In this post is a fresh list of stocks which have experienced massive buying. I believe the stocks listed in this post are worthy of adding to the stock watch list. As stated at the bottom of this post, I have chosen three stocks which I may be speculating with in the weeks to come. As stated in previous blog posts I'm a firm believer of stocks which have had significant moves higher on big volume. Some of these stocks will sell off, and some will continue to move higher, it is important to use caution when purchasing and use discipline when selling. All of these stocks have had nice moves higher on huge volume (% volume increase compare to 50 day average).
For the week of July 27, 2009, the stocks which are on my watch list are listed in the table below.
Company
Ticker
Price Increase
% Volume Increase
Acorn Energy, Inc.
ACFN
3.13%
85.39%
Alexion Pharmaceuticals, Inc.
ALXN
5.42%
59.73%
Ariba, Inc.
ARBA
8.87%
287.87%
ArvinMeritor, Inc.
ARM
19.27%
259.63%
CDC Corporation
CHINA
18.59%
474.24%
CyberSource Corporation
CYBS
9.42%
305.66%
Exelixis, Inc.
EXEL
13.89%
111.14%
Horizon Lines, Inc.
HRZ
33.75%
287.46%
inContact, Inc .
SAAS
14.98%
183.95%
Inter Parfums, Inc.
IPAR
15.48%
296.04%
Jinpan International Limited
JST
6.42%
114.37%
LaserCard Corporation
LCRD
11.18%
357.53%
Manitex International, Inc.
MNTX
42.70%
2778.15%
RealNetworks, Inc.
RNWK
14.59%
219.64%
Regeneron Pharmaceuticals, Inc.
REGN
5.76%
107.51%
RF Micro Devices, Inc.
RFMD
15.24%
241.09%
SciClone Pharmaceuticals, Inc.
SCLN
5.29%
88.90%
Seattle Genetics, Inc.
SGEN
13.74%
432.81%
Select Comfort Corp.
SCSS
21.36%
267.13%
SonicWALL, Inc.
SNWL
14.08%
726.66%
Standard Motor Products, Inc.
SMP
0.98%
148.15%
The Black & Decker Corporation
BDK
10.11%
188.19%
Tix Corp.
TIXC
19.93%
380.86%
Vical Incorporated
VICL
11.15%
88.64%
Westell Technologies Inc.
WSTL
10.74%
615.34%
As you may know some of these stocks could give back all of their gains just as quickly, so instead of purchasing the stock, sometimes I purchase at or near the money call options on the stock. Purchasing call options is a cheaper way of opening a position on a stock, but if the stock sells off, you'll lose 100% of the premium you paid for the option and will not hold the stock, however if the stock continues to rally, you're % gain will most likely be much greater than if you purchased shares on the stock. To learn more about opening an option position like this click here.
Not all of these stocks have options traded on them, but the ones which do could pay off in big ways. I used this strategy when purchasing STEC Inc (STEC), and it paid off as STEC continued to rally after the calls were purchase (see more here).
3 stocks which have really caught my eye from the list above, and have options available on them are: LaserCard Corporation (LCRD), Alexion Pharmaceuticals, Inc. (ALXN), and SonicWALL, Inc. (SNWL). I'll be looking at purchasing call options for the August option expiration starting Monday.
The Trade:
LCRD Option Trade: Purchase the in the money August 5 call options. To open this contract as of close Friday July 24, 2009 would cost roughly $35 per contract. Buying on weakness is key; If LCRD pulls back, I may buy some of these contracts. These options expire August 22, so if I could open a position on weakness, and then LCRD rallies, I would most likely look at writing out my August 5 call options for the August 7.50 call options (known as a vertical call spread- learn more here). I would do this because it would lower the cost of my position (at the same time limiting my upside), but I have completed spreads where I could not lose (waiting for a rally in the stock and selling the higher strike call for more premium than I paid for the lower strike call).
ALXN Option Trade: Similarly to the example above I would look at creating a spread, but I would use the calendar spread option strategy. I would buy deep in the money call options for the January 2011 20 strike call option. As of close Friday this would cost roughly $2,400 per option contract. I would then write this stock out monthly until I was called out. I would write the August 2009 45 strike call option out for $90 per contract. This would give me downside protection on my initial investment of 3.75% and would yield a return of 7.92% in less than 4 weeks. The current options market is factoring in a 35.3% chance of having this stock called out at expiration. In that case I would simply write a similar strike hoping for another nice premium for the September options expiration.
