The Wings are Delicious, is the Option?

Over the weekend I had the chance to eat at Buffalo Wild Wings (BWLD) and really liked the wings. I checked out their stock, as I knew it was a public company, and I noticed that the stock has just been trounced (like most other stocks), except that the stock traded at its 52 week high (44.98) in September (not like most stocks) and that historically when this company reports they either POP or DROP. Therefore I did some speculation on BWLD today. The short interest on this stock is over 25%! I have a feeling if we see them beat the quarter on February 10 after the bell, this stock could bury my strike price of 30. I purchased some FEB 30 call contracts today for $60 a piece. The stock is trading at around 25 a share, and in 52 days I think this stock (if beating the quarter) could sky rocket on a short squeeze. Remember this is a speculation play, meaning I wouldn't "gamble" more than 0.5% of my portfolio on the bet. Say you purchased about 20 contracts for $1200 and the stock then reaches its 52 week high after they report (possible on a massive short squeeze)... That $1200 then would turn into $29,960. However if the stock finishes at 29.99 your $1200 would be $0. This is one call I will bekeeping my eye on, and IF you have money to speculate with maybe you should buy a contract or two at a limit of $50-$100 a contract.

HAPPY NEW YEAR! MAY 2009 BRING PLENTY OF PROFITS!



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Light Volume, Dead Options...

With the terrible year (for most) coming to an end most traders/investors have taken all the losses they want/need to realize for the year, not to mention the Christmas and New Years Holidays... Therefore volume is extremely light, which makes for the options market to be even lighter. It has been tough to find anyone to trade options with me. So I had to look a bit harder and go with a "semi-boring" trade today. Today I sold 10 PUT contracts on Merrill Lynch for the 5 January strike for $30 a contract. Friday the stock should be fully converted to BAC (Bank of America) and I don't think we'll see BAC at $5.81 (which is equivalent to MER at $5, ratio is .8595) within 18 days, one reason being investors might buy into certainty, because the MER/BAC deal is officially closed etc... Worst case scenario is that the stock gets to or goes below $5.81 and I purchase the shares for $5.81, I don't have a problem (unless of course more banks get nationalized which is a scary thought but still very possible). I will then just write out of the money calls on the newly purchased shares until eventually I get called out. The other side is that the stock is not below $5.81 on that third Saturday in January, I will then have made a $300 (minus commissions) profit. I guess that's not too bad considering how light the volume is. The way I look at is: I want the 1000 shares of Merrill and I am getting paid to place the limit order for 5. This way I might get my shares at what I set the limit a, but I might not get them but get to keep $300 for free... If there is a stock you've been looking at, and you think the limit you want to place is just way too low, you might want to sell the PUT contract and have a shot at that price and get paid for doing so...



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Why I Never Set Market Orders and Rarely Set Limit Orders

Tonight I am sharing why I never set market orders and rarely set limit orders. The first rule of serious investing is never set market orders! Never set market especially when the volume on the stock is light... If the last price of a stock was $8.50 and the current bid is $8.25 and current ask is $9 and you place an order to buy at market, you will buy at $9. I would suggest putting a limit order a penny to 5 above the current bid, this will give you the highest bid and you might be able to bargain with the lowest "asker". So why not use a limit? When trying to buy a stock I'll use the PUT option. If a stock is at 50 and I wanted to pay 45, I will then simply sell to open a put contract at the 45 strike. I will then get a premium, and if the stock is below the price I want to pay, when the contract expires, I get the stock at the price I would have picked it up at anyway (price I would use to place the limit order). This helps cost average down your shares, and gives you a chance to make "free money" if the option expires above the strike. Obviously you wouldn't use this strategy if you were buying less than 100 shares, or if you absolutely "needed the stock today" in your portfolio. I have been using this strategy to purchase my shares and I find it has been working well. If you say "well you could really get burned, because it is like becoming the insurance company for a particular stock", I would argue. Say a stock is at 50 and then goes to 38 and you sold the 45 put for a $300 premium or $3 a share(when the stock was at 50), then you are down $4500 (price paid for stock) -$3800(current value of stock) - $300 (premium received for stock) or down a total of $400, but if you put a limit in for $45 (when the stock was at 50) and you filled your order, and the stock then goes to $38 you lose $700. The trade-off is: not owning the stock today versus money in your account today, with the chance of never getting the stock at all. This is my strategy for buying all of common shares.



