Category Archives: OPTION TRADING

NOVEMBER 20, 2017

thanksgivingHappy Thanksgiving!

As you will notice I have not been posting much this month. Briefly, I have been extraordinarily busy with work during the month of November. I had a client’s office flood and I’ve been working on a huge new construction project in Alabama so a lot of my time has been with my “day job” and not with this blog.

I still find time to trade and really screwed up with Dominos a couple of weeks ago. I just happen to execute a lovely 170/180 bull put spread the day before the Papa John’s NFL and earnings debacle. Terrible timing and it cost me $14,000.00 at one point. Luckily, due to experience, I did not panic. I actually closed the bull put spread and waited patiently for DPZ to bottom. When it went below $170 per share I began buying the Jan 170 call pretty aggressively. Within a few days I pulled out of my loss and recovered completely. Whew!!

Home Depot

Then came Home Depot (HD). Wow! Love me some HD and I have literally kicked myself for two years for not buying it and just holding. I cannot remember if it was before or after earnings, but I bought 10 Jan 150 calls and I’ve made great money so far. I intend on holding this time.

November Winners

I’ve also done well this month with Square Inc (SQ), Verizon (VZ) and my favorite stock of the year XPO Logistics (XPO). All of this combined has not only recovered my initial loss with DPZ, but brought me higher than I started. If you have been following along you might wonder why my balance is only $70,800 and some change if I’ve done so well this month and that’s simple: commissions. I closed two huge and highly unprofitable positions in Pandora (P) and Rite Aid (RAD) within the past week. The commissions alone for closing both were above $2,500.00. Ouch!! But hey, at least my balance is higher for the month so far…even with the commissions!

Pandora and Rite Aid (Ouch!)

Pandora kicked me pretty hard, and I’m sorry I’m out, but I don’t see anything good for the short-term. I’m still watching it close. Rite Aid I will execute a covered stock purchase in January. I was going to do it this week, but I am waiting to see what happens the first week of January. I have a feeling the market will sell off as those that are waiting to take profits finally get their chance (to save taxes). I plan on buying 10,000 shares of Rite Aid and covering with the 2019 1.5 put. I have a feeling it will be above $2.5 before the end of 2018 and I want my money (and commissions) back!

Current Holdings

Home Depot – holding Jan 150 calls – 1000 shares worth

Verizon – holding Jan 40 calls – 1000 shares worth

XPO Logistics – opened new position in 60 / 80 call spread – 1000 shares worth. Hoping for a pullback before Christmas so I can buy back the 80’s profitable (collecting most of the premium) and double down on the 60’s which is what I really want to call…

I hope everyone has a Happy Thanksgiving…I will be working the entire week even on Thanksgiving day! There is no reward without risk…and hard work! Enjoy!

HAPPY HALLOWEEN INDEED!

octoberSay goodbye to October! Cannot believe it’s already gone, but it sure is good to be a bull these days! My bull put spreads are working like a champ and I’ll be the first to tell everyone I cashed out 75% of my holdings this morning! Very glad I did and this includes all of my Micron (MU) positions. I didn’t really want to sell the JAN 35 CALL’s, but I was up over 40% and MU was up nearly 6% today so I took the gain. I mean who wouldn’t?

I still hold spreads on NVDA, DPZ, NFLX and XPO and will for at least the next week or until my balance gets closer to $80,000.00. I was very excited to hit 70% YTD return last week (after commissions), but I gained another 10% this week already! Whohoo!

This is why I’m cashing out. Being an experienced trader involves being disciplined and everything has been hitting my predetermined exit amounts. I can’t help but exit some of the positions. I’ve been waiting for Micron to make a move for weeks and when it went above $44.00 per share I started selling.

I still hold calls in MGP, GE, P, RAD and IBM

How I Missed Amazon (AMZN)

AmazonYeah, I missed Amazon (AMZN). I’m sure you’re asking how? How could someone in the tech industry and having traded Amazon so many times in the past not be ready for this? Well, that’s a good question, but it really goes back to fear and dislike of earnings season.

Earnings Season Blues

I have this problem with earnings season. I always lose money and bet on the wrong horse. Those I hold long term always do better, but if I decide to buy anything within two (2) weeks of any earnings announcement I typically lose.

