Many (but not all) of the option trades we will be doing will be vertical credit spreads. One of the posters has a set of videos on some basic issues regarding these spreads which are worth saving so I'll save them here: Part 1 http://www.youtube.com/watch?v=RMZjeS9LKb8 Part 2 http://www.youtube.com/watch?v=b2BBy2Xl8z8 Part 3 http://www.youtube.com/watch?v=UjyKnJy-Lk4
I have reviewed the situation with GIS and have come to the same conslusion.... I will put on the Jan 2011 50/45::80/85 IC . It's a good trade. This is what I conlcuded before and it is that trade that produced such a big brawl. It was probably my fault because I did not really explain how I got there. It's a little complex: 1. Look at the GIS 2 year chart: http://finance.yahoo.com/q/bc?s=GIS&t=2y&l=on&z=m&q=l&c= At the depth of the March drawdown GIS went as low as $50.00. If we get a 'W' recovery we may have to withstand that decline again. So I want to place a trade that will be successful even if GIS goes down to $50.00 2. What kind of trade would that be? Well I could sell a 50 strike put. Lets see if that's feasable: Of course the Nov 50 put is no bid. There is no Dec 50 put, the Jan is bid at .05, the April is bid at .25 and the Jan 2011 is bid at 1.30. If I have a cash account I will require cash margin to completely cover the strike. Thus the yield on the April short put is 25/4075 = .6% in 168 days or 1.3% annualized. Not worth the trade. The yield on the Jan 2011 is 130/4870 = 2.6% in 448 days or 2.0% annualized. Worse. If I turn the short put into a bull put spread by buying the 45 strike the numbers get better: November, December and January are still a wash, but April Yields 2.45% or 5.1% annualized and Jan 2011 yields 9.48% in 448 days or 7.6% annualized. That's beginning to look worthwhile. If I check my probabilities table the random variable probabiliy of GIS being above 50 on expiration in Jan 2011 is 91%, and the random varable calculation does not take into account the effect of a long term support level there. So, for me at this point this is an anemic but acceptable trade. 3. When faced with an anemic but acceptable trade I immediately check to see if I can enrich it. For example I could turn the whole thing into an Iron Condor buy adding a bear call spread, as long as I don't compromise the probabilities too much. The bid on the jan 2011 80 call is 1.30 and the random variable probabiity of GIS staying below 80 until then is 78%... not quite 91 but again it does not account for the high resistance at 70 and frankly I don't think GIS has any chance of getting near 80. If I do the 50/45::80/85 IC my yield is 19.05% or 15.3% annualized, which is a little low, but not too bad for my conservative option portfolio. 5. So on Monday I will put on that trade for GIS... and I will watch that 80 strike.
You guys made fun of my jelly rolls but they did incur little risk, of coarse they did not make any money. Ok pick your underlying - over 60 dollars Lots of open interest at many strikes. Just stick with a few and trade them over and over again. You should know spreads like Iron Condors, Butterflys, Calendars and Diagonal spreads - Know these backwards and forwards. You should be able to do these in your sleep. Know your max loss it should not be more than your average good month. Paper trade till you have it down cold and then start very small and after 6 months of consistent trading go up a little. Like anything else it takes time doing it over and over again. Yesterday I saw this lady, she and her husband just got into trading options. She had about 650K in her account. Last week her husband sold 20 NOV 1700 NDX puts, she did not know he did this. She was down around 50K - ouch, it was very painful to look at. She did no know she had all those long deltas and did not figure out what was the risk until she was down a lot of money. Not a good situation to be in. At that point she was gambling. She needed to cut her deltas down. God help her if the market continued down. Really the whole account had a FUBAR look to me. I my opinion she needed to take everything off and paper trade a few months and get her ducks in a row the start off small and get consistent.
The theta of these options is ZERO. In three months, the theta of these options will still be ZERO. As someone asked earlier in the chain, "what's the point of entering a trade and not getting compensated for the next 400 days? There is no point.
PALM: http://www.fool.com/investing/general/2009/10/30/worlds-scariest-stocks-palm.aspx http://finance.yahoo.com/q/is?s=PALM http://finance.yahoo.com/q/bs?s=PALM http://finance.yahoo.com/q/ks?s=PALM http://finance.yahoo.com/q/bc?s=PALM&t=1y&l=off&z=m&q=c&c= Trade: Sell the Jan 2010 $12.50 call and buy the Jan 2010 $15.00 call for a net of $75. Yield = 75/175 = 43% in 75 days or 206% annualized.
CLX: http://www.marketwatch.com/story/clorox-profit-up-23-lifts-forecast-2009-11-02?siteid=yhoof http://finance.yahoo.com/q/bc?s=CLX&t=5y&l=on&z=m&q=l&c= http://finance.yahoo.com/q/ks?s=CLX http://finance.yahoo.com/q/is?s=CLX CLX up .93 to 60.17 Iron candor: sell the Jan 2011 75 call and the Jan 2011 45 put and hedge with the 80 call and the 40 put for a net of 85. Yield = 85/415 = 20% in 448 days or 16.6% annualized. random variable prob CLX < 45 = 14%, prob CLX > 75 = 20%
TEVA: http://finance.yahoo.com/news/Teva-Pharmaceutical-3Q-profit-apf-231374664.html?x=0&.v=1 http://finance.yahoo.com/q/bc?s=TEVA&t=2y&l=off&z=m&q=c&c= http://finance.yahoo.com/q/is?s=TEVA&annual Trade: Bull put spread: Sell the Jan 2011 40 put and buy the 35. Current bid ask = (-115)/(-65). Teva has dropped .93 on earnings and Market decline... the street expected more and TEVA has run up on the expectation. Bid (-125) on the spread and will hold the bid for several days to see if it gets filled.
If you really want to do that you can without a dedicated PC: http://docs.google.com/ "Create and edit web-based documents, spreadsheets, and presentations. Store documents online and access them from any computer."
TLT: http://online.barrons.com/article/SB125720608076224113.html?mod=BOL_hpp_dc http://finance.yahoo.com/q/bc?s=TLT&t=2y&l=off&z=m&q=c&c= Jan 2010 is 74 days away, TLT closed at 94.10 .................................P/L.................................... 80.....94/90 put spread.....100/98 call spread 85............225.............................35 90............225.............................35 95...........(175)............................35 100.........(175)..........................(165) 110.........(175)..........................(165) ------------------------------------------------------- req:..........175.............................165 Yield........128%............................21% Ann......... 622%..........................103% and many others.