Category Archives: OPTION TRADING

CASE STUDY – FCX

Good Morning Everyone!

Briefly, before the market open I wanted to take a second and provide details on a trade I made with Freeport-McMoran [stock_quote symbol=fcx].

The life of this trade and how I have ended up is exactly what could and sometimes should happen as the seller of a cash-secured put.

On Monday, March 28, 2016 (just a week ago today) I SOLD 100 contracts of the APRIL 2016(1) 10 WEEKLY PUT @ .25 per for a total premium of $2,500.00. This option EXPIRED on APRIL 1 because it was a weekly option.

I intended on making this premium in a single business week during a single trading week. At the time FCX was trading above $10.00 per share…I believe it was in the $10.35 range.

On Friday, April 1, 2016, the market dipped and so did FCX. It actually dipped well below $10.00 per share trading at almost $9.50 in early session. I knew I was at risk of getting exercised (assigned), but I saw an opportunity.

Here is where I, as an experienced trader and someone who is intimately familiar with FCX, made a decision to SELL an additional 100 contracts of the APRIL 2016(1) WEEKLY 10 PUT @ .34 per for a total premium of $3,400.00 bringing the combined premium for the week to $5,900.00.

I sold them the DAY of expiration knowing FCX would go back up. Yes, $5,900.00 premium for a single business week of exposure for 20,000 shares of FCX at $10.00 or $200,000.00 in collateral.

Today, Monday, April 4, 2016

I now own 20,000 shares of FCX. Why? I was assigned Saturday morning because FCX closed Friday at $9.89 per share and it did not go above my $10.00 strike in after hours trading. I now own 20,000 shares with a cost basis of $10.00 per share.

This is the “advanced” part that is sometimes hard for people to visualize. I did not make my entire premium of $5,900.00. Since the underlying stock closed below my $10.00 strike I, for the sake of this article, “lost” the difference between the $10.00 strike and the closing price of the underlying which was $9.89.  Therefore, 200 contracts (20,000 shares) x .11 cents (difference between strike and closing price) = $2,200.00.

I kept $4,700.00 of the premium upon assignment. Make sense? I didn’t lose money, I just didn’t make as much premium as I had anticipated because the underlying closed below my strike price of $10.00.

SO WHAT NOW?

When I awoke this morning not only did I have 20,000 shares with a cost basis of $10.00 per share, but FCX was UP trading at, you guessed it, $10.00 per share! How fantastic is that? I could have SOLD all 20,000 shares of stock in pre-market trading immediately and indeed made the entire $5,900.00 premium as expected.

Remember you can buy and sell stock in pre-market trading starting at 7 AM Central Time. That’s a big difference between stocks and options. You can only trade options during normal market hours.

By selling all 20,000 shares at $10.00 per share I would have gained the .11 cent difference back on the actual share price to make up my entire premium of $5,900.00. You with me? If FCX goes above $10.00 per share (my cost basis) I will make even more money and I know damn well it will – eventually. That’s why I didn’t really care about getting assigned.

You never sell cash-secured put’s against any stock you would not want to own immediately. Also, never sell a strike price you are not willing to pay for said stock. If you’re assigned you will own that stock for that strike so be careful!

CONCLUSION

I did not sell my shares and will hold them until I can make a little more money. I know FCX will be above $10.00 soon. I’ve already made $4,700.00 in premium and I now own 20,000 shares of FCX that I can keep forever if I want.

FCX does pay 2.02% dividend yield or .20 per share. That’s $4,000.00 per year in dividend income. Not too bad.

FRIDAY, APRIL 1, 2016

FRIDAY, APRIL 1, 2016

This is NOT an APRIL FOOL’S JOKE let’s get that straight right off the bat. What a day. I struggled with a few trades and even after stellar single session day trades with Home Depot [stock_quote symbol=hd] gaining more than $4,000.00 today and closing out and Starbucks [stock_quote symbol=sbux] gaining more than $3,000.00 and closing out I still managed to LOSE $1,061.99 for the day and so far the month! Damn it! It was really and truly a wild ride.

PANDORA MADNESS!!

