OptionPundit

Tag: option trading

  • How to Play Alcoa (AA) Earnings?

    Aloca (AA) is set to announce earnings after close today. Wall Street is expecting a fall to -$0.55 to -$0.57 EPS depending upon who do you follow (Zacks, First Call etc). The quarter was not that exciting, hence the expectation are already factored for a very poor quarter. I think the movement will depend on the extent of swing of losses in either direction. My personal bias is that will beat these lowered numbers (probably on ground of higher discounts to liquidate inventory, etc.) . Worth watching though is the Gross/operating Margins.

    Earnings related trades are speculative and hence there is 50/50 chance of being correct. So, How to play this?

    aa-earnings-apr-09Earlier I mentioned about a beautiful strategy to play large moves, called “Backspread” strategy. Here is a Trade Idea-

    While I would like to play upside I also want to protect myself for any negative announcement and hence negative stock reaction. I am planning to open a April 6/7.5 2:3 Call ratio spread i.e. Sell Apr Calls 2X and Buy April 7.5 Calls 3X. This will yield about $1.50 credit. The Max I can lose by April expiration is $150. My break even points are $6.73 and $9 by April expiration.  As long as AA moves beyond this range, this trade will be able to make money.

    What’s the catch– Tomorrow morning the IV will drop like a stone as the news will be out and stock will move. The worse case, the IV drops and stock doesn’t move. For this trade to make money, stock has to move.

    There are other ways to book profits. For instance, if AA drops heavily then close the 6 calls buy buying it back cheaper and sell the 7.5calls when AA bounce a little upwards. But this all requires intra day trading skills/maneuvering.

    Don’t try this if a) you are not willing to lose and b) you don’t how to profit from it even if it goes against your plan.

    Disclaimer– As of this writing I own this spread. I may change my position anytime without notice.

    Profitable Trading, OP

  • OPNewsletter (Apr’09) +7.6%, 15th Positive Month Out of 16

    A terrific week and 3 cheers to the Bulls for sustaining the momentum. Finally, my witty Oct’08 remark on “Mark to Market” relaxation a.k.a “do-what-you-want” came true; G-20 supported by $1trillions and a market that went down nearly-2% and then back up +6.5% to close overall +5.75% (Dow). Ups-n-down, and then up up and up. There is no doubt markets are overly stretched but continuous strength in the face of overbought indicators is a sign of strong momentum. Markets continues to discount all the bad news and turns bullish mad on almost at every ray of hope; I hope that light at the end of tunnel is not another locomotive.

    For OPN portfolios, so far, are doing fine this month as well. We increased our investments by almost 3.65% last week and in spite of this increase, we are up overall +7.6% x-commissions and +5.3% including commissions for April portoflios.

    • IWM Portfolio is up +7.46%;
    • X portfolio is up +17.2%,
    • USO portfolio is up +6.88%;

    So far we have deployed 37.8% of assumed 10K capital.

    This is the 15th month of positive gains for OPNewsletter (out of last 16) since I reopened it in Jan 2008 and this period includes one of the worst bear markets, at least of my life time. The success spells for the consistency and for the promise from OP “Powerful option trading strategies for Consistent Income“, month after month. And hence earning the buck for the work i.e. “No Profit, No Fee“.

    I shall start looking for May’09 portfolios soon. If you would like to sign-up for the OPNewsletter, pls click here.

    I hope you read a big picture post. There have been multiple +20% type rallies and even this time around as well. But this time it is different, it is on sustained buying power as well as sustain drop in selling pressure. But hey markets can do anything, anytime, so just be cautious and if you do plan to go long, you may wanna go in increments.

    If you would like to trade alongside OPNewsletter, pls click here

    Have fun, Profitable Trading, OP

  • Fasten Your Seat Belts

    Though it is difficult to say anything like this these days, but still I am inclined to say this; Fasten your seat belts. I hope you had sufficient time to prepare for hedging as I shared my “heads-up” after Thursday close last week. As of this writing Dow futures are down almost 200 points, that’s little over 2%. The losses were widespread across Asia, (Japan Nikkei 4.5%, Hong Kong down 4.7%, India;s Sensex Down 4.5%, and Singapore’s straits times little over 4%).

    For OPNewsletter, we are comfortably positioned for the sell-off. In fact for the April’09 portfolios we are up +6.8% (x-commissions) and we have invested nearly little over 34% of assumed 10K capital. Entering into the Friday, we were relatively short delta so this sell off might offer some nice opportunities (you may sign-up for the waitlist here)

    As the week starts, there is lot going on. GM’s Rick Wagoner Forced Out After Failing Obama Scrutiny; Geithner Says Some Banks to Need `Large Amounts’ of Aid and Warns Against Tax. Financial sector seems to be opening on a weak note unless Mr Geithner changes his remark (remember the reserve currency remark). I think the stage is probably being set for the next round of funding request.

    The “large amount of aid” news is probably shaking confidence world-wide and fear might be resurfacing. Soon we shall also start preparing for earning seasons. So friends, a lot more coming on way, fasten your seat belts and be prepared.