SNWL Option Trade: I would look at all out speculation with this company, as the share price and volume both exploded. I would look at getting into the September 2009 7.50 strike call options on this stock. This would cost me roughly $50 per contract as of Friday's close, but I would look to get in on weakness. To break even the stock would need to get to $8 a share, and getting the stock over that isn't out of the question, especially if this rally continues. The current options market is factoring in a 21% chance this stock is at or above $10 a share by the September options expiration.
In this post I will be writing about an option strategy known as the Diagonal Call Spread Option Strategy. To understand this post you'll need somewhat of a background in stock options. To learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front; check out my book here.
A Diagonal Spread option strategy is very similar to the Bull Call Spread option strategy, except that it uses different option expiration dates instead of the same. This strategy is a great way to generate monthly income off the ETF, regardless of what the fund does. I will be using three very popular ETF's for my examples, but similar strategies can be used on any stock that offers stock options. The ETF's are the: Diamonds Trust (DOW), Series 1 (DIA), PowerSharesQQQ Trust (NASDAQ), Series 1 (QQQQ), and SPDR S&P 500 (SPY).
All data as of market close Friday July 24, 2009.
Income Generating Strategy #1: Purchase the in the money DIA 50 strike January leap 2011 call option, and sell the 93 strike August 2009 call option against it. The initial cost of the January leap 50 call option is $41.07 per share. Writing the August option out would give you cash of $1.03 per share or 2.5% of your initial investment.
If the ETF is assigned at the August options expiration, the total return is 7.21% (in less than 30 days).
If the position is not assigned (called out) you will have profited 100% of the premium received ($1.03 per share or 2.5%), and will be able to write the option out again for a future expiration generating additional income. You will be able to write options out on this ETF on a monthly basis until January 2011 (546 days).
Income Generating Strategy #2: Purchase the in the money QQQQ 20 strike January leap 2011 call option, and sell the 41 strike August 2009 call option against it. The initial cost of the January leap 20 call option is $19.51 per share. The August 41 Call option is currently trading for $0.35 per share. Writing this option out would give you cash of $0.35 per share or 1.8% of your initial investment.
If the ETF is assigned at the August options expiration the total return is 9.43% (in less than 30 days).
If the position is not assigned (called out) you will have profited 100% of the premium received ($0.35 per share or 1.8%), and will be able to write the option out again for a future expiration generating additional income. You will be able to write options out on this ETF on a monthly basis until January 2011 (546 days).
Income Generating Strategy #3: Purchase the in the money SPY 50 strike December leap 2011 call option, and sell the 100 strike August 2009 call option against it. The initial cost of the December leap 50 call option is 48.58 per share. The August 100 Call option is currently trading at $1.49 per share. Writing this option out would give you cash of $1.49 per share or 3.1% of your initial investment.
If the ETF is assigned at the August options expiration the total return is 7.06% (in less than 30 days).
If the position is not assigned (called out) you will have profited 100% of the premium received ($1.49 per share or 3.1%), and will be able to write the option out again for a future expiration generating additional income. You will be able to write options out on this ETF on a monthly basis until December 2011 (876 days).
When I open diagonal option call spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return or greater if assigned). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month. It is like receiving monthly dividends.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
I've been using this strategy to sell near the money calls on my leap stock options for the short term, and find it to be a great source of generating income for my portfolio. Using these ETF's versus stocks, is a much safer strategy, but won't return as much either.
If I want to be long a stock I simply purchase deeper in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if it's not assigned), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.
In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange [CBOE]. The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.
Today's top ten most active stock options are listed below from the most amount of contracts traded to the least.
Tiffany & Co September 29 Put Option
Citigroup August 1 Call Option
Wells Fargo October 24 Put Option
Citigroup August 2 Call Option
Citigroup August 3 Put Option
USEC Inc. October 5 Put Options
SPDR S&P 500 September 91 Put Options
SPDR S&P 500 September 88 Put Options
SPDR S&P Homebuilders December 16 Call Options
Wells Fargo August 17.50 Put Options
It is very interesting that the SPDR S&P HomebuildersETF (XHB) was among the most active. This is the first time I've seen this trade in the most active contracts. I could not find any information about a special dividend being spun from it either, so this was not a dividend play.