I was sinking with Pandora [stock_quote symbol=p] badly in early morning trading. It was dropping and I continued buying down. Before lunch I had 900 contracts of the MAY 2016 9 CALL and I was in the hole nearly $13,000.00!! This is where experience and emotional control really come into play. I could have panicked, sold and stopped the bleeding. Sure, that was an option. The WRONG option. I patiently waited knowing that after lunch each day, 90% of the time, there is a descent rally.

Luckily, I was right. I ended the day only DOWN $1,800.00 having sold 450 contracts (half my position) for a gain. I am holding the remaining position to see what happens next week. See, panic would have LOST BIG MONEY. Never panic, just change your strategy (or go run around the block and step away for a bit that works too).

STARBUCKS – MISSED IT BY THAT MUCH

This is a great example of how even a veteran can simply get out too early. I will literally think about this all weekend.

It started at market open. I noticed Starbucks was going to have a good day so I purchased (buyer) 400 contracts of the JUNE 62.5 CALL option @ $1.05 per. Why June? Just in case I was wrong this gave me enough time to correct a mistake. The order filled at 8:55 AM and I was off to the races. Just a mere 30 minutes later at 9:22 AM I sold ALL 400 contracts @ $1.13 per gaining 7.72% or $3,200.00 (before commissions) and I was very excited! Nothing like making over 3k in 30 minutes I said to myself as I jumped in the shower to go about my day.

Why did I sell? Why 7.72% and $3,200.00? Well, I get numbers stuck in my head when trading and while I watched it going up I said to myself, “if it gets over 3k and I can make 3k after commissions I should be happy with that and I’ll eject”. That’s what I thought, and that’s what I did. I stick to my gut plan no matter what.

Then, I kept watching that option. H-o-l-y Crap…I am just sick. I got out WAY, WAY, WAY too early. I could have easily sold them after lunch for $1.50 per contract. YES, that would have been almost a $20,000.00 gain in a single session day trade. First day of the month! First day of the quarter! I would have been UP more than all of MARCH!! I just want to punch something…

Regardless, what is the lesson here? What should you learn from this? It’s always better to have made money and exited a position only to watch it keep going then to have lost money. Period.

Oh well, sure I would have immediately gone to BMW and leased a new M3, but you know what? I made 3k in 30 minutes and I bet not many people could say that today!!

BOTTOM LINE

Never panic. Always have a plan. Don’t hate yourself when you exit too soon…we all do it from time to time.

HAVE A GREAT WEEKEND!

WEDNESDAY, MARCH 30, 2016

Welcome to Wednesday!

Today will be a SELL day. Why? The market is flying and in today’s market we take profits when we can. This is rule # 1 people! Let the market settle this morning, but between 8:30-9:30 Central Time you should have a nice rally and I’ll be shaving or downright exiting any profitable positions as the buyer.

As the seller you (and I) can just sit back and smile! You’re doing well and the market is moving in our favor today (unless you sold CALL’s). I’m a cash-secured PUT seller so everything I own today that I am the seller will be more profitable…and decaying!

Don’t you love this sh*t?? Good luck today!

CLOSING BELL REVIEW

The session has ended and had you invested in MetLife after reading my Dividend Stock article back in February you would be doing very well. Did anyone see MetLife [stock_quote symbol=met] today? Up 5.35% or $2.27 per share to $44.73!

Another hot day of trading, but today I was selling profitable trades and shorting more than anything. I did sell the 1000 contracts of DNR CALL option for a $5,000.00 profit (see yesterday’s post).

Restoration Hardware [stock_quote symbol=rh] is kicking my ass. Yes, I was crushed by the dreaded “volatility crush” that happens after earning and went from being profitable $1,000.00 to being DOWN $2,025.00 at the close. However, I did BUY MAY 2016 35 PUT options as well as MAY 2016 45 CALL options which I am currently riding up and down trying to make up my loss on the original APRIL CALL. I do still own the APRIL too!

VIX Volatility Index [stock_quote symbol=vix] was falling most of the day and I did what I said I would do and continued buying it down ALL day. I now have 650 contracts of the JUNE 23 CALL option with an average cost of $1.57 per. I am DOWN $9,625.00, but I believe very strongly it is just a matter of time before it spikes back up. I feel an increase in volatility coming…

Starbucks [stock_quote symbol=sbux] believe it or not is really eating my lunch currently. I purchased 400 contracts (over time) of the MAY 2016 55 PUT and the underlying has done nothing but continue North. I’m currently DOWN $5,000.00, but I’m holding strong.