I have already lost on AMD (I have no idea why I tried) and P&G. I was not in the mood to be wrong again so I remained on the sidelines for Amazon. I almost (hovered over the submit button for an hour) purchased several Jan 950 Calls yesterday morning for nearly $15,000 (they’re not cheap), but ultimately took the safe route. What would they be worth today? Try $30,000…yeah 100% gain. Ahhhh!!!!

2017 YTD Risk Management

Let’s be honest, I’m up over 60% for the year. There was no reason to take the risk. I’m happy with where I am with my holdings and with the year. Why push my luck? (trying to justify my stupidity)

Because I knew this was coming. Everybody thought it would be last quarter and the jump failed to materialize (I lost on that one too). But I’ve known this entire year that Amazon was too hard to beat and one day it would pop. Last night was that night.

Congratulations

To anyone who was brave enough to hold through earnings congratulations. You deserve the massive gains this morning.

Pandora (P) Ya Kill’n Me!

pandoraPandora (P) has been absolutely terrible lately. I was really under the belief we would be closer to $9.00 per share as we approach earnings next week. Boy, was I wrong! It just keeps getting worse and I own 2000 shares along with 80 (another 8000 shares) Jan call options. Luckily, for my portfolio, I was smart enough to protect the 2000 shares using the $8.00 PUT for next Friday’s expiration (the day after earnings).

Earnings November 2nd

UPDATE: After writing this post I was reviewing my positions and realized Pandora has moved their earnings release date from October 24th to November 2nd. I’m not sure who got it wrong originally, but for a bit I was thinking I was losing it until I found other articles with the October 24th date. This is why I own the Oct 27th $8 PUT options and now I’ll be forced to roll them out to November 7th (I believe). I hate it when plans change!

If Pandora blows earnings and it continues to tank, I’m going to be forced to exercise my put options and get out of the stock. My max loss is $480.00 and I’m already past that so I will actually be better off next Friday than I am today if I am forced to exercise.

Keep in mind there is a huge short position in Pandora so if they beat or there is good news we could see a serious short squeeze (hence the 80 calls).

Pandora Has an Identity Crisis

Pandora is suffering, in my opinion, because it’s not cool anymore. Too many “parents” or those of us in that older age group use it and the kids see mom and dad using it and that’s just taboo! That’s my thought and I could be completely wrong, but Pandora is just old. It should be bought and rebranded.

Not From a Lack of Trying

Pandora is a great product. Their new premium service is excellent, the mobile app overhaul is great and the sound quality is not only improved, but has always been excellent as well. There is nothing wrong with the service or product…it’s just not cool anymore.

Poor Pandora.

Bullorbust View

My view is simple: I like the product, but I’m getting tired of fighting a downhill spiral. If earnings disappoints next week I’m out (unless something weird is said in the conference call). Will I lose money? Absolutely. Would I buy it back? Not unless something fundamental changes. I do believe they’re slowly becoming a buyout target and I think someone should definitely buy them. That’s not a reason to invest however. If you’re profitable on Pandora take the gain and get out. If you’re upside down like me then we have one more shot next week.

General Electric (GE) Update

geTried to tell everybody! ha! I closed my entire position at the closing bell. Wow! What a day! My GE position closed up more than 28% gain today alone! Why did I sell? Well, I’ve learned to control greed. Sure, it’s going higher (probably), but 28% in a day is 28% and there is no reason to give that up. Maybe it cools down next week, maybe it doesn’t. I’m anxious to see what exactly happens…

November 13th

There is also the continued risk of the shareholders meeting on November 13 where John Flannery said today that he will be discussing the dividend (and its future). This could create another buying opportunity.

Take the Money

So, for now, I’m taking the money and relaxing. You have to understand I’ve been a strong advocate of GE all year and I’ve been in the hole all year. To pull out of the hole and become profitable by 28% so quickly is something I just couldn’t pass up.

Bullorbust View

I still believe GE is going higher in the long term. Will I be buying back my position? Absolutely. I will watch over the next week or two and buy call options on any significant weakness before November 13. On November 13th and during the shareholders meeting I will be watching very close and buying any dip.

