Nice hearing from you.
Yes, we watch gold and crude every day but have not done much in the commodity market with them. It seems that the fundamentals for Crude show consumption greater than production, making it in short supply, now and in the future, yet, pricing acts like the world is awash in Crude. We think the difference is in Natural Gas Liquids, which production is exploding. We always have our suspicions concerning the government and in an election year with unending political campaigning, that goes double. Who really knows what they are up to? In the meantime and for now we must go with the pricing.
We usually carry a heavy gold position just because we always have and it feels right. Neither reason, however, is valid and are among the dumbest reasons ever. What is valid though is the nice sideways action since march, which is an option seller’s dream.
We have put on GLD, as a gold condor, as well as AGQ, as a silver condor. We have recently had positions in the miners, such as GG, NEM, FCX, SLW and RGLD. The world financial system is a mess, which is typical when people leave it to the politicians to manage. Its no news flash that the world’s stock markets reflect dour news. Things are bad in Europe. The US economy is certainly slipping back into recession and if the real truth were known, actually slipping into a deeper depression. China and Japan are on the economic ropes.
This will not be good for the resource sector as reduced demand and continuous unwinding within the markets will take another bite. But notice, that our strategy constantly adjusts against the price of the underlying driving our breakeven point ever lower. Where we have a clear established trend we sell puts or calls against the trend. Where we have sideways action, we sell strangles and condors. All to take advantage of the fact that we have no real idea where the market is going but we will profit from it if it doesn’t go there too fast.
We are taking a closer look at copper and nuclear Power and will cover our research in a future trade journal.
The tax thing is a big deal and will have profound effects on the markets and plenty of unintended, or more likely, serious intended consequences. We are dealing with a ruling political elite who do NOT serve the best interests of this country or its people, but who serve only their own selfish corrupt desire for more power. As traders, we have to outthink them and outwit them.
And they say we evil speculators “strangle” the market.
RGLD, CAT, SSO, EWZ, TZA, XLE, CLNE, AGNC, ETP
FROM THE LOG: Friday, Jul 6, 2012
+2 Jul 77.5 Puts @ 2.50
-3 Aug 75 Puts @ 2.50
Rgld closed at $77.01. That places our options In-the-money (as they were most of the day). The Jul options still had 15 days to go so we could have just waited for either the underlying to maybe head north above the strike, taking our options out-of-the-money, or wait about 15 days and accept assignment, keeping in mind that as ITM options close in on expiration the possibility of early assignment goes up.
OR, we could roll the options forward to gain more time until expiration and improve the strike price. We chose the latter. We bought back the Jul 77.5 puts for $2.50 and sold the Aug 75 puts for $2.50, gaining nothing on the transaction but gaining 2.5 points on the strike, and adding 28 days to the option term.
Where before the adjustment, if assigned the 2 contracts, we would have to pay $77.50 per share, or $15,500, less the premium of $570, or $14,930, or 74.65 per share. 77.5 x 200 – 2.85 = 14,930/200 = 74.65.
We also chose to sell 3 contracts this time at $2.50, or $750, just to add a little more premium (and risk) to the mix. We still like the stock and at some point we will allow assignment if it continues to go down. In the meantime, we plan to milk the puts for more premium…all on a stock we do not own yet.
We originally sold 2 contracts, strike $77.5, at $2.85, or $570. Should assignment occur in this cycle, we would benefit on the 2 contracts in that the per share price would be $75 – 2.85, or $72.15, or $14,430. Of course, since we sold 3 contracts our actual cost would be for 3 contracts, or $75 x 300-570+500-750= $21,680, or $72.26 per share.
This transaction illustrates an iron-clad rule. We must NEVER cover a position without selling at least as much premium as it is costing us, even if we have to sell more contracts and go further out.
Upon receiving a fill, we immediately placed a GTC order at the 15% level, or .40 (rounded up). This is a change from the 20% level.
If the put premium sneaks down to .40 while we are sleeping, the position will automatically close. We do this with ALL positions. We are often pleasantly surprised at how many go to that level and close out, sometimes with only a few days into the position, especially with the weekly options. The premium decay can happen very quickly and we have too many positions to see everything happening at once. Autopilot is much better.