MARCH ROUNDUP

Maybe, just maybe the VIX will spike tomorrow (Thursday) and I can close out March gaining more than $25,000.00. I’ll be made if I don’t considering I was way over that this morning. Keep in mind this is after the $32,000.00 loss on Ford covered calls. I have to keep mentioning that haha.

Currently I’m up a measly $15,503.54, but I suppose that’s not too bad considering I’m actually up from yesterday and I’m getting killed on several. I’m also up almost double from the March 25 Week Review last week. Ok, maybe I can live with this!

 

 

 

RESTORATION HARDWARE (RH)

RESTORATION HARDWARE ALERT

Disclaimer: this is purely a speculative (gambling) play. This is another I could not resist because I knew RH’s earnings report came out tonight after the closing bell. I also knew it would suck and everyone has been bashing them for days. However, they are on the floor already. They’ve been kicked enough and sometimes, just maybe, sometimes a stock just won’t go any lower.

I have seen stocks take a beating and then gradually go up after people hear all the bad news and begin buying again. All the “sellers” are done selling and those that think the company will make a come back start jumping in again because it’s just too damn cheap.

I purchased 100 contracts of the APRIL 2016 50 CALL @ .25 cents per contract ($2,500.00 worth) at 2:48 PM Tuesday, March 29, 2016 before the closing bell. Before 3:00 PM I was UP $1,000.00.

Did I sell it? No. This is purely for fun so I didn’t care.

WHAT TO DO NOW?

If you’ve been watching the ticker after hours you will know I’m in trouble haha! The underlying closed above $39.00 and it is now somewhere in the $37 range. I’m not too concerned. On Wednesday, I plan on doing two things: buying down my existing APRIL CALL’s – I have an auto order placed already for .10 cents per contract for another 100 contracts. The second thing will be to BUY the MAY or JUNE $43.00-$45.00 strike CALL’s allowing more time for the option to work. Especially while the stock is in the gutter and the CALL premiums are cheap.

I have faith and, again, this is just for fun. Time will tell…

PANDORA TRADE UPDATE

pandoraPANDORA

In today’s post (written around 2 PM Central Time Tuesday, March 29, 2016) I stated that I couldn’t resist buying the Pandora [stock_quote symbol=p] MAY 2016 9 CALL option for $1.32 per contract. WELL…had you done the same you would currently be up 11.74% like me! After I posted today’s post I reviewed my portfolio and sure enough within an hour of buying and the closing bell my 100 contracts were profitable $1,550.00!! I just laughed and I kept them.

My gut told me after the market settles with regard to Pandora’s CEO status and future the stock will head back North. If, this week, I gain 20-30% I will sell and close the transaction. If it goes back down I will buy more of the same option no matter what. What does that mean? If I gain 20-30% I will sell to close and if it dips back down I’ll buy the same option again – I know what’s it’s worth now! If I don’t gain anything and it goes back down I’ll still double-down. I’m that confident.

I have another gut feeling that Pandora will not only move higher in the future, but bounce around quite a bit while those that are scared to death wait and bail, wait and bail, rinse and repeat…

VIX TRADE ALERT!

VIX TRADE ALERT!

VIX [stock_quote symbol=vix]

The JUNE 2016 23 CALL option I made serious money on last week has returned to the level I purchased it originally. I believe this is another good buying opportunity and I have already purchased 100 contracts of the JUNE 2016 23 CALL @ $1.80 per contract. This is actually a nickel cheaper than what I paid last Monday. I have an auto order pending for another 100 contracts at $1.70 per.

If purchased at $1.80 and sold at $2.15 (where I sold it Thursday) this is an easy 20% gain. Buy, buy, buy!

MONDAY, MARCH 28, 2016

GOOD MORNING EVERYBODY!

What a morning it has been! I woke up, rolled over, looked at my phone and wow! Up $8,000.00! Nothing like waking up to that after an extended weekend of nothing. Whoo hoo!

