Sold puts on $18 CRUS for April. Credit $0.30 Annualized % return..... 13 - 14% otm cushion.... 19% http://finance.yahoo.com/q/bc?t=2y&l=on&z=l&q=b&p=&a=&c=&s=crus&ql=1 The main risk to this stock and trade is,.... so much of the companies income is tied to AAPL.
With CRUS at 22.07: http://finance.yahoo.com/q/bc?s=CRUS&t=2y&l=off&z=l&q=l&c= "Catch a falling knife and put it in your pocket..." Short Put: Sell 1 April $18 put for $25 ($30 is the ask, the bid is $25)...Required = $1,775 (yield = 1.4%) Bull Put Spread: Sell 1 April $19 put and Buy 1 April $15 put for a net credit of $27...Required=$373 (yield = 7.2%) Bull Call Spread: Buy the April $20 call and sell the April $25 Call for a net debit of $240....Required = $240 (yield = 108%) Long Call: Buy the April $19 call for a net debit of $380,required = $380 Price.............Bull Put Spread.......Short Put.......Bull Call Spread.......Long Call 5...........................(373)................(1275)..................(240).................(380) 10..........................(373).................(775)..................(240).................(380) 12..........................(373).................(575)..................(240).................(380) 15..........................(373).................(275)..................(240).................(380) 18...........................(70)....................25....................(240)..................(380) 19............................27.....................25....................(240)..................(380) 20............................27.....................25....................(240)..................(280) 25............................27.....................25.....................260....................220 30............................27.....................25.....................260....................720 Many other possibilities. (note: none of the above trades have any 'double sided' risks) Which is the 'best trade'...depends on the hypothesis that is the basis of the trade.
I don't think a stock with earnings, no debt, and real products, should be considered a "falling knife". Those who bought the stock considerably higher and without any tech support nearby, made the mistake of buying high on good news. Those, who are investing in the "teens", while the stock is now trading considerably lower, in the low 20's, are not hoping to catch a falling knife. They are simply investing in a financially healthy, quality company, at a better price. As for your $19/$15 credit spread theoretical trade,... it is not unreasonable. The minor downside is, you are investing at $19 vs my $18. The upside is, you've given yourself some price flexibility, by doing a 19/15 vs a 19/18. Another positive is, your price is in the "teens", thus making it more likely that you could actually consider buying the stock, if it closed slightly under your strike of $19. That being,... strikes in the $40 plus area, are often too expensive for spread traders to consider buying,.... due to their number of contracts initiated. And I like that it is not a "double sided" risk trade. That being, you have unlimited upside potential movement, and a "reasonable" degree of restrictive movement to the downside. So why do I still prefer my $18 naked put vs your $19/15 spread? Besides having a lower strike, a higher credit, and less leverage risk for a similar potential dollar earned,... I am also not paying for protection I will probably not be using. Why do i say that? The contract expires on the 19th, and earnings are reported on the 22nd.... unless they warn early. Hence, if the contract were still in affect when earnings were reported, then your trade would be a wiser/safer trade than mine. But your protection expires before earnings are released. If I'm going to pay for protection, I want the contract to still be in effect, when earnings are released.
I don't disagree with that...mostly. "...so much of the companies income is tied to AAPL." If you plot CRUS with AAPL: http://finance.yahoo.com/q/bc?t=2y&s=CRUS&l=off&z=l&q=l&c=aapl&ql=1 You can see that AAPL sucked CRUS up with it when Apple Fever was at its peak, and now CRUS is being sucked back down with Apple as skepticism reigns. And none of it correlates with the overall market: http://finance.yahoo.com/q/bc?t=2y&s=CRUS&l=off&z=l&q=l&c=aapl&ql=1&c=^GSPC So what happens to CRUS would seem to really be a question of what happens to Apple. The degree to which CRUS will be able to uncouple from AAPL will be set by the degree to which AAPL dominates CRUS's income stream... in both reality and perception.
<<< So what happens to CRUS would seem to really be a question of what happens to Apple. >>> Hence the reason for my $18 strike, with a 19% otm safety cushion, and tech support in the 20 area. Plus the fact that CRUS is financially healthy. I would not risk such a "dependent" trade, on a stock with excessive debt.
Sold puts on $17.25 IPI for June. Credit $0.60 Annualized % return.... 12% The 5 year chart below shows strong tech support in the $19 - $21 range. With the stock trading at $19, I initiated the trade, with my BE price of $16.65 http://finance.yahoo.com/q/bc?s=IPI&t=5y&l=on&z=l&q=b&c= Company is financially healthy with no debt, and is reasonably priced at my BE of $16.65. Company has shown some earnings weakness recently. But temporary issues are what I look for, as long as the companies overall health, stability, and value are still solid.
