Hey all!
This week was a blur of activity. Youngest daughter had 4 volleyball games this week. She did well, but got a nice little bruise on her forefinger from serving. The team did ok. They split the week going 2-2. So far they are running at about .500 this year. But only a couple of teams have been way better than them.
I completed my 2nd Dan testing this weekend. It was an interesting way to spend my birthday. I was a stressful, hard, sometimes painful way to spend my birthday, but I loved every minute of it! I only have a few bruises and scrapes. My knees are sore but the rest I did today is taking care of that. I will find out if I passed in about a week.
Eldest daughter got 96% on her Block 2 test in tech school. I am so proud of her! She is just killing it! She has about a month to go before shipping off to her permanent duty station
Another great week for the weekly options trader in me! We had another successful week in the markets.
Ok now on to the trades:
ANALYSIS
Here is last week’s trade #1:
AAPL 645 Put $ 1.05
AAPL 640 Put $(0.66) This gave an Net Credit of $0.39 for a 7.80% ROI
The wait for the new IPhone is now over. The release date has been set and the product revealed. AAPL just shot up last week hitting multi year highs for the stock based on this new info. As the stock went up and up we immediately went to the put side and were very well rewarded.
1. We put this trade on Tuesday after watching the price action continue to move upward while the premiums remained almost unchanged on the put side.
2. The price stayed above the 20 day and 50 day SMA all week, and in fact is outpacing the upward slope of both lines. This was our first clue to use the Put side.
3. We went out slightly more than 2 Std Dev from the strike price and used our probability to get a 94.0% success probability.
4. The trend was still going up quite rapidly so any thought of turning this into a Condor Type trade was quickly quashed.
5. Last week I talked about a new indicator to help identify good trades. The IV > HV indicator. Most online brokers have this information, but sometimes you have to dig a little more to find it. Trademonster is my primary broker and on the quote page this graph is conveniently right below the price chart. When Implied volatility is greater than historical volatility this shows good option premium, the bigger the gap between Implied Volatility (IV) and Historical Volatility (HV) usually the better the option premium. IV > HV = good trade indicator. This indicator was used this week and it worked well.
Trade #2:
GLD 163 Put $ 0.29
GLD 161 Put $(0.16) This gave a $0.13 Net Credit for a 6.50% ROI
GLD is a trade I like to do because there is little price movement normally. This week was not that normal case, but the price action was almost continually upward. Again the IV > HV indicator showed this was a great trade as the separation between the two was almost 20%. The $4 upward price movement this week was another week of high price movement, usually a move of $1 of a high move in this ETF. Over the past month this ETF has gone from around $155 to $172.
GLD has been channeling recently between 154-173 for most of 2012 and looks to be ready to break out to the high side as tensions mount over the financial cliff and the US election and the Europeans not getting their act together.
1. The probability calculator gave this trade a 93.6% success probability.
2. At this trade we were just a little more than 1.5 Std Dev away from the underlying strike price.
3. Our new indicator the IV> HV was in our favor.
4. The trade was better than our minimum 3%.
5. The overall trend was up so we go put side.
PAPER TRADE
MS 13.00 Call April 2013 Qty=10 Cost=$4,200 Mkt Value $5,450 Gain=$1,300
As I was searching the weekly list for potential trades I came across this stock. Morgan Stanley (MS) looks very good from a technical standpoint. The weekly options just didn’t have the premium to make this a viable trade. But with a good setup like the chart shows this had potential for a profitable trade if we went out a little further. Let us walk through this trade:
1. The chart is showing a definite up trend bouncing off support of $13.
2. At the $17.08 closing price Friday we are closing in on the 52 week high of $21.19
3. IV > HV
4. The options picked were about 7 months out, this gives us plenty of time to let our anticipated up move while lessening the effects of time decay.
5. A deep in the money call was bought because:
a. It is already in the money so the option premium will continue to rise as underlying stock price rises
b. The amount of the premium will be greater than an out of the money call that moves into the money
6. The original target for the underlying price was $17.50. The charts show that this price move could easily go to $18.50 since the stock closed at $18.24 Friday. We have already passed our anticipate $800 profit and still have many months to let this one ride. Our new profit stop is at $1,500.
7. So we are letting this one ride a little further. I am prepared to let this ride up to $20 dollars. This is my hard stop, and I will exit the trade and take the profits at that point at the latest. We are at 31% profit right now and are just looking for a little extra.
COVERED CALLS
We have been doing covered calls on Vivus and McDonald’s. We are continuing with these two stocks in our covered call adventure.
Symbol Company Stock Option Option Initial Annualized
VVUS Vivus 22.08 Sept 25 .27 2,676.00 12.1%
MCD McDonalds 91.70 Sept 92.5 .16 9,174.00 2.09%
VVUS closing price Friday came in at $22.08 and looks to be in a holding pattern. I thought were starting an uptrend last week, but that just didn’t materialize. Now it looks like our shares will be safe from the call and we can start to look for the next months covered call to write. We are a week away from the monthly expiration and feel very comfortable with our $27 in premium per covered call. Right now the $24 or $25 strike looks like appealing choices.