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BGZ Buy the Stock and Sell The Call

Today while the S&P was near 905 I purchased 200 shares of BGZ. BGZ is an inverse ETF that uses 250% leverage to get a 3X opposite move on a large basket of large cap stocks. So for every 1% drop in the basket of large cap stocks, this ETF moves up 3% or so. I purchased 200 at $61 per share, and waited an hour or so before I wrote 2 call contracts for the December 80 strike. I sold both contracts for $391.50 AFTER fees, that means my cost basis for these shares is now $59.05, and I am giving the rights to someone to purchase the shares off of me ( in 10 days) for $80. So if I do get called out I would net over $4000, but if Idon't I will just write them out again for the January expiration and get another whopper of a premium. The reason I am doing this is because by writing the call so far out of the money I am guaranteeing myself a much higher price than I paid for the stock (if I get called out), as well as gives me a little income off my shares and lowers my cost basis. The other good part is- well if this stocks gets trounced that just means 85% of my portfolio is doing great! I will continue to play with these very volatile stocks as long as the VIX (Volatility Index) remains above 30- which I see for the next 6-8 months. This strategy has worked for me well the last 3 months with both BGZ and SDS. If you think that these are too volatile look around thre are many inverse funds out there to be found.



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Why not do Both?

Recently I have been doing some back testing and I chose Google as my guinea pig... Expensive guinea pig right? Well not really considering I made over 60% in about 2 weeks. A little over 2 weeks ago, November 24 to be exact, I purchased both calls and puts on Google. Knowing how volatile the market currently is, I assumed we'd see Google trade in a huge range for the next 3-4 weeks (at the time the options had 25 days left until it expired). Before you read on, notice that I said the word assumed, a dangerous word in the world of investing, and I could have been left with $0 if my assumption didn't pay off- so don't think I am saying this strategy works 100% of the time!

On Nov. 25 when Google was around 255 share, I purchased the December $240 put, and the December $270 call (notice $15 up and $15 down- I call this a "custom straddle" also known as a strangle - learn more from my advanced trading options E-Book ). I purchased both contracts for $2910, and as of today Google traded up to $318 a share. I sold both my 270 call for $4640 and my 240 put for $125 so together I banked $4765, $1855 of which was profit, that's 63.7% profit to be exact.

So in this case my assumption paid off. Would I have done this if the market was less volatile? ABSOLUTELY NOT! This time it paid off nicely and I've already decided to try this strategy again for the January expiration, once the holidays, and December expiration are over. I will most likely do this as long as the VIX (Volatility Index) is over 50.



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Visa Options Paid Off- Update to November 28 Post

Today Visa traded up as high as $57.67 per share, I sold all but 5 of my contracts (December 55 strike calls) for $330 per contract. Yes I sold them for more than quadruple my cost. Just to reiterate a point stated in several of my previous posts, if you can risk your money you should look at trading options versus trading common shares.



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DIG DIG DIG

With oil taking a serious nose dive, I have started to find value in that sector. Of course Merrill Lynch came out and said oil may hit $25 a barrel if China slows down, but I honestly think even if pure speculation drives it that low, we will see a bounce back quite quickly. I must say the best way to play this would be an ETF or Exchange Traded Fund. You can find all sorts of these that capture the entire sector if you do a little research. It will help protect you from anyone of these companies going under or getting diluted, but of course you won't get the 500% overnight gainer either. I like DIG this is the Proshares Ultra Oil & Gas, which means it goes up roughly 2% for every 1% the holdings in that ETF portfolio rise. This holds your major oil and gas players such as Exxon, Chevron etc... I picked up 300 shares today for around $22 a share, and I already wrote $35 strike calls on them for December and received a premium of 35¢ per share. That's right I sold the rights to these shares at $35 for 35¢! These shares ended at $25.50 so with $9.50 to go in 16 days I am confident I might have received some FREE $. This gives me a cost basis of $21.68 per share after commissions. So If I do get called out I won't cry about it, I'll simply look for the next bargain, and sell some calls on it. Assuming I don't get called out, I will write the 3 contracts again for January hoping for another $1 per share for $35 strike again, assuming this ETF goes higher by then. I am holding DIG until I get called out, I am not afraid of an unrealized loss because I can simply keep selling out of the money calls for a nice premium and eventually I will be up all around on these shares. There are so many great stocks, and ETFs that are just fetching great premiums in this volatile market, that if you know how to play you will be certainly be cashing in on these terrible times.



