Trade of this week: covered call of FFIV (strike 105).

Was out of town last week and just returned late yesterday.  Last week was another bloodbath and I bled as well.  Several of my option spreads lost money.  My NFLX 160 put long was exercised and I was long 10ooo shares of NFLX this morning with a huge margin call.  Luckily, I was able to sell NFLX for a $1 profit (at $161) this AM and closed the margin call.

The market is very oversold.  VIX is ~19.  It is very ready for a rebound.  But when will this rebound occur is anybody’s guess.  It will need a catalyst.  At this juncture, the only type of trades I will do are covered calls (not have to worry about expiration).  So I chose FFIV which has withstood the current downtrend relatively well.  I am net short FFIV (with short calls expiring in July).  I entered a covered call of FFIV with a strike at 105 expiring this Friday (10.1% return).

 

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Positions for this week

  • Bidu: set up 2 spreads in 2 different accounts.  120-125 put spread for $0.4/sh profit. 125-130 for another account for $0.92/sh.
  • nflx, 255-260, put spread for $0.8/sh
  • pcln, put spread 480-485, $0.35/sh
  • mcp, put spread 55-57.5, $0.38/sh.
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What to trade?

bidu: spread of 125-130 is still a good trade.  bidu has never fallen and stayed below 130 since March.  A put spread of 125-130 gives $1.15/sh; 120-125 of $0.44.  120-125 is a much safer and yet still profitable trade.

nflx: a spread of 250-255 = $0.28.  Not bad.

slw: sma 200 is 34.14.  SLW has never even touched sma 200 in the past 2 years.  A spread of 33-34 should be safe.  As of Friday, 33-34 put spread provides $0.18/sh.

pcln: a spread of 480-485 gives $0.475, a pretty attractive trade.  pcln has not fallen below 485 since March.

v: a spread of 72.5-75 = $.285/sh.  A very good candidate, if you can get the order filled.

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Market Condition: Neutral to Slightly Bullish

  • ChartAdvisor.com: cautious (bearish). “There are times when it is better to reduce exposure to the markets and wait patiently for the markets to give you an opportunity. This is likely one of those times.”
  • SchaffersorsResearch.com: this week’s Outlook actually rings a more bullish tone than the last week, as exemplified by this statement “..the bulls could have the upper hand during the next couple of weeks”.  The risk of markets going down further remains, albeit of a lower probability (“A major breach of these strikes — a lower-probability scenario, but certainly a possibility — would lead to accelerated selling in the short term, as shorting of futures would pick up considerably, potentially creating a cascade down to 1,250-1,260 on the SPX, which would be its breakeven point for 2011.).
  • Vix: 16 and 20 are two important #s to watch (SchaeffersResearch.com).  When VIX goes below 16, the market tends to fall (“sub-16 readings have spelled short-term trouble for the market”).  ‘At the same time, for most of 2011 — with the exception being March — the 20 area has marked buying opportunities”.  VIX is 17.85 now and was 19.85 last Friday morning.
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Weekly Summary: another great week (for my accounts)

Well, the Wall Street was a bloodbath this week but my trades were all successful (except one, FFIV whose position I closed before the closing today with a very trivial loss).   I practically doubled one of my trading accounts with mostly option spreads in 2 months.  If there is any trick to my success, I’d say this to you: respect the technical analysis (TA).  When I place trades with option spreads, I pay a lot of attention to the chart patterns.  I place my trades below support lines.  Stock prices usually fluctuate back and forth with a channel (as represented by TA).  If you know TA, you’ll know where to place your trades.  Another tip is to stick to your war plan and do not change your plan easily.  Before you place your trade, anticipate what to do if things don’t go the way you want.  In stock market, you are playing with statistics.  Just like in our life, we deal with probability all the time.  You may say playing with stock market is a gamble.  Well, I am sorry to disappoint you, but you are gambling everyday in your life.  When you sit behind that wheel and drive your car onto the street, you are gambling.  You are betting that the weather is good, I am not drunk, therefore the probability of me hitting something or someone or someone else hitting me is low.  So you drove out of your garage.  When you are on that road, are you sure 100% you won’t have an accident?  Even staying in your home, sweet home, are you sure you are 100% safe?  Who says there won’t be an airplane hitting you from the sky?  Who says there won’t be an earthquake hitting your home?  But why do you still stay in the sweet home?  Because, subconsciously, you know the probability of the above to happen is very small.  So you see, you are playing the probability game.  The same is true to Wall Street.  If you respect statistics (or probability), you’ll have an upper hand.  The difference between gamble and investment, in my humble opinion, is weather you use your brain or not.  Gamble, in my view, is betting purely on luck or chance.  Whereas investment is a calculated risk taking.  Life is full of risks.  Anyone who disagrees, give me your mobile and I’d like to see if your brain is full of water.

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SLW

I added a covered call of SLW today (i.e., bought SLW and sold SLW Jun. 18 expiration call at strike price of 36).  My cost (cost of purchasing SLW shares – the profit of selling Jun. 18 call) = $34.7.  If SLW is above 36 in 16 days, the profit is 1.3/34.7 x 100% = 3.75%.

 

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Several bullish (put) spreads for the week

I can’t tell how the market will go in the long term, but it appears the market is calm and bullish for this short week.  Also the major indexes all bounced above their support level, making these support levels even stronger.  Based on this analysis, I set up several put spreads, including BIDU (125/130), PCLN (485/490 and 495/500), NFLX (250/255), FFIV (105/110), SLW (34/35), LVS (39/40), and MCP (57.5/60).   Keep our fingers crossed.

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YHOO

YHOO is another interesting stock with a high TV.  It’s now right on SMA200.  The question is whether YHOO has done selling.  It’s ATM weekly call (16) has 1.3% return and its Jun. 18 ATM call has 3% return.  

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MCP

MCP has the highest time value among all the weeklys (2.42% for an ATM strike of 62.5, exp in 4 days).  MCP’s recent fall from high 70s appears to have halted at ~60.  For an ITM strike of 60 (a safer trade), the TV is 0.88%.  

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SLW

SLW is another interesting stock.  SMA200 has been a strong support for the past 2 years.  SLW is above SMA200 (34.05) and has just broke out of the SMA 20 (35.5).  A covered call with a weekly 36 call yields 1.57% return with 1.27% ITM protection (i.e., the stock has to fall more than 1.27% before hurting the return).  The only problem is the low option volume.  I may not be able to get my orders filled.

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