Congratulations

Congratulations to all of those who stood with me and had the guts to double down or quadruple down (like I did) and watch it turn around! Now, go enjoy the weekend and college football!!

Trade of the Day

timeToday’s trade puts (no pun intended) time on your side by leveraging time decay to your benefit.

It’s actually quite simple. You’ll take your favorite stock that has had a good, strong run recently and buy it…but at the same time sell an ATM (at the money) call option against it. The first question you will ask yourself is why the hell would I sell calls against a stock I just bought for the same price I just paid? Simple: for the premium!

It’s Almost Like a Straddle

Buying stock and selling an ATM call is almost like straddling the stock with a put / call straddle trade. You own the shares and sold the ATM calls against them (meaning someone can call those shares away from you at expiration for the price / strike you sold them for) and all you have to do is wait.

If the stock sits still and trades sideways until expiration you make money. If the stock continues higher you make money. If the stock drops you lose money on the shares, but it’s offset by the money / premium you are paid on the calls down to your break even. Then you can just buy the calls back (or let them expire worthless) and ride the stock back up. We all know eventually a stock will go back up if you’re buying good companies.

The Trade

Let’s look at Micron. It’s been on fire lately and more than likely it’s heading higher for at least the short term. Let’s take $25,000 at 2:45 PM today (15 minutes before the close) and purchase 600 shares @ $41.65 and SELL the November expiration (30 days) 41 CALL option at the same time. This would be considered a “covered stock” purchase because the shares are somewhat “covered” to the break even price if the stock turns South.

This means that you just paid $41.65 per share, but by selling the call you’re obligating yourself to hand over those shares on expiration day to Joe Bob Blue for $41 IF the stock is above $41 on that day. You might be asking: wouldn’t this trade lose money? Well, yes, if that’s all that was happening here. However, you were paid by Joe Bob Blue $2.26 per share to provide him that right (to take your shares at $41 per share). That’s the premium we’re being paid and that’s what we’re really after!

How to Calculate the Trade

Using simple math we can easily calculate the profit: You paid $41.65 per share. You were paid $2.26 per share from Joe Bob to call them at $41. When he calls them you will lose 65 cents per share, but you were paid $2.26. Therefore, your profit is $2.26-.65 or $1.61 per share. Keep in mind, your break even is $41-$1.61 or $39.39. If you believe Micron will remain above $39.39 for the next 30 days then this trade is for you and you will not lose money.

The total profit for the trade is $1.61×600 shares or $966.00 (before commissions of $11.45). So think about it: you just bought stock for $41.65 and sold calls below your cost basis and as long as the stock is above $41 per share (lower than you paid) in 30 days you’ll still make $966.00 profit on $25,000. That’s 3.92% for 30 days! Very easy and you make money even if the stock sits or even dips slightly! You even have a little downside protection to $39.39. If you’re comfortable holding Micron why would you NOT do this? Yes, the stock can gap up to $44 per share and you will not capture that gain, you will still only make $966.00, but so what? You’re still beating every money manager in town with your return.

It’s All About the Premium

This trade is all about the premium paid to you, the seller of the option. It’s not about making money on the shares of stock. We don’t care about that. We only care about the premium. This is what I call a reverse cash-secured put trade. It’s still a somewhat bullish trade, but instead of selling puts and being put the shares you sell calls against stock you buy / own.

Why not just sell puts? Well, it’s all about the current situation. With General Electric (GE) I would be selling puts because the put premium is elevated due to being beat down lately. It’s also close to earnings so the implied volatility is high. Sell the Dec 20 puts with GE. Micron on the other hand is at all-time highs. You can’t sell puts against it because the premiums suck because it continues to go higher. The call premiums are elevated and we want to take advantage of that so we sell calls. It’s dangerous to sell naked calls so we buy the stock purely to cover the calls we’re selling for the premium. Makes sense right? ha!

Big Money Trading

To give you a little more of a reason: if you’re trading with $450,000.00 this trade would make you roughly $17,500.00 for 30 days or, again, 3.92%. That percentage gain is what most people make annually and you can easily do it in 30 days.

What if it goes wrong?