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RIMM Options Looking HOT!

Today the once $80+ Billion Research in Motion was trading for less than $20 Billion. That's right the once $140 per share giant was trading near $35 a share today. First off I must say that RIMM at $140 is far overvalued, but that's beside my point. With the new storm selling out almost everywhere I think they might be able to beat earnings. Historically when RIMM reports better than expected, they rally 20%+. I think that this may be the case. RIMM has been beaten senseless in this vicious market, and I think it's time they beat for a quarter instead of miss (like they have the last 2). I bought calls today for the December 45 strike for $50 per contract. If I double my money between now and the day RIMM reports, which is the day before the contracts expire (December 18), of course I will sell half my contracts and let my free contracts ride. Pure speculation like this can either make or break you. I am hoping to hit a real homerun with these.



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Looking Ahead to Christmas...

Today is Black Friday and it seems things haven't changed too much in this horrible recession. I understand that everything is largely discounted but at least people are buying anything at all... Anyway with this market trading on its last day for November and a short day if that, I'll suggest a call I purchased today and I am confident will expire in the money making me some extra holiday spending money... Today I purchased 20 contracts of the Visa December 55 Call for $80 per contract. I am speculating that between now and Christmas Visa will give positive outlook that they have achieved record sales of their gift cards- that of which Visa gets a hefty $5.95 premium for a piece of plastic (almost pure profit for the firm), not to mention the transaction fees when someone uses the card. I assume Visa to give this outlook or for an analyst to say something along the lines of this. I purchased the rights to Visa for a premium of 80¢ a share, but I'll sell 3 quarters of my position at around $1.30 premium per share, giving me a profit and letting 5 contracts ride for free.



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One HOT Option Trade for a Volatile Market

With the November expiration coming this Friday, it would seem that premiums for an unlikely strike price would be getting next to nothing. That is not the case however with some of my holdings, as I wrote some covered calls today for SDS. Today SDS traded as high as 109.40 and as low as 99.50. When the SDS was at about $103 I wrote out 2 contracts for the $120 strike for $225 per contract! Yes I received a premium of $2.25 a share with only 4 days for the option to expire. I bought these shares less than a week ago for roughly $90 and I already pocketed $450 for the right to sell my shares at $120/share or $19 higher than what SDS closed at. For those who are familiar with the SDS you know how volatile it is and for those who don't, learned how volatile it was the minute you read the trading range for the day. Yes the SDS will fetch a better premium due to its volatility.

Okay so let's take a less volatile stock such as Caterpillar (yes I know most of the stocks nowadays are very volatile- but CAT is a stock I own and much less volatile than most I hold). The stock hit a high today of $36.30 and a low of $34.73. Now ask yourself, what do I see CAT trading at the close Friday? Your guess is as good as mine, but my guess is not too much higher than $40, if it can even get there. Then I would look at the $40 strike for November to see if the premium offered would be worth the risk of unloading my shares for $40/share at the close Friday. I see that the last contract that traded was for a premium of 18¢ or $18/contract. The high for that particular option contract was 26¢ or $26/contract. At the open Wednesday I would put a limit order in to sell my contracts for $30-$35 or a 30¢-35¢ premium per share. The chances of CAT getting over $40 by Friday is likely and you may not make as much money as you could have, but if your cost basis for CAT is below $40 and you sell your shares at $40, then so what you still made money on your common shares + the premium you sold your contracts for.

