OptionPundit

Tag: put diagonal

  • OPNewsletter (Dec’09) Up +10.7% (Open)

    OPN December 2009 portfolio is up +10.7% (still open). We invested 73.9%  of capital per portfolio spread and all the mini-portfolios are making money. The Iron condor sub-portfolio is closed for +14.14% gains. December portfolio’s weekly update is now available at the OP Discussion forum (Member’s only section). To access the Subscriber’s Page of the forum, sign on with your own username and password by clicking here.  We have already started opening income portfolio for Jan 2010 and will complete full portfolio in the coming weeks.

    OPNewsletter has consistently outperformed the broader market. Pls read customer reviews or If you would like to sign-up for OPNewsletter directly, pls click here to sign-up for the wait-list (as the subscription is by invitation only).

    An important shift seems to be taking place amongst market participants’ minds i.e. “less bad is good” seems to be changing into “just good is not good enough”. If you are looking for playing an income option trading strategy for downward move while still protecting limited upside, try a put diagonal that benefits more from the downward move.  Albeit, do note that markets are now entering into typical bullish period of the year (Dec-Jan). This whole rise from March bottoms had been full of contrariness, are we about to see any other contrary period?

    Are you enticed by “teasers” from newsletter service providers to make loads of money in the stock and options market? I encourage you to check out “stockgumshoe” where Travis does an excellent job of decoding the “next million dollar” making opportunity. Then there is fascinating Dr Brett of TraderFeed, always someting interesting to read and widen knowledge horizons. I suggest you to read the first post in a series that he is directing toward developing traders. He plans to write about topics that “no one told me about when I was learning the ropes”. Check it out.

    If you are a web developer who would like to work on a few cool web 2.0 projects for OptionPundit (or if you know someone who does), pls write to OptionPundit(at)gmail.com.

    Profitable Trading, OP

  • AAPL +35.6%; MCO +3.5%

    Basic members were alerted for 2 free trade ideas. One is closed for nice gains while other trade has been successfully rolled to next month.

    Starting with Moody’s (MCO) trade idea. The basic premise for that trade was shorting of Moody’s by hedge fund manager David Einhorn, who correctly questioned the health of Lehman Brothers four months before its collapse. I wanted a trade that will still yield profit even if I am wrong. The trade idea (An Option Trader’s Way to Short Moody’s) was first shared with the Basic OP Members (Membership is free until Dec 2009, click here to sign-up). In spite of MCO rising almost 10% against my desired direction, we successfully rolled the trade to July gaining +3.5% in June.

    The other trade was on Apple (AAPL) where I shared my bearish stance based on last several year’s historical data (and pleasantly, history did repeat) –

    At OptionPundit, we played this event around this time last year and made good gains. While the same approach (Bearish bias) has pretty good chance of making money, context however matters.

    I shared the trade via comments section on what exactly I was planning.  Since then AAPL has been falling almost non-stop. I closed it at various profit points, the largest being +35.6% gains. Another OP reader Ron  shared his ideas for a ratio spread.

    The basic membership to the OptionPundit site is free until Dec 2009. If you would like to be a member and receive alerts to free trade ideas or important market commentary, pls click here to sign-up

    We are about to start July’09 OPNewsletter portfolio and this is a record month in the making. If you would like to sign-up, this is an appropriate time to join OPNewsletter.

    Profitable Trading, OP

  • Green Mountain Too Hot to Hold

    Today Barron’s reported that GMCR may be too hot and investors should look closely at the company’s profits through purchases from royalty-paying licensees. A few weeks back I published my bearish bias contrary to what Zacks had (Aggressive Buy) and suggested two different ways to trade GMCR. With shares trading at almost 60 times earnings for the current fiscal year, investors should look closely at why earnings beat analyst forecasts by 40 percent while sales beat by only 8 percent, Barron’s said.

    The earnings increase was driven by an 85 percent increase in royalties the company gets from other companies selling coffee in its proprietary single-serve cups, called K-Cups, Barron’s said.

    GMCR will trade on post split (3 for 2) today. We’ll see if Barron’s profiling gives much needed correction to GMCR when it starts trading today; thus increasing my gains and probably for those who shared similar opinion.

    Profitable Trading, OP

  • An Option Trader’s Way to Short Moody’s

    Shares of Moody’s Corp (MCO) fell sharply on Thursday after hedge fund manager David Einhorn, who correctly questioned the health of Lehman Brothers four months before its collapse, disclosed he was shorting the venerable ratings agency. His logic- the parent of Moody’s Investors Service undercut the value of its primary business — assigning grades to bonds — after giving AAA ratings to insurer AIG (AIG), mortgage banker Fannie Mae (FNM), bond insurer MBIA Inc (MBI) and other companies later revealed to be badly overextended.

