling down, I have been able to deal with markets that either go up or come down.  Please check out other case studies in this space to see how I use the modified covered call strategy to trade in bull, swing and even bear markets.

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Falling market today.

Posted on May 11, 2011 by admin

The market is fluctuating (as expected).  SP500 is ~1340, the support line.  So far today, the market lost what it gained in the past 2 days.  This is not surprising.  The most likely scenario is that the market trades in a range.  If SP500 drops below the support and stays there, then we got a bigger problem.  Stay put for now.

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PCLN, NFLX & LVS spreads

Posted on May 10, 2011 by admin

Today, I set up several spreads:

  1. PCLN: long weekly 510 put, short weekly 515 put, net credit: $.6/spread.  This is a bit riskier than the 500/505 spread.  Due to low volume, I couldn’t get 500/505 nor 505/510 spreads.  The 510/515 spread is riskier.  PCLN shows a support near 510.
  2. NFLX: Long weekly 225, short weekly 230, net credit: $.55/spread.  This is also a bit riskier than the 220/225 spread.  But only 3 days to expire and the market seems to be calm and VIX is falling.  Also due to low volume, the 220/225 spread could not get executed.
  3. Yesterday, I set up a spread of LVS weekly, long 41 put, short 42 put, net credit: $.12.  Wanted to add more positions today, but wasn’t able to, due to low volume.
  4. FFIV: due to low volume, didn’t attempt this setup.
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Next Week’s Trading Prospects

Posted on May 8, 2011 by admin

Several possible trades to consider:

  • PCLN, 50 day SMA is 500.  PCLN has almost never fallen below 50 SMA, except during the flash crash.  A spread of 495/500 carries a relatively low risk.  Long 495 May 13 put, short 500 May 13 put, profit $.675 (15.6% return in one week).
  • NFLX: 50 day SMA = 225.64.  Current price: 229.47.  Spread of 220/225: cost: 3.775, profit: 5 – 3.775 = 1.225 (1.225/3.775 = 32.5% return in one week).  This trade is a bit riskier, with a higher return as well.  In the last 2 years, NFLX has dropped below 50 day SMA only a few times and then quickly rose above this strong support.  If you have guts, this is an interesting trade.
  • FFIV ($100.9): this stock has been bearish since 1/11’s poor earnings report.  The last earnings report was great and the stock price shot up from below 20 day SMA to at the 50 day SMA.  But it failed to rise and stay above 50 day SMA.  Now it’s stuck between 20 day and 50 day SMA (98.94 and 102.15).  Although I don’t believe FFIV will be able to rise above 50 day SMA anytime soon, it’s unlikely to fall below the 20 day SMA easily either.  Its May 13 put spread of 95/97.5 costs $2.1, profit $.4 (or 19%).
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