If Micron tanks 8% it would be around $38.30 per share. You would be down, but not out. You’re going to own nearly 11,000 shares with a real cost basis of $39.39 so you’ll be down rougly $11,000.00. If this happened you would have two choices: sell the shares immediately if you think Micron is going lower and take the $11,000 loss or hold until it moves a little higher and sell more calls for the next available expiration.

Due to the lower cost basis of $39.39 even if Micron fell 8% your total $450,000.00 portfolio would only be down 2.4% or $11,000.00. It won’t be hard to make up 2.4%. In fact, Micron would probably come right back and as soon as it got near $40.00 per share I would be selling the 40 or 41 calls.

 

General Electric (GE)

geGeneral Electric
(GE) Earnings Friday

On Friday, October 20, 2017, General Electric will release their latest earnings report before the market opens. Why is this important? Because the new CEO John Flannery is expected to ease concerns surrounding the companies status and future. Everyone will be watching…

Worst Performer of 2017

General Electric is the worst stock in the DOW. It has been the worst performer of 2017 and is really having a hard time with both earnings and public perception. If you like 52-week low’s or stocks that have been beat down this is a perfect choice.

GE stock has tumbled, down more than 25% in 2017, while the DOW has gained over 16% as of October 17, 2017.

Dividend Risk Whispers

The big debate is whether or not GE will be adjusting the dividend and there are many people who are literally petrified of the possibility. Remember, some investors live on dividend income and even though they may be getting pounded on the stock performance they continue to receive regular quarterly dividends and this keeps them in the stock.

If General Electric lowers or, heaven forbid, suspends the dividend you will see an absolute catastrophic event occur on Friday. Every investor who has held strong through the disaster stock performance will finally give up. It will truly be an historic event and I personally do not believe they will touch it. They are smart enough to know what will happen.

Earnings History

GE typically exceeds profit expectations, but has lately failed to gain momentum even as we approach earnings despite beating eight out of the last nine quarters. This could be a good thing…how much further can it tank if it’s already on the floor? Well, as Jim Cramer always says, stocks stop dropping at zero.

Even with a beat, GE has declined on the day of earnings for the last seven quarters. GE is expected to report earnings excluding nonrecurring items of 49 cents per share. This is up 32 cents from the same period a year ago. Revenue is estimated to be $32.54 billion, up from $29.27 billion in the same quarter last year. As you can see there are positive estimates and I believe they will beat, but what happens to the stock on Friday is completely dependent on what is said and how it is presented.

Bullorbust View

So what do I think? I think GE is a buy. Call me crazy, but if it dips to around $20 per share…give me a break! There is intrinsic value in the company. I think Flannery can turn things around and he may wait to provide more detailed information on his plans until the investor meeting which is planned for November 13. Investors may not get good information on Friday which could send it even lower.

My plan is to SELL DEC 20 PUTS on any Friday dip. I currently own Dec 20 and 25 CALLS and I’m upside down (no duh right), but plan to call the Dec 20 CALLS and hold the shares long-term in my primary portfolio. I’m willing to lose my Dec 25 CALL premium completely so I’m holding through earnings and the investor meeting no matter what.

If GE beats on the top and the bottom and they don’t touch the dividend everything will be fine. Be prepared and good luck!

THIS WEEK’S OPTION LESSON

protectionThe Collar with Stock My New Option Love

In January, I will be trading with $500,000.00 so I will use this for the example below. Within Thinkorswim this is called a “Collar with Stock”. Here we go!

Nvidia is having a great day and closed around $185. It went up and, thus, the call premiums are elevated. This is a good time to sell calls, but what if you don’t have any shares? You certainly don’t want to sell naked calls that’s dangerous.

Bullorbust Tip: As the underlying stock price moves higher the call premiums increase and the put premiums decrease. Calls are for going up, Puts are for going down…

Since the stock is moving higher I want to sell calls instead of selling puts (my other love). Since I have no shares and don’t want to be naked, I want to buy stock and sell calls at the same time with put protection (collar with stock). This is what happens in the same transaction with one (1) commission:

SELL NVDA NOV 185 CALLS (25) or 2500 shares worth @ $10.85 per share for a total premium of $27,125.00

BUY 2500 shares of NVDA stock @ $185.39 per share for a total cost of $463,475 leaving roughly 10% in cash.