-2 JUL Weekly(8) 82.5 puts @ .81
We are short the 85 calls and the 82.5 Puts and have driven down the Cost per Share from $112.68 to 88.24. That is still a little above today’s closing price of $84.61, but we are getting there.
-4 Jul Weekly(8) 53 puts @ .60
We own 200 shares and are short 2 weekly 54 calls and 4 weekly 53 puts, bringing down our Cost per Share to $57.43. That still leaves us a little underwater on the share price but headed in the right direction.
-5 Jul Weekly(8) 53 calls @ .39
-5 Jul Weekly 51 Puts @ .45
-10 Jul Weekly(8) 18 Calls @ .35
-10 Jul Weekly(8) 17 Puts @ .31
-5 Sep 70 Calls @ 1.08
-5 Sep 61 Puts @ 1.25
-10 Aug 14 Puts @ .50
-5 AUG 35 Puts @ 1.07
-4 Sep 45 Calls @ 1.03
-10 Sep 42.5 Puts @ .91
Before today, we held 400 shares at a cost of $45, less premium received of .65, or 44.35. We sold another $1,280 in premium today, bringing our cost down to, or $41.20 per share.
$18,000-260-380-900+(commissions 21) = 16,481, or 41.20 per share.
This position has a 71% probability that it will return 10.8% (52% annually), as it is now structured. We expect a dividend of $358 in 24 days and may adjust the strikes should the underlying head above 45.
If called. we would receive $45 x 400 = 18,000. Because our cost per share is 41.20, our cost would be 41.20 x 400 = $16,480, for a profit of $1,520.
In this portfolio, in the past two weeks, we have sold $5,813 and 8,705 in net premium. If continued at that rate, we would generate $377,000 per year. With an 80% retention rate, we would retain about $300,000. Why not 500,000? 1,000,000?
The limiting factor and question is how much capital will it require?
We will save the answer to that and other questions for a future Trade Journal.
JPM, AIG, CHK, CAT, TZA
FROM THE LOG: Tuesday, July 10, 2012
More Sowing and a little Reaping. That is what today was.
+500 Shares @ 34.24
-5 Weekly(4) 35 Calls @ .42
Too good to pass up. The premium of .42 over 4 days implies a return of $37.41, or 109% annually. If called, our profit would be $1.18, or an annual return of 150%.
Our Cost per share is reduced to $40.87.
+500 Shares @ 31.01
-5 Jul(11)31 Calls @ .66
The premium of .66 over 11 days implies a return of 70%. If closed out before the 11 days, annual percentage goes up. Our CPS is $30.35
-5 Jul Weekly(11) 19 Puts @ .51
The premium of .51 implies a return of 140%
+5 Weekly(4) 18 Calls @ 1.17
-5 Weekly(11) 18 Calls @ 1.31
We rolled out to next week’s expiration and gained 14 points. The stock goes ex-dividend 7/12, and closed today at $18.69. The options are in the money by 69 cents. Even our 11 days out July 21st options could be called at any time so we added a little more premium to the mix and maybe bought a few more days for Sister Theta to do her work in the premium decay department. If called we receive a net option premium of $1.65+1.17-1.31 = $1.79 and $18 a share, or 500 x 18 = $9,000 plus the option premium of $895, or $9,895. Today our net CPS is $14.18.
+1 Jul 85 Calls @ .25
+2 Weekly(4) 82.5 Puts @ 2.76
-2 Weekly(11)82.5 Puts @ 3.65
+10 Weekly(4) 18 calls @.54
-10 Weekly(11) 19 calls @ .48
We rolled up and out losing .06, or $60, but gaining another dollar in strike price, or $1,000, if called. Adjustments always cost money. The cost on this one was very small and it improved our position.
+10 Weekly(4) 17 Puts @ .05
-10 Weekly(11) 18 Puts @ .62
Our 15% GTC order was triggered, buying back the puts we sold on 7/6 for .31, or $310, for $50.
We don’t own any shares of TZA so we cannot compute Cost per Share, but we are up about $1,170, in just four days.
What did we accomplish today?
