HI all,
Well, this is not exactly like the past two weeks, but similar. We dropped AAPL this week and went with a GLD ladder trade. AAPL continued its downward slide, but the call premiums dried up as the market thinks that AAPL will continue to slide a bit.
The Blackbelt Promotion Ceremony was this afternoon where I and another young man received our 2nd Dan Blackbelt. There was another young man who received his 1st Dan and seven junior students who received their blackbelts. This is a big step forward. Now I REALLY have to know what I am talking about!!! 2nd Dans are expected to help out with classes and get their instructor certificate in time for the 3rd Dan testing. I really do enjoy the martial art as it gives me a way to train my mind and body.
MAX10 started this week, and man it put me through the paces! We had a day off when the rec center was closed for the funeral of a worker who was a friend of mine Deb Duff. She died unexpectedly in her sleep last weekend. It hit me particularly hard because she was only 6 years older than me. She is the person who set up my first training program after I decided to get back in shape after taking a couple years off from soccer refereeing. I had gained a few too many pounds and the leg issues were getting worse not better. She set up a regimen that got my legs stronger and got me my wind back and made me want to get better – hence the MAX10.
Youngest child had a volleyball game Friday afternoon. They won and she did well, got some serves over and hit the ball well. Tumbling started and she really got into that! The fledgling football program at the school didn’t fare as well. The got creamed again. This is a common occurrence as the team is basically the age of a JV team having to play a Varsity schedule. In 2 years they should be pretty good as all the 9th and 10 graders will be upper classmen by then. But for now they are learning how to lose gracefully.
Eldest daughter is two weeks out from going to her first duty station. Her birthday is Tuesday when she will now be legal in all regards except drinking and lower car insurance rates. That is right the big 18. It is hard for me to believe that she is out on her own – she is my little girl. But she is finishing Tech School passing her tests with flying colors and just all out killing it. I am very proud of my Airman! She will only be about 12 hours away at her duty station, so there might be a road trip in my future.
Our boy is doing well in school and I think recovered from homecoming. He loves to be in the shop downstairs making things and it is fun to watch the enthusiasm he brings as he is showing the latest creation.
AAPL and GLD were been good to us the past few weeks. But AAPL’s continued downward slide has caused the option premium to dry up well below our 3% limit. GLD on the other hand was still cranking up the returns. As I said in the intro we did a ladder trade this week. A refresher – a ladder trade is when we use one equity/ETF/Index for our trade and the credit spreads on in multiple strikes. I will break down the individual trades in the analysis section, but the overall trade looked like this:
GLD 171.50 Put $0.20
GLD 170.50 Put ($0.11) This gave a $0.09 Net Credit
GLD 170.00 Put $0.15
GLD 169.00 Put ($0.09) This gave a $0.06 Net Credit
This ladder trade gave a total ROI of 7.50% for the week. The ladder trade idea was used because after going through our list of stocks and indexes and ETFs that we trade in only the GLD had any returns that met our 3% criteria. As you recall this is our starting point. Then I moved to the next set of criteria which is the probability metric and the Standard Deviation metric. These two trades are where we ended up. I chose to ladder because I did not want to have all my eggs in one basket. And once I found the top part of the ladder anything below it would be safer.
ANALYSIS
Above is the chart for both trades. Trade #1 is the white lines and trade #2 is the brown lines.
GLD 171.50 Put $.20
GLD 170.50 Put ($0.11) This gave a $0.09 Net Credit for a 9.00% ROI
1. We put this trade on Thursday morning after watching the price action rise above the 20 and 50 Day SMA after hovering right around it all week. When both SMA lines are broken upward that is a Put Spread signal.
2. The price was above both the 20 day and 50 day SMA when I made the trade. Now I look for a set of strikes that are at least 1.5 Standard Deviations from the underlying market price at the time of the trade. The 171.50/170.00 spread fit that bill. Now I know that the 170.00/169.00 will also fit the bill as we are moving further away from the underlying price. More on this later
3. The Probability Calculator gave the 171.50/170.50 trade a 90.04% probability of success. Have set a minimum of 85% on the probability calculator but if I can go higher I will. The 172.50/171.50 trade when I looked at it also met all the metrics for success, but had an 85.00% probability score. Now in hindsight this would have worked as the closing price for GLD for the week was 172.62, BUT this was the closing price and there was a rally in the last hour of trading from 172 up to the 172.62, so there would have been lots if anxious moments watching to see if the trade would have been profitable. By going out a little further to the 90.04% probability we alleviated much of that stress.
4. The IV > HV indicator also showed us that this was a good stock to put a spread on as IV>HV. This gap narrowed so that at the end of the week it was almost non-existent. Next week we may not be using the GLD as this indicator is fast losing steam.