Bullorbust Tip: They’re only going to charge you $451,000.00 roughly or the difference between the stock price and the credit premium.

BUY NVDA NOV 175 PUTS (25) or 2500 shares worth @ $5.80 per share for a total premium of $14,500.00. This is your insurance policy and you’re going to pay handsomely for it.

This trade will cost you $44.45 in commission with TD Ameritrade.

With this type of trade you are protected from a massive market collapse AND you’re guaranteed a certain amount of premium. You are not making the entire premium as if you simply bought the stock, sold the calls and the stock continued higher or sat where it is now, but your downside is protected and this insurance policy costs you basically half your premium.

Bullorbust Tip: We are not trying to make money on the shares, we simply want the premium during higher Implied Volatility. This is why we don’t care about buying stock and selling calls at the same price / strike. We are only concerned about the premium.

SCENARIO 1

You execute this trade and the next day NVDA is $200 per share. Anything that happens the “next day” will look very bad on paper so you will need to be mentally prepared for that, but it will work itself out at expiration. Short options take time to work their magic. So, you wake up the next day and NVDA is $200 per share – your short calls will have greatly increased in value losing, on paper, what looks to be an ass load of money. This is of no concern because you will not lose more than the premium paid at expiration. The remaining loss will simply disappear along with your shares when the option is exercised (and it will be exercised) at expiration. This is the point.

The shares are covering the calls in case it continues higher, but NO MATTER WHAT you’re going to get paid the $27,125.00 in premium from the calls. The puts on the other hand will be worthless so that protection (insurance policy) that you paid $14,500.00 out of your $27,125.00 premium or a little over half (to make sure you don’t go broke) will be gone.

Ultimately, with this scenario, the best action is no action. Do nothing but wait until expiration and collect your $12,625.00 premium (the call premium minus the put premium is your profit for the trade). Your shares will be gone and everything will disappear and you will be nearly 13k richer! Yay!

SCENARIO 2

You execute this trade and the next day NVDA is $150 per share. This, in my opinion, is the best-case scenario. Why? Because really I don’t mind holding the shares of stock and if this happened the short calls and the long puts would be INCREDIBLY profitable. Based on my calculations (analyzed with thinkorswim) you would be profitable somewhere in the $76,000.00 range on the calls and puts.

YES, your shares would be down $35 or $87,000.00 roughly, but your options are helping to offset the disaster, again, the point. You will be faced with an important and difficult decision so, again, you must be mentally prepared for this event. Always have an entry and exit strategy before executing any trade.

The decision will be to either buy back the calls at probably 2 cents each and take that gain, sell the puts enormously profitable and take that gain and hold the shares OR close all positions and be down $11,900 roughly. Tough decision and it will depend on a lot of variables. That loss is still better than being down $87,000.00 which is what the retail stock purchaser who just bought 2500 shares at $185.00 per share the previous day would be down!! Whew!!

If something terrible is going wrong in the world it might be best to take the 12k hit and relax in cash for a bit. You can also simply hold the shares and wait for a rebound which is probably what I would do, but maybe with a stock that pays a better dividend so I can eat while I wait.

Bullorbust Tip: IF this happened closer to expiration your max loss no matter what is only 14k total or less than 3% of the amount allocated for the trade ($451,450). Remember, the amount allocated is the total cost of the trade minus any actual premium gained.

SCENARIO 3

You patiently wait 38 days and nothing happens. NVDA remains at $185.00 per share or is higher on the third Friday of November. Everything disappears and you clear $12,625.00 in profit after being fully protected. This amount will differ slightly based on what exactly was paid for the stock shares and the options pricing at the time minus commissions, but you get my point.

If you didn’t care about a downside risk with holding the shares (and why would you with NVDA) then you could leave the puts out entirely eliminating your insurance policy and clear nearly $28,000.00 for a month’s worth of waiting. Literally doing nothing but smoking cigars, maybe a little golf and napping a lot.

Bullorbust Tip: If NVDA started to turn over your break-even would be around $175.00 per share so you would have until that price to buy back the calls and sell the shares more than likely even depending on when the downturn happened. This is your failsafe. I rarely hold a trade past break-even if things are not going my way. This takes extreme discipline because you will more than likely lose money, but if the trade goes wrong get out and live to fight another day. Given how NVDA has acted this year I would buy back the calls and keep the shares and ride them back up making money both directions!

