Good Day Traders!
Well we have started off the second half of the year with a two week winning streak. The market as a whole was down for the week and it showed in the premiums that were out there.
Later in the blog I am going to premiere a new item that was spawned from you the readers. I received a literal ton of requests for this so I am obliging.
The paper trade this week is a very speculative trade that has a possibility or going either way meaning that it could be worth lots or there could be a bloodbath.
Eldest daughter is through three weeks in basic training. She is almost halfway through. I am starting to make plans to get to San Antonio for her graduation. What I thought was going to be a pretty easy trip is getting more complicated be the day. Getting all the info for the background check from different relatives and finding points where we can join up to travel together are interesting challenges. Boy is doing well in his driving for Driver’s Ed, gaining confidence behind the wheel and getting much needed experience. And youngest daughter is enjoying her summer with friends and chasing butterflies – literally!!
I have started a 10 week fitness program called MAX10. If you have done P90X is it similar, but in a group setting. I have done P90X and I really liked it, but I was alone in the basement sweating my tail off. The gym I go to had a Living Social coupon for ½ off the MAX10 class so I took the coupon and signed up. So now I am sweating my tail off with 30 other people in the gym. I can tell in the 2 weeks just completed my fitness level has improved. I do have to do some modifications due to some arthritis, but I do as much as possible and have really seen some results. For those of you like my in the mid-40s and wanting to get back into shape programs like MAX10 or P90X or any of these new cardio/weight training mix classes with limited breaks really work, but it does take a commitment.
OK let us get on with the analysis:
ANALYSIS
Here is the trade put on this past week:
Sold: PCLN 660 Call $0.89
Bought: PCLN 670 Call ($0.40) This gave a Net Credit of $0.49 or 4.90% ROI
Let us look at this trade through the lens of the system:
1. Find the direction of the market. The market overall was flat to just slightly negative depending upon which measure you used. The SPX was down until Friday when a BIG push up sent the index to just barely into positive territory. The RUT was negative for the week, but again just barely. The DJX (the Dow Jones 30 divided by 100 index) was just barely up at the end of the week after a BIG push on Friday. For our purposes I treated the market as negative since that was the way it was until the huge push Friday.
2. If the market direction is upward, use a put credit spread, if the market direction is downward use a call credit spread. Since we the market as downward we used a call credit spread.
3. Make sure there is no standard news event that will be coming out during the week that could affect your trade. There was nothing on this horizon, but the beginning of earning season for the second quarter started this week, which can lead to some volatility.
4. Choose among the following indexes - RUT, NDX, and SPX; use these equities – GOOG, PCLN, AMZN, and APPL. This week after going through the list the PCLN options were the way to go.
5. Find a spread of at least 1.5 Standard Deviations away from the strike price with at least a 3.5% weekly ROI. The trade we found after looking at all the indexes and equities we regularly use the PCLN was the one that fit the best. PCLN was 1.75 Std Dev away and had an ROI of 4.9%
6. Use your online broker’s probability calculator to get at least an 85% probability of success on your trade. This trade had an 88.3% probability Thursday morning when we put on the trade. This higher level of probable success is one of those places where we put some safety margin in for the jobs report impact.
7. If possible use the indexes of RUT or NDX where the settlement is Friday morning instead of the others that settle at Friday Close. In this case we could not use the RUT or NDX as the ROI was not there on these this week.
8. If your trade drops so that you are losing ½ of the money you expected to gain on the trade, then it is time to sell. This was not an issue this week.
9. If the market drops to within 1 strike price of your spread and stays there for more than 5 minutes it is time to sell. This was not in play either.
10. Monitor your trades, but don’t obsess on them. This was much easier this week as we had a large cushion Friday going into trading.
PAPER TRADE
This paper trade as I said is a more speculative trade, but the option premium was just so outrageous that I thought it would be interesting to see how it would play out.