    Now neither I have as much resources nor as close information as David may have. But I do want to play according to his bearish bias on MCO. I also want to protect my losses for what if he is wrong?

    I am playing it via Put diagonal spread and I shall write put against it month after month. If he turns out to be right, I might multiply my returns. If he is wrong, I may still make money.

    mco-bearish-put-diagonalHere is the trade idea- Buy Jan 10 25 puts and sell Jun 26 puts for 2.80 debit and 1.00 margin, net cost $3.80. My break-evens are 23.8 and 29.8 by June 20. If Moody’s is in between those, I shall be making money (assuming no signifciant fall in Jan IVs). I can then roll June options to July’09 and keep doing so month after month (provided it remains bearish).

    If however, By June 20, MCO stays around $25, the returns will be around $1.20 i.e. +30% for almost 3 weeks holding; and after rolling a new month with new returns will start. The risk to watch out is the sudden drop in the stock; two scenarios either gap-down at open or drift lower during intraday. Not much I can do in the 1st one, but for 2nd scenario I may use intraday trading/swing strategies where buy back the short puts and sell those again at the close or at the “upside reversal” of MCO.

    Disclaimer- As of this writing I own the above spread but I may change my position any time. Should you decide to follow this, pls do due diligence before investing. Pls make sure you have worked out risk managemet plan in advance.

    Profitable Trading, OP

  • Who is defying The “D” word

    gmcr-10-yr-chartIn such a market when almost every other counter is falling apart, it’s hard to imagine that there might be a company that is defying gravity day after day. It has rounded-up 78X returns since the great bull started in Oct 1998. Talk about technical indicators and everything is probably going to tell you, it’s overbought, and by the way, it has been so for time and again, dare you touch it?

    And last guess who might be defying the “D” word, a Coffee company, check them out here.

    Green Mountain Coffee Roasters, Inc. (GMCR) is engaged in the specialty coffee industry. The Company sells over 100 whole bean and ground coffee selections, hot cocoa, teas and coffees in K-Cup portion packs, Keurig single-cup brewers and other accessories. The Company manages its operations through two business segments, Green Mountain Coffee (GMC) and Keurig, Incorporated (Keurig). GMC sells whole bean and ground coffee, hot cocoa, teas and coffees in K-Cups mainly in domestic wholesale and retail markets, and directly to consumers. In addition, GMC sells Keurig single-cup brewers and other accessories primarily directly to consumers and to supermarkets. The majority of GMC’s revenue is derived from its North American wholesale markets

    Zacks has a buy list. It is a company that has been growing topline rather spectacularly (check out the financial figures here ) All nice!. Trading at about 50 times this year’s expected earnings, and about 40X next year’s earnings. Amazing performance by almost any standards. When best of the breed are trading in their teens, GMCR is sky rocketing. Fantastic.

    Hold on for a moment, the coffee company’s founder Chairman Robert Stiller has amassed his fortune, he sold nearly 200,000 shares for $14.6 million of the skyrocketing stock. Though he continues to own 4 million shares, representing a 16.1% stake, but still the last price sold was 80% more than what he got just two months back in March by selling another 200,000 for about $40. Don’t conclude too much from the sell as he has been selling time and again for sometime. You may track his previous sells here, but I think this time he probably has judged correctly that there are better bargains than GMCR now as the markets are correcting (my way of fun).

    Bottom Line, I am not with Zacks’s perspective and I would like GMCR for a bearish play. I don’t exactly know when will the fall start, and therefore I have two strategies to play.

    • First one is similar to covered call, but let me call it covered put. It is like a Put diagonal spread where I am buying the leap put and selling the current month’s OOM puts, and then roll it over. For instance, I may choose to buy the Dec’09 $75 puts for $16.70 per contract and then sell June 70 Put for 4.20 bringing my net to $12.50. My break-even till Jun will be $58 and $86. However, I not going to wait till then, as soon as I am done with my theta gains, I shall be rolling (I’ll have Jul to Nov and then final one Nov/Dec sell). One needs to nimble though, in case it starts move strongly in any direction (watch-out will be exceptional gap-up or gap down), I may play intraday as well, by selling (or buying) one and then buying (or selling) it back. This strategy allows me to be incorrect.
    • Second strategy is rather simpler. In this case I might choose a June (an example) 75/65 put debit spread. the risk/reward ratio will be 1:2. But then there is not much room for error. Once may eliminate that risk by choosing outer months, but it has less room for error than the first strategy.