CONCLUSION

No matter which strategy you use or how you leverage options there is simply no better way to make money. You can protect yourself and your cash with simple methods that, in certain scenario’s, might make you even more money!

There are many other scenario’s that I left out because these are the top three (3) choices in my opinion. However, one scenario I like that I did not include is IF NVDA hit $150 the next day you could close the entire collar with stock (buying back the calls, selling the puts and selling the shares) and then turn around and sell at-the-money puts immediately for an enormous premium.

This is the same (really) as holding the shares and riding them back up except one big difference: if the stock inches up or sits around and consolidates for a month you get the entire put premium without the stock moving hardly at all. If you just held the shares hoping it goes back up you make nothing if it sits around.

There are many ways to play this game…this concludes today’s lesson. I hope you enjoyed it!

WESTERN DIGITAL (WDC) BUY

wdcWESTERN DIGITAL (WDC)

Western Digital is a buy and I do not agree with the current sell sentiment surrounding the company and stock. No, the Toshiba memory deal did not go their way. That sucks for the near term, but it doesn’t change the long-term fundamentals. Yes, most people were waiting on the Toshiba deal to justify current valuations and to try and determine the true market value. The problem is everyone has gotten too caught up in the deal and it’s failure and they’re not paying attention to the company itself.

THE TRUTH ABOUT WDC

Western Digital [stock_quote symbol=wdc] is better than its competitors. It’s best-of-breed and their products are far superior than the other, as popular (for now), manufacturer: Seagate Technologies [stock_quote symbol=stx]. That’s all you need to know. That’s the truth.

SEAGATE AND THE PAST

In the past, I was a huge fan of Seagate. In fact, for more than ten (10) years I sold nothing but Seagate products. I hated Western Digital and really thought they were crap for most of my tech career. I owned a large position in Seagate stock and for years they paid a good dividend. Then, around 2014, things began to change. I noticed more and more Seagate drives failing. In fact, every failure we had for nearly two (2) years centered around Seagate.

In 2016, I was upgrading a hard drive in a six (6) year old laptop (not my idea, but whatever) and noticed the drive I extracted was a Western Digital. I remember saying out loud “well, I’ll be damned no wonder it still works” and that’s when it hit me. Seagate was dying and Western Digital was quietly making better products. I sold my entire Seagate holding that very day and began buying calls in Western Digital.

WESTERN DIGITAL THE FUTURE

Storage is important and will always be required. What is more important is storage durability. The last thing you want to do is move an enormous amount of data to crap drives and end up having to do it all over again and losing data in the process. I stay the hell away from Seagate at this point. Western Digital Blue Solid State drives perform beautifully and I am upgrading hard drives and fixing crashed Seagate drives with WDC Blue’s more now than ever before.

No, I am NOT a seller of WDC. I believe the Toshiba deal and the negative sentiment hovering over WDC because of the deal will eventually fade away. I believe the earnings for WDC over the next twelve (12) months will prove more technicians, such as myself, are figuring out that Seagate (and others) sucks and WDC is taking market share.

Western Digital is the best and time, along with earnings, will prove this. Buy the dips and be patient. I have a $100 12 month price target on WDC.

 

WESTERN DIGITAL (WDC) BUY

WESTERN DIGITAL (WDC) BUY

[stock_quote symbol=wdc]

The chart tells me it could retrace back to mid-60’s if it really wanted to. However, it is currently sitting dead on the 200 day moving average of $79.16 and I do not see it going under $70. I very much consider WDC best-of-breed in the storage industry.

Therefore, I highly recommend selling the JAN 70 PUT @ $4.33 each. Return will be roughly 1.2% per month and break-even would be around $65.67 using Thursday pricing – which is perfect.

It should open lower on Friday making this trade even better. If it keeps falling simply sell more PUT’s for more premium. Remember market 12 month PT is around $110 average with $140 upper-end. I consider this N. Korea bullshit a buying opportunity.

Worse-case you own it at $65 and you can sell calls against it…