Sold: VVUS 34 Call $0.63
Bought: VVUS 36 Call ($0.32) This gives a $0.31 Net Credit for a 15.5% ROI
Background:
VVUS = Vivus Inc., a pharmaceutical company that is currently banking on a weight loss drug – Qnexa – which will get final FDA approval (or not) on July 17th. The general consensus is that the drug will be approved, but it is far from a sure thing. VVUS got a HUGE bump back in late February after its rival Arena Pharmaceuticals had a weight loss drug approved by FDA and Arena was largely ignored by the market. Arena soared and put egg on the face of most of the Pharma analysts. Probably as a CYA move a lot of money moved into VVUS more than doubling the share price. VVUS has slowly climbed higher with the approach of the FDA ruling this week.
Why I made this trade:
1. The premium is just outrageous
2. Although the FDA is expected to approve Qnexa, there will likely be some restrictions on it. Depending on whom you read these restrictions could be minor – such as a label warning, to major – Qnexa not allowed to be marketed to certain groups of people, like pregnant women and people with young children in the house. The general point is Qnexa will most likely not be available to all obese people. Arena’s drug is available to much more of the populace. This doesn’t bode well for VVUS.
3. The stock will have to move 26% in three days for me to get hurt on this trade.
4. I went the call side because the consensus of analysts on VVUS is that if the drug is approved there won’t be a large price move, but if the drug is not approved there will be a huge downside move.
Why I am leery of this trade:
1. This trade uses traditional monthly options. VVUS doesn’t have a weekly market in options
2. The option premium is keeping up with time decay, and sometimes premium is being added. In technical talk negative Theta on a call option is not the norm. The overall consensus is that Qnexa will be approved as I said above, but it is far from a foregone conclusion.
3. There is a BIG news event coming out before the option expiration. The FDA decision will make or break this trade
Currently I am negative in this trade. The option premium has been keeping par with time decay, and this makes it hard to make money the way I am used to making it. The success of this trade depends on me believing the analysts in that if the drug is approved there will not be a large upward move in the share price. I am not at one of my loss sell triggers, but I am monitoring the trade.
BIG NEWS!!!!!
Ok – due to OVERWHELMING DEMAND I am going to add a new segment here. I am going to add some stocks where you can use a covered call and/or cash secured put strategy. I will primarily focus on covered calls, but from time to time give up some cash secured put ideas.
Now some important things to keep in mind with this:
1. A covered call strategy is NOT a short term income producing strategy.
2. Covered call selling is a long term strategy. That is my opinion. There are websites out there that will tell you that you can make big bucks using a covered call strategy. They use stocks that are more speculative than I like to get.
3. I will put stocks out here that you can hold for a long time – several months to years. Part of the strategy is to also capture dividend returns to compliment the option premium.
4. Some will have weekly options, some won’t.
5. The capital requirements will be higher for this strategy than my normal credit spread strategy. To use a covered call strategy, you must own 100 shares of stock for every call option contract you want to sell
6. The return will be lower using this strategy than the normal strategy I use.
OK – here are the current covered call picks:
Symbol Company Stock Option Option Initial Annualized
Ask Bid Outlay Return
VVUS Vivus 27.11 July 34 .35 2,676.00 14.2%
MCD McDonalds 92.40 July 92.5 .66 9,174.00 7.85%
Notice that to do these two ideas you would need $11,850 for two options contracts. For this outlay a total of $101 is yours. This would give a .85% ROI over the next week, and this comes to a 9.37% annualized blended ROI. VVUS is more speculative while MCD is a stock that I have owned for years in my child’s UGMA account. Neither of these have weekly options at this time.
VVUS Chart
MCD Chart
DISCLAIMER: Hashley Capital Management, LLC; as well as I are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in options is risky and can result in loss of capital. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC and are the opinion of Hashley Capital Management only. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence, that is your decision and yours alone.
Reach me @:
Email: hashleycm@yahoo.com
Twitter: @awagel01
Stocktwits: awagel01
Or leave a comment on the blog
TTFN
Ash
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