I did a double-take when I read your post. After glancing at a couple of chemical and fertilizer companies this a.m., I just signed into ET and learned that we sold the exact same option in Intrepid Potash (IPI). I was already short some in a taxable account and threw a massive 5-lot trade into my wife's IRA. I had some free trades to use and it's more of a placeholder until I decide whether to buy the stock. 12% ROI normally doesn't cut it for me. FYI, They are issuing some debt this Spring; probably wasn't necessary since they just paid out a 75 ct/share special dividend, but debt's cheap now. I like that potash (the commodity) might be bottoming out and that the two big cheeses own 40% of the company. P.S. Someone shoot me if I ever start talking about over-leveraged credit spreaders.
The fact that we both made the same investment, indicates at least one of us has a "great mind",.... with the other simply "thinking a-like." I too am not thrilled with a potential 12% annualized return. However, given that the market is at an all time high, and I'm on a certain % of leverage,... I prefer a slightly more otm safety cushion, even more than a slightly higher % return. In addition, given that the trade is almost 3.5 months long, that presents plenty of potential opportunity, for an early buyback of the trade,.... and thus a higher % return than 12%. (For example, last week I posted, that I bought back my $10 ARO 6 weeks early, keeping 75% of the profit.) <<< P.S. Someone shoot me if I ever start talking about over-leveraged credit spreaders >>> Believe me, you won't have to ask.
Re the 12% ROI on cash secured puts: I am going to re-think my activity in the tax-deferred accounts. I was looking through my trade database and for a trade to fit the parameters I'm looking for -- % OTM, Delta, ROI, etc -- I'm selling distant dates, very high IV or using lower-priced underlyings (or some combination of the three) than I prefer. When I look at the notional/cash secured value of these put transactions, I'm tying up a lot of money for 10-18% and some of it's in trades I would be hesitant to make in a taxable margin account. The IPI trade is a good example: 12% annual ROI in an IRA and over 60% in a margin account. But in the margin account I'd sell a strike or two lower, sleep better, and still get over 30% PA and a tax loss benefit if the trade went south. Putting the higher risk trades in my retirement accounts, although it's been working fine, is bass ackwards. I'm either going to have to accept an even lower ROI and go with better names and/or lower strikes, or find a different asset class. Wall Street keeps pumping out high yielding trusts and MLPs to meet investor demand. Maybe I'll buy a pile of that steaming crap and hope for the best.
<<< When I look at the notional/cash secured value of these put transactions, I'm tying up a lot of money for 10-18% and some of it's in trades I would be hesitant to make in a taxable margin account. The IPI trade is a good example: 12% annual ROI in an IRA and over 60% in a margin account. But in the margin account I'd sell a strike or two lower, sleep better, and still get over 30% PA and a tax loss benefit if the trade went south. >>> I think you may be overly focused on that 12% return. And perhaps rightly so, if you are not diversifying your trades. But if you are diversifying, as I am, then that 12% return is but one trade. I have other trades that earn 16% or 19% as well. At the end of the year, it's all about the BLEND of % returns. Yes, you are tying up a lot of money if they are cash secured puts in an IRA. But, you would be tying up the same amount for any trade in an IRA. There is no way you are going from 12% in an IRA to 60% in a non IRA using the same stock and strike.... unless you are changing your strategy from selling naked puts, to selling put credit spreads. Then you are correct. However, by changing to the spread strategy, you will probably be unable to buy most of your stock, if it drops slightly below your strike. Thus you will be forced to close the trade for a probable loss. While, if you had been naked, and thus been forced to set aside more cash for the margin requirement, you would at least have the CHOICE of whether to close the trade,... or buy the stock, sell covered calls, collect dividends, and... "manage the recovery". Final thought..... I'm not thrilled with the 12% return on IPI either. But look where the VIX is trading. Thus, we have to accept the market environment we are in,... vs the fantasy we desire. Or select a higher strike, resulting in a subsequently "lower probability trade". And again, the issue is NOT the % return on this or that trade. The issue is the BLEND of % returns from all trades, at year end. I earned over 22% last year, via my "blend" of 13 - 19% otm trades,... plus the use of leverage. The "risk/reward/probability" criteria I use for my trades, is based on the fact that some trades deserve to only earn 12%, while others deserve 19% Some trades may only require a 5% otm cushion, while others require 20%. Each trade gets evaluated independently, based on that trades "risk/reward/probability of success metric".