    Trade carefully, Trade Profitably, OP

  • Get Ready for Next Bear Leg and Start Hedging

    As of yesterday’s close, the DJIA has gained 21% since establishing the March 9 low. The S&P 500 and NASDAQ have gained 23% and 25%, respectively, over the same time period. Wow, we have had wonderful rally so far, >20% gains in matter of less than 3 weeks; and probably one of the strongest rally that we have seen in this bear market. To make the bullish case even stronger, the rally continues to extend despite overbought conditions showing solid strength.

    dow-great-depression-pix-1But, is this short covering or real buying? During great depression, there were almost 8 to 9 rallies depending upon what you consider rally. Market topped out on Sept 3, 1929 @ 386.10 and then it dropped 18% fairly quickly (almost 1 month) and recouped 50% of losses in few sessions. Then it dropped again from 358 to 212 i.e. (60%) in about a month’s time (Mid Oct’29 to Mid Nov’29) and it recouped slightly less than 50% of this fall in next few weeks then there was another correction before indices marched upward to regain 50% of losses from all the way from Sept’29 top. The rally continued till Mid April’30. There so many sharp snap back rallies till Jul 8,32 when Dow bottomed at 40.60 never to see that level again.

    In the current scenario, from a 14,198 top to Mar 9 low 6470 for Dow,  the 50% target will be around 10,334. So there is all likelihood for indices to go those sort of levels in extreme cases before resuming any downward trend assuming the economy continue to deteriorate. But before Dow even touches 50% level, there will be minor resistance at 8,000 followed by strong 8,900-9000 band.

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  • OPNewsletter- Mar’09 +8.8%, Apr +2.4% (Open)

    March’09 portfolios were closed +8.8% (excluding commissions) and +5.6% (including commissions). I used up about +46.7% of the assumed 10K capital for OPNewsletter. This result doesn’t include excellent results from bonus trade alerts.

    market-movement-mar09-opn-portfolio When compared with broader markets, this was probably one of the best months for OPNewsletter. Look at the major market movements since we opened the Mar (Mid Feb’09) portfolio. RUT traveled almost -20% south; and DOW, S&P500 and Nasdaq ranging from -14% to -16%. All this was followed by sharp snap back rallies. Isn’t this amazing, almost 20% back and forth move in one month. I have not researched to find if this is one of its kinds or has happened before. But whatever be case, this is not income trader’s best friend. This was surely not an easy period. In fact one of the toughest and most volatile periods, at least of my lifetime (leaving aside Oct 1987 crash). Hence preserving capital and delivering just positive results itself is good enough. One of the strategy I used was to focus only what was opened and keep cash free to make adjustments as needed. This served nicely without really triggering panic due to shortage of capital. For Option Trading Strategies, We used multiple strategies i.e. Calendars, Credit Spreads, Digonal Spreads and so on. I however, decided not to open an Iron Condor this month anticipating extreme movements which also served nicely (There is not a single losing Iron Condor since re-opening of OPNewsletter).

    For OPNewsletter, The best performing portfolio was USO which delivered +22.8% and it was also rolled over to Apr. I expect this portfolio to deliver +50% by July. The worst portfolio was ABT which was almost break-even (+0.89%). MCD delivered +5.5%. A tough month though, it required greek’s analysis, technical analysis, gut feel and past experiences with similar situation (VISA, May 2008) helped sail through this month.

    Some of the excellent intraday trades, results not included in OPN tracking, were +42% on SRS, +58% on VIX, CF arbitrage of $6, DECK for +220%, AZO (+27%, +39%, +73%), SKF +20% to +50%, FDS lost to break-even, NKE earnings +22%, DELL earnings amongst others. As mentioned, These results are not part of OPN tracking.

    We are nicely positioned for Apr’09 portfolios as well and so far invested only +19.7% of assumed 10K capital. I shall be opening a few more portfolios next week, if you would like to join, pls sign-up for the OPN waitlist.

    Those who could trade intra-day, markets offered wonderful trading opportunities, specially on the Expiration day. A smiling butterfly was shared with all the free members as well, that resulted into >+100% gains. Hope folks who followed invescafe/speculative trade alerts (some of those listed above), probably had some good opportunities that I played for intraday trades.

    (You may want to sign-up for the Basic Membership (Free until Dec 2009) that I use to share free trade alerts for registered members).

    I have been experimenting with several underlying/strategy combos over past 3-4 months, with real money. I think I am ready for opening new Portfolios/newsletter(s) to take advantage from current environment. I shall share more on this later.

    One final message, markets are not out of woods yet, pls don’t let complacency set-in, these are extraordinary time and it requires one to be taking extraordinary steps.

    Trade Carefully, Trade Profitably, OP

  • SKF Smiling Flies, +100%

    The free trade idea on SKF resulted in +100% gains.

    screenhunter_01-mar-21-0433 First starting with FDX and NKE, I had these puts from the starts but even those who followed the notice and decided to follow the trade must have benefitted as well. Then I shared smiling butterflies on SKF, High Risk High Reward Trade, and it closed for +100% gains for one day holding. NKE was pinned at $45 (GS, AAPL, and POT weren’t really pinned this time). Though I identified GOOG pin at 330 in the beginning but I was biased for it move closer to 325 or 335 and mentioned accordingly on the forum.

    Net net, a fantastic, thrilling and rewarding option expiration day. Congratulations to those who benefitted from the SKF/NKE and PUTs as well.

    Profitabel Trading, OP