MONDAY TRADES SO FAR

Starbucks [stock_quote symbol=sbux] was heading up and I was profitable on the MAY 2016 60 CALL options purchased last week. Yes, I am the buyer and I’m profitable! Imagine that. Anyway, I noticed the uptrend and considering my gain and positive attitude this morning I purchased 350 additional contracts @ $1.60 per bringing my total to 400 contracts with an average of $1.56 per or $62,400.00 as the buyer – RISKY! But no reward without risk right? Blow 60k and make some fast cash…I have an auto-order to SELL those 350 contracts for $1.70 per. The mark hit $1.70 moments ago, but just couldn’t move higher to execute. Man I was pumped, but it’s now trading at $1.66. I’ll hold it the rest of the day and see if I can execute at $1.70 after lunch.

UPDATE: 11:25 AM – holy cow! While I was typing this it executed! After commissions I profited $3,200.00 on just the 350 contracts I purchased today in less than an hour and a half. Monday – not so bad after all!

JC Penney [stock_quote symbol=jcp] is moving up today as well. This is PERFECT for my 100 contracts of cash-secured PUT’s with a strike of $11.00! Yay! Just 19 more days and counting! The MAY 2016 11 CALL’s @ .74 cents per I purchased (buyer) last Thursday I SOLD for .90 cents per contract moments ago. Total gain of 21.62% or $1600.00Easy money!

MONDAY GAINS

So far I’m up $11,825.00 for the DAY as of this post (11:30 AM) which will definitely bring my March total gain figure up! Everything is performing beautifully and my APRIL cash-secured PUT’s are decaying nicely.

WHAT A HELLOFA MONDAY!

WEEK ENDING MARCH 25, 2016

easterHAPPY EASTER!

I’ve been very busy the past few days so I’ve had little time to post. My apologies. I plan to start reviewing the weeks trading activity every Saturday, but it takes an enormous amount of time to go back and pull transaction history. This is especially true for a busy trading week like the one we just went through. On Monday I stated I would not be doing that much since it was the first week of Spring, but that turned out to be inaccurate considering the massive amount of trades executed on Thursday.

Also, I wrote a great article on what to do if you think you’re going to be assigned (exercised) on expiration day. You can find it here.

Trading Like a Mad Man

Thursday I had twenty-seven (27) orders filled (executed) as well as many, many cancelled or modified orders throughout the day. The first was selling the JUNE 23 CALL options on the VIX [stock_quote symbol=vix] for a massive gain of 16.22% and $24,000.00. That set the mood for what would be a romantic courting of the market for the entire single session.

Next came McDonald’s [stock_quote symbol=mcd] and boy was it a good day for this one! I was riding the APRIL 115 PUT as well as the APRIL 125 CALL up and down most of the day ultimately ending $4,282.00 ahead and completely out of everything at the closing bell. This could not have been more perfect. How did I do it? As I have said before I would buy 100 contracts of the PUT, ride it down to 10-20% gain and sell all but 1 contract. I would then buy 100 contracts of the CALL and ride it back up to the same 10-20% gain and sell all but 1 and buy 99 of the PUT’s again. Back and forth to a total of over 4k profit…

Other Thursday Trades

Nordic American Tanker [stock_quote symbol=nat] – This is a PRIME example as why I love a good dip in the market. Wow! I originally SOLD 100 contracts of the APRIL 13 PUT @ .20 cents per contract on March 21st. I SOLD 100 additional contracts of the same APRIL 13 PUT @ .30 cents per contract Thursday. This increased my total premium from $2,000.00 to $5,000.00 with just three (3) weeks until expiration!! NAT then turned around and started back up which is perfect. I should have no problems expiring above the strike and I shall keep the entire $5,000.00! This does require $260,000.00 in cash as collateral against the trade. Yes, you can do it with less, but how many times do I have to tell you – never trade NAKED!

Even if I’m exercised, with NAT’s dividend I would gladly accept the 20,000 shares at $13.00 per share. The dividend yield is $1.72 per share or 13.2% at the $13.00 strike. For 20,000 shares @ $13.00 per share that would equal an astounding $2,800.00 per month in dividend income ($34,400.00 annually for you math challenged folks). I can live with that…

Chevron [stock_quote symbol=cvx] – I purchased (buyer) 50 contracts of the APRIL 2016 95 CALL at 9:52 AM for $1.55 per contract. I sold them all 11 minutes later for $1.71 per contract. Total profit was $800.00 or 10.32%.