MCD is continuing the uptrend in price after bottoming out in the high $80s. We have a possibility of getting called away, but if we do we will have a good short term profit on our hands. We have 3 months of option premium and our current strike is above our purchase price. If it gets past the $92.5 price level and we get called away this will have been a VERY successful trade. We will have had three months of call premium, plus we will get $70 in dividend for the past quarter since we held the stock past the Ex-Dividend day of August 30. Plus we will make $76 if we are called away.
Remember, unless we hit a 15% stop loss point we will continue to use these covered call stocks to generate income and not worry about the day to day or month to month price fluctuations. We will concentrate on getting the most premium we can safely from these stocks.
DIVIDEND STOCKS
Here is our Dividend Stock Portfolio:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 38.12 08/27/2012 2.65%
AGD Alpine Global Dynamic Fund 5.76 5.93 08/27/2012 12.52%
AOD Alpine Total Dynamic Fund 4.37 4.55 08/27/2012 15.10%
MO Altria 34.26 32.94 08/27/2012 5.16%
Current Prices as of 09/14/2012 Closing Price
Each of these stocks carry a 15% stop on them, and we are nowhere near that on any of these stocks. If 100 shares in each stock is held that will generate $416 in dividend revenue assuming no reinvestment. This gives a 5.10% return. This is a pretty good return in this market and it is very safe. Two Blue Chips and two funds that are diversified in sectors and globally. If reinvestment is used that number goes even higher.
I have developed a watchlist for this Portfolio. These are stocks that basically meet the criteria we have: (1) a moat business model, (2) dividend of at least 3%, (3) solid fundamental analysis numbers. Here is our watchlist:
Ticker Name Recent Price Date Div Yield Target Price
PG Proctor and Gamble 69.16 09/14/2012 3.25% 62.50
JNJ Johnson & Johnson 68.47 09/14/2012 3.56% 65.00
INTC Intel 23.37 09/14/2012 3.85% 22.00
INTC – The slow downhill slide of this stock is still going, getting closer to my buy price. The lowered guidance means that Q4 will probably get a boost as long as INTC hits the new numbers. They are the pre-eminent company in their sector and I do feel confident that they will make the transition to tablets as everybody is saying that is where the PC market is going. Now I will just try to pick up this World Beater on sale.
JNJ – I am still looking to get into this stock at $66.00 or lower. The stock is on a slight uptrend again after a slight pull back. There is a recent run from $62 to $68 and so I would like to split the difference and get in at $66
PG – I might have to wait on this one a bit. It is continuing the uptrend and is closing in on a 52 week high. The slight pullback I saw was more of a quick consolidation. So now I just sit back and wait patiently for this stock to come back to Earth. The last thing I want to do is buy at the high and wait for another high to come along. I will be patient as the chart shows that $62 is long term support for this stock. Also at this level that would raise our Dividend Yield to 3.75% AND give us lots of upside potential.
QUESTIONS
Why have you started dividend stocks and covered calls? I thought you only did weekly option spreads.
Good question, and I will answer it in two parts, but I will say generally that there were many repeated requests for my opinions on these strategies:
1. Covered Calls. The covered call is not all that different from the spreads we normally do. Many options education people will start with covered calls as the first options trade they discuss. I put it in here because the two stocks we have going on right now offer a very good return for relatively little risk. Also with MCD we have the added income stream of dividends. VVUS gives us some exposure to the pharma arena, but rewards us for that added risk with very good options premiums.
2. Dividend Stocks. Dividend stocks offer two income stream potentials. The first is the upside potential in the stock price. This one is a more ethereal on as it is up to the whims of the market. The second is the dividend. This is a reliable income stream since the stocks and funds I choose are of high quality.
By having these three strategies in effect we now have multiple income streams working for us. The best part of it is two of the three income streams require us to do nothing but occasional monitoring after the initial purchase. We still need to watch the stocks to make sure that there isn’t any big news item or fundamental shift in the companies.
What does Delta mean? I see this a lot in the readings and don’t understand it.
Delta measures the change in an options value with respect to the underlying price. For example if a stock costs $30 and moves to $33, the Delta for the stock would be .10. Long call options will have a Delta from 0 to +1.0 and long puts will have Delta from 0 to -1.0. Short positions will reverse the sign on Delta.
Delta is probably the most used of the Greeks because it tells the anticipated move in an option price for every $1 move of underlying stock price.
You might have read the term delta neutral trades in your reading. What this means is that a trader will try to get an overall Delta of 0 for the trades they put on. For example if I buy a call with a Delta of .2 I will need to buy a put with a Delta of -.2 to make the trade Delta neutral.
I really haven’t talked a lot on Delta neutral trades because the trade I do the most is never a Delta neutral trade. In order to make my trades Delta neutral I would have to do both call and put credit spreads each week, essentially doing condor type trades. That is not how my system works.
If I were doing a directional strategy I would consider doing Delta neutral trades to help hedge my position.
I am preparing more questions and will have them answered soon so if yours wasn’t tonight it will be coming soon.
I encourage any and all comments so please keep them coming. Remember I cannot give you specific advice ( Don’t ask me if you should buy 33 shares of XYZ) but can offer general information (whether XZY is a good company fundamentally or if my interpretation of the charts look good or bad)
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 stocks and/or options is risky and can result in loss of capital. Stocks as well carry inherent risks and should be well researched before any buy decision is made. 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 @:
Twitter: @awagel01
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TTFN
Ash
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