The bottom line is yes this market is horrible, but you will be able to make some income if you hold common shares (in lots of 100) off this market. If you plan on just holding your shares to sell them for a better day, there is no point why you aren't creating income off those shares! There is a way to make money in this market so don't get out of the market because you hear negative news in every direction. Remember this strategy is only for those who plan on holding their common shares no matter how beat up they get...





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I Smell a Short Term Rally coming

Sorry I have not been able to blog in a while but as usual I have been very busy. I figured since it is a Friday I can take a rest from my school work and write a quick blog. Just by glancing at the charts I think we are definitely due for an uptrend (10% or better on indexed), whether it is a 1 day move or 3 months, I think we'll get at least that out of the market on the upside before we go down again. Today as the market was selling off I was taking advantage of the bargains out there, and was buying up with all the money I had sitting on the sidelines. I think we are just way to over sold and I think it can be fairly easy to make a quick buck trading into an uptrend soon. Today I purchased call contracts on GS, RIMM, CAT, GOOG, MER, and V. I think these contracts should bank a quick dollar or even land in the money by the time I'm ready to trade them. I will start unloading the instant the market moves higher, just because it is too dangerous to stay long for too long in these markets, but I will try to hold as much as I can until they expire. I think the entire market will move higher so I would assume most names to be safe for a short term trade.



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GS update 2

Today I sold the rest of my PUTS on Goldman Sachs as the stock plunged to a new 52 week low of 74. I sold my last PUT contracts at $7490 a piece or 74.90 a share. I think I made the right choice, because I see a short term rally coming to the markets in the next week or two and these options expire in less than 2 weeks. Either way I am happy that I was able to take part in this JACKPOT trade.



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Easy Rally Quick Short!

Today as we rallied in the market (for no reason), I was shorting stocks, after covering them all yesterday. I shorted names from AMZN to ZLC and will cover them as the market gets weaker. I honestly think this trading environment is awesome, and hope nobody is trying to be rational and "invest" because frankly I think that you will get hammered short term, and you'll have a chance to pickup the stocks at an even lower price.



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WOW What a Disaster! Bailout... FAILED!

Sorry I have not been able to blog lately, I have been extremely busy with school and work. I would like to start by saying that today was a complete disaster the S&P was down over 100 points! I covered all of my shorts today, because I think everything was way over sold. I think that this bailout will EVENTUALLY get passed once each crooked politician gets his/her way. If we have more crazy selling tomorrow I will be looking at calls to buy, as well as common shares... My advice is: I think it would be smart to cover some shorts, and wait for the market to have a rally to short again. I will be shorting if we get a rally of any sort. Individual stocks not necessary to name, I don't think any stock will stay up in this market.



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Update to my Goldman Sachs PUTS

With the financial mess getting really ugly I decided to sell 3 of my GS contracts today for a total of $19,740 or $65.80 premium per share (as GS traded down near a low of 90 today)! I still hold 7 contracts which I will wait to sell, because I have a feeling GS and the market as a whole might be headed lower!



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PUT Goldman Sachs in its place

Today I am writing about some PUTS I purchased to hedge myself. I own GS stock so I purchased 10 contracts (while GS was trading at about 171 per share) for the October expiration for the 145 strike. Goldman is the last financial giant standing, and honestly I don't think they can avoid this credit mess, therefore I purchased 10 contracts for a total of $1400 today. So with almost 50 days until these PUTS expire I will see what kind of profit I can pull. I will keep everyone updated when and at what price I sell the contracts.



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Hello World

Hello, and welcome to my blog. I have been investing in stocks and options since I was 11 years old (That's over 10 years ago now). My first stock was Corning Glass Works (GLW) and I purchased 45 shares at around 34 a share. I later sold my shares for over 200 a share during the tech boom in Summer 2000. Ever since making my first dollar I have been fascinated with the financial markets. I mainly am creating this blog to share my strategies with others, as well as "journal" my ideas so I can see how I did... Hope you enjoy reading my blog.



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THANK YOU!

Thank you for your support to my blog. I appreciate it and will continue to bring you the best material on a daily basis! Sphere: Related Content