I was sitting at my parents kitchen table watching CNBC with my dad when I made this trade and I looked at him and said, “well, I just made 10% in 11 minutes I suppose I should sell it”. We laughed and I sold them. Just a few hours later that same option was worth $2.10 per contract or $2,750.00 profit or 35.48% gain. I sold it just a little too quick…but damn, 10% in 11 minutes? Who could resist!  

Ford [stock_quote symbol=f] – Too much to list. I purchased (buyer) APRIL 11.75 CALL’s and APRIL 12.75 CALL’s as well as SELLING (seller) 100 contracts of the APRIL 12.75 PUT. So far so good.

Denbury Resources [stock_quote symbol=dnr] – this one was just funny. I bought 5,000 shares during early session for $2.05 per share and sold all 5,000 shares for $2.30 in afterhours trading right after the closing bell. PERFEEEECCT!! This resulted in a 12.5% gain and $1,250.00 profit on this trade alone and it was STOCK not options! I also SOLD 200 additional contracts of the APRIL 2016 2 PUT (cash-secured put) for .25 cents per contract – total premium $5,000.00 with just three (3) weeks remaining until expiration! I also doubled-down on the APRIL 2016 2.5 PUT @ .60 cents per contract. I now have 200 contracts on both the APRIL 2 and 2.5 strike PUT options.

Conclusion

The week was long after all. I should have known it would be wild given the short trading schedule. I realize I am somewhat all over the place with my posts this week and I’m trying to keep a standardized approach (or find one). I’m finding it difficult to get everything in my head on paper quickly and efficiently so I may sound like I’m rambling sometimes and for that I apologize.

Total gain for the week: $30,828.86

Total gain for March to-date: $8,536.78

Why is March so low given the amazing week? Well, some of you may remember the 400 contracts of the Ford APRIL 12.75 PUT I sold several weeks ago. I got nervous when Ford was hovering around $13.80 and I did not really want to lose 40,000 shares so I bought them back at a significant $32,000 loss (plus commissions).

This hurt badly – more my ego than my wallet. It goes to show you that emotion can still get the best of even the most experienced traders. However, it really worked out great because I almost made it all back this week. Thank you VIX! I’m actually glad I did sell them because even in the market dip this week Ford did not dip below the $12.75 strike. I was sure to get exercised in a few weeks unless Ford takes a nose dive shortly which I don’t really see happening.

Now, yes, I should have or could have waited just a hair longer and bought them back yesterday saving a significant amount of money, but I cannot predict the future no matter how hard I try. I did what I had to do with the information I had at the time even though it cost me big. Never get mad at yourself for doing what you think is right in the heat of the moment. Do the best you can and let the chips fall…

In the end…I’m still up for the month! February saw a $54,000 gain and so far March will see an $8,500.00 gain. Not too shabby…even with a $32,000 loss!!

 

 

VIX TRADE UPDATE

UPDATE – Thursday, March 24, 2016

Ok I did it! I SOLD the 800 contracts of the JUNE 23 CALL options I purchased for $1.85 on Monday for $2.15 this morning. Yes, I could have gotten $2.20 around the opening, but I waited too long and when the VIX started going down I wanted to hold my gains so I let them go. How did I come out? Pretty damn sweet…gain of 16.22% or $24,000.00 (before commissions) in roughly three (3) trading days. Not a bad way to make a living…and not bad for my riskiest trade ever. If I was desensitized to this size and risk trade I would probably have held them for at least another couple of weeks, but when you’re up you’re up and you get out. 24k in three (3) days is enough for me.

Remember this quote: Bulls make money, bears make money, pigs get slaughtered. This is absolutely the truth…

Trading The VIX (Volatility Index)

Whoa Boy! This morning (Wednesday, March 23, 2016) I posted I had made the riskiest trade of my trading career by purchasing (buyer) 800 contracts of the JUNE 23 CALL option on the VIX [stock_quote symbol=vix] Monday. The total cost of the option was $148,800.00 and some change (with commissions). Yesterday (Tuesday) I was down more than $14,000.00! I ended today up $8,000.00! What a swing!

Very exciting!! I probably should have sold and been happy I was right – at least a little. Instead I held. I truly believe the VIX is going higher and it’s a June expiration. The problem is: the more the VIX goes up, the more my other trades go down (more than likely). The VIX going up usually means the market is going down because overall fear is increasing. So I realized this afternoon I’m really playing both sides of the equation which always make me nervous. If the VIX continues up on Thursday I might bail…