Trade #2:
GLD 170 Put $ 0.15
GLD 169 Put $(0.09) This gave a $0.06 Net Credit for a 6.00% ROI
Both parts of the ladder were put on at the same time Thursday morning.
1. The probability calculator gave this trade a 94.65% success probability. I knew this one would have a higher probability since it was further from the underlying price at the time.
2. Being further away also increased the Std Dev but in this case barely so. The first trade was right at the 1.0 Std Dev marker and so was this one.
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
Do not have one of these yet, but looking.
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 18.55 Oct 23 .32 2,676.00 14.3%*
MCD McDonalds 91.00 Oct 100 .10 9,174.00 1.3%
* Changed this calculation from using the stock price at call option sell to using the initial investment.
VVUS has sunk a little lower in price since we put on the next covered call. As we said last week this is part of the high volatility of a biopharma stock. I am ok with it right now because of my long term outlook for this stock. Based on our initial investment we have a 14.3% ROI and so far for the year we have generated 3.14% return over the 3 months we have covered calls on VVUS. This would equate to a 12.6% ROI for the year I will take that any day.
MCD bottomed out in June after rising to new highs for the company. Lately we are seeing a pattern of higher highs and higher lows. This means that the stock is slowly moving back up to where it reached new highs earlier this year. The June lows were hit when a management change occurred. Now that the company seems to be over that little hiccup we are back moving slowly but steadily upward. We are almost back to breakeven on the stock price and have made some good money with the covered call premium and dividend money.
DIVIDEND STOCKS
Here is our Dividend Stock Portfolio:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 38.58 08/27/2012 2.71%
AGD Alpine Global Dynamic Fund 5.76 5.97 08/27/2012 12.18%
AOD Alpine Total Dynamic Fund 4.37 4.49 08/27/2012 14.80%
MO Altria 34.26 34.00 08/27/2012 5.17%
INTC Intel 22.87 22.68 10/01/2012 3.94%
Current Prices as of 10/05/2012 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
MSFT Microsoft 29.85 10/05/2012 3.08% 28.00
PG Proctor and Gamble 69.63 09/21/2012 3.25% 62.50
JNJ Johnson & Johnson 69.65 09/21/2012 3.56% 65.00
MSFT – This is close to our target and is heading down to it. Hopefully soon it will be in our range. This stock is literally a household name. If you have a laptop or desktop computer you probably are running a version of Windows on it. Also if you are like me your productivity suite is a Microsoft product. Word is the standard business word processor, Excel is the standard spreadsheet, Access is the standard database system, Outlook is the standard mail program, and Power point is your default presentation software package. MSFT has a lock on these markets. The company is generating tons of cash and is a stable dividend payout stock.
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
How do I know when to pull the trigger on an option spread? I go through your system, but when I get to the price I don’t know how to get a good price.
First let me say that I cannot tell you exactly when to pull the trigger on any trade that you make. I do not have the SEC licensure for that. BUT what I can tell you is how I make that decision by using my system. Let us take a look at one of the trades I did last week.
1. Decide which way the market is trending. Last week the market was trending flat to up so we went with a Put credit spread
2. Next we look for a stock/index/ETF that is on our list that will give a minimum of 4% return as well as having the IV > HV. Below is our list:
a. Stocks:
i. AAPL
ii. PCLN
iii. AMZN
b. Indexes
i. RUT
ii. SPX
iii. NDX
c. ETF
i. GLD
ii. SLV
iii. QQQ
3. After going through these GLD was the only one that met our criteria fine tuning:
a. Decide the spread size. Using the GLD the spread size was $1 meaning $100 of margin per contract. This allows us to maximize the amount of premium collected
i. Most spread sizes will be $5 or $10 meaning using $500 or $1,000 or margin
b. Now start moving down the option chain for a put or up the option chain for a call spread. This is how we got the first trade of 171.50/170.50 on the put spread.
c. Now, you have the bid ask price. I try to go to the midpoint of the bid-ask spread and set my limit order. DO NOT USE MARKET ORDERS!!!!!
d. If you use a market order then you could get caught in a momentary swing that greatly reduces your return. By setting a limit order you are telling the market that that is the minimum you will accept. This will protect you from getting caught in a premium trap.
e. If you don’t get your order filled right away don’t panic. Let the market makers work their mojo. One of my maxims is “It is better to not have a trade than to make a hasty one.” If the market is hovering around your order but not biting, then you might have to adjust, but don’t start adjusting after 3 minutes of your order not getting filled.
f. I don’t just get to name my price. The option chain shows my prices and that is what I use, just like everybody else.
Good question! Keep them coming!!!
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.
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TTFN
Ash
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