Premium sold: $3,255
Premium bought: $1,752
Net Premium Increase: $1,530
SSO, EWZ, SLW, EEM, JPM
FROM THE LOG: Thursday, July 12, 2012
+4 Weekly(3) 53 Puts @ .53
-4 Weekly(10) 52 Puts @ .70
Covered the 53 Puts with 2 days to go and rolled into the 52 puts with 9 days to go, for a gain of 23 points. This improved our strike by $1, which got us under the price of the underlying, and widened out the profit zone. Looking for the opportunity to sell calls tomorrow.
+5 Weekly(3) 53 Calls @ .05
-5 Weekly(10) 52 Calls @ .56
Harvested, or reaped, the profit on the 53 calls with 3 days to go. We sold the 5 contracts on 7/6 (5 days ago) for .39, or $195, and covered for $25, for a net of $170. That doesn’t look like a lot of money but to keep it in perspective we must multiply these weekly options by 73 periods (365 days /5 days=73) or, $12,410. That looks a lot better, however, we must keep in mind that number is just a statistic that may or may not hold throughout the year as it would require us to take profits in each 5 day period.
-10 Weekly(10) Puts @ .40
This is the second bite out of the Silver Wheaton apple. We previously collected and kept $190 on this weekly option. This week we bagged $400 and If it stays out of the money until Friday July 21, we will keep the premium and do it again. The ROI is about 9%. Extended over the year, that would be 9% PER WEEK x 52. That implies $20,800 per year, for a return on margin of about 475%
+2 Weekly(2) 51 Puts @ 1.37
-2 Weekly(9) 50.5 Puts @ 1.34
+3 Weekly(2) 51 Puts @ 1.39
-3 Weekly(9) 50.5 Puts @ 1.36
Due to a brokerage slip up, we got to our 5 contracts via several transactions. We collected $956 with 9 days to go on the options. The ROI is an astonishing 20%. Figure that out on an annual basis.
-5 Jul Weekly(9) @ .40
-5 Jul Weekly(9) @ .38
We added this ETF to our stable this week by collecting $390 for the week. Annually that amounts to more than $20,000. ROI is 11%, or 572% a year.
+5 Weekly(2) 35 Calls @ .34
-5 Weekly(9) 36 Calls @ .33
Moved our calls up one notch to the 36’s and out one week for no gain or loss in premium. The effect is to widen out the profit zone, putting us a little farther out of the money on the call side without costing us anything, except the price of one more week in the position.
+5 Weekly(2) 34 Puts @ .65
-5 Weekly(9) 34 Puts @ .92
We rolled this put position out one more week and gained 27 points. The strike is still just out of the money, and is an OUT-of-the-money or an AT-the-money option. By doing this we squeezed another week and another $135 out of it.
Since weekly options are created each Thursday, we try to sell premium on Thursday and Friday. Last week’s options expire at the end of the business day on Friday and we do not want to be caught with options that go to exercise, unless that is part of our strategy for that specific stock, ETF or Future, or unless exercise would lower our Cost per Share to make it worth it.
Therefore, we cover any outstanding positions as soon as they hit the 85% earned point, sometimes by Monday or Tuesday, and look for opportunities to “double dip” for the week. Any remaining outstanding options are covered on Thursday and Friday and rolled out to the following week, collecting at least as much premium as it costs to cover.
Once each month the weekly option expiration coincides with the monthly option expiration, which allows us to get a jump on the weeklies by selling or adjusting 10 to 15 days in front of the expiration, rather than the normal 8 to 9 days. We find some of the premiums very enticing at that point.
We sell a certain amount of premium weekly and keep track of our cover or buy back rate so our net premium sold reaches our preset goals. Generally, we use software but have been known to track such amounts on the back of envelopes too.
Great posts. Your trading philosophy is consistent with mine so that I find your insights quite helpful. I have one small question to ask with regard to nomenclature (naming rules) that you started using in Post 106.
Using an example from your July 12th post.
+4 Weekly(3) 53 Puts @ .53
- 4 Weekly(10) 52 Puts @ .70
By using a calendar and your explanation, I can figure out that "Weekly(3)" is July 12th and "Weekly(10)" is July 21st. (not strictly a weekly but the regular monthly). Quite simply, what does the 3 and 10 signify?
Thanks in advance,