    There may be more and more strategy, bear call spread, OOM calendars, OOM butterfly, strangle/strangle swaps etc, but I am not so much excited about other strategies (for my style).

    Disclaimer – This company is in a very strong move up and I am talking contrary to market, you may lose money using my perspective. I currently do not own anything in the GMCR, but I may open/close any type of positions any time. Pls do your due diligence before investing even a single cent.

    Profitable Trading, OP

  • Put Diagonal Spread- An Income Startegy to Play Downward Move

    The Dow has still been unable to regain the important resistance of 11,750 (few points here and there). It danced around that level for a while before falling like a hard rock. In this post, while I shall be sharing about Put Diagonal Bearish startegy, I shall also briefly touch upon current market state.

    Dow is around 11,100-200 and the next level of key support is 11,000 followed by the July 15th low of 10, 827. As I mentioned earlier, the real important area to watch is 10,697 or so which is almost a 50% retracement of the bull market that started Oct’02 on and peaked in Oct’07.

    I had earlier mention on how one can survive such a market. One of the key things I would like to highlight is that one needs to be very nimble in decision making these days. You can’t prolong the decision making. For instance- I mentioned that Gold was oversold, it bounced for a very short period but look at it now, it has turned bearish and now it is to test the level it took over 20 years to cross. I booked some gains, some losses (a lost vertical spread even for OPNewsletter) but since then I am in bearish trades for this.

    How do you play bearish moves while protecting for any potential upward move?

    Put Diagonal Bearish spread is one such a strategy that enjoys some excellent benefits and can be used when your analysis indicates that the price of a stock, ETF, index, or commodity futures contract has strong probability of going steadily (not abruptly) lower over the next month (s).

    This Put Diagonal option strategy, can be a debit or credit spread and can be done in multiple ways depending on how aggressive you want to be. This is a good trade to do with LEAPS in combination with short-term options. In the conservative strategy, buy an OTM (Lower strike price, e.g. DIA $105) Put with 60 days or greater to expiration, and sell an OTM (higer strike price e.g. DIA $110) Put with at least 30 days until expiration and at most 30 days less until expiration than the purchased Put.

    Here are some of the key features of a Put Diagonal spread-

    1. Because diagonal spread is essentially a vertical spread+ calendar combo, in most cases it is a vega positive trade. I’ll keep it simple and won’t into IV smile curves etc. With the fall in underlying, the average IVs generally rises. So falling markets are Put diagonal’s friends.
    2. As this is a put diagonal spread with bearish bias, it’s delta negative. Falling markets will general profits due to short delta.
    3. Since you are selling short options and buying the long option, this trade is theta positive. So as the time passes by you are making receive checks from theta every day.

    All key Greeks are in this trade’s favor. But one needs to be watchful. Watchful because even though it will make money when underlying is falling, it may lose money for that day. It only gains because of IV increase and with theta accumulation accompanied by partial short delta.

    When to enter– You have bearish expectations for the underlying asset, but you do not expect the asset price to fall too quickly. Pay as close to $0.20-$0.50 for debit/credit (excluding margin). But do note that there should not be a big IV skew between sold Puts and purchased Put. IV skew exist for a reason and implies that a big move probably is on the way. One also need to look at the risk/reward of the trade and selecte short strike where you expect the underlying to be at expiration.

    Decide when to exit- Set your exit rules in advance so you don’t have go through the emotional gyrations during panic hours. I generally prefer 15% gains for exit and 12% for loss exit but it also depends on where the underlying is in relation to expiration date. IV also plays an important role. If IV keeps falling spoiling the risk/reward, there is no point in continuing to keep the trade unless I think IV is about to rise.

    Adjustments-
    You may roll the short options to next month if you are using leaps/longer term options for back month. You may convert it into a calendar, vertical or double diagonal. There are various options which will be applicable depending upon the time to expiration, underlying position and IVs in addition to your outlook about the underlying move.

    Key watch-out– It’s an excellent startegy and allows lot of flexibility. However, the success if this trade depends upon selection on underlying, selection of short strike, IV profile and risk management. A sound trading plan is required before executing this.

    Continue to watch this space, I may share some trade ideas as we are going through this bear market. Feel free to add your comments or question to know more about the strategy.

    Profitable trading, OP