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I am surprised the market is holding up as good as it has been so far today... I went short into close yesterday, and haven't been able to cover today anything for a nice profit. As of now the top ten option contracts traded, from the most contracts traded to least are listed below.
Tiffany & Co (TIF) September 29 Put Option
Citigroup (C) August 1 Call Option
USEC Inc. (USU) October 5 Put Option
Wells Fargo (WFC) October 24 Put Option
Citigroup August 3 Put Option
SPDR S&P 500 (SPY) September 88 Put Options
Citigroup August 2 Call Options
Wells Fargo August 17.50 Put Options
Financial SPDR (XLF) September 11 Put Options
SPDR S&P 500 September 91 Put Options
Certainly some mixed activity today, versus the past week of mainly Citigroup option contracts being traded.
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On the back of some upsetting earnings numbers coming from Amazon (AMZN), American Express (AXP), and Microsoft (MSFT), it looks as if the market may have a tough day keeping this rally going (12 days on the NASDAQ).
The DOW Futures are lower by 30 points, NASDAQ Futures down by 10.50 points, and the S&P 500 Futures down by 4.70 points. Sphere: Related Content
With the Volatility Index (VIX) being at the lowest levels in a long time, and earnings from: Amazon (NASDAQ:AMZN), American Express (NYSE:AXP), and Microsoft (NASDAQ:MSFT) sparking an after hours sell off, it would be a great time to purchase leap 2011 call options (that is if you believe in this rally). Calls are cheaper with less volatility, and of course if the price of the stock goes down so does the premium paid for the call.
In this article I will write about 10 major financial stocks and a calendar spread option strategy on each one. To understand this article you need somewhat of a background in stock options. o learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front click here.
Calendar spreads are similar to bull call spreads, except the date for the expiration is different.
All data as of market close Thursday July 23, 2009. Pricing will change throughout the trading day.
Calendar Spread Option Strategy #1: Purchase the in the money American Express (AXP) 10 strike January leap 2011 call option, and sell the 30 strike September 2009 call option against it. The cost of this strategy is $1,770 per option contract, and if the stock is assigned at September expiration the profit from this position is $230 per contract or 12.99% (57 calendar days). This position will be profitable (not taking into account commissions) as long as American Express is at or above $27.70 a share by September 19, 2009 (September options expiration). The current options market is factoring in a 49.0% probability American Express will be at or above 30 a share at September options expiration.
Calendar Spread Option Strategy #2: Purchase the in the money Bank of America (BAC) 5 strike January leap 2011 call option, and sell the 13 strike September 2009 call option against it. The cost of this strategy is $727 per option contract, and if the stock is assigned at September expiration the profit from this position is $73 per contract or 10.04%. This position will be profitable as long as Bank of America is at or above $12.27 a share by September 19, 2009. The current options market is factoring in a 49.3% probability Bank of America will be at or above 13 a share at September options expiration.
Calendar Spread Option Strategy #3: Purchase the in the money Bank of New York Mellon (BK) 10 strike January leap 2011 call option, and sell the 27.50 strike September 2009 call option against it. The cost of this strategy is $1,600 per option contract, and if the stock is assigned at September expiration the profit from this position is $150 per contract or 9.38%. This position will be profitable as long as Bank of NY Mellon is at or above $26.00 a share by September 19, 2009. The current options market is factoring in a 47.6% probability Bank of NY Mellon will be at or above 27.50 a share at September options expiration.
Calendar Spread Option Strategy #4: Purchase the in the money Goldman Sachs (GS) 100 strike January leap 2011 call option, and sell the 180 strike September 2009 call option against it. The cost of this strategy is $6,843 per option contract, and if the stock is assigned at September expiration the profit from this position is $1157 per contract or 16.91%. This position will be profitable as long as Goldman Sachs is at or above $168.43 a share by September 19, 2009. The current options market is factoring in a 26.1% probability Goldman Sachs will be at or above 180 a share at September options expiration.
Calendar Spread Option Strategy #5: Purchase the in the money JP Morgan (JPM) 10 strike January leap 2011 call option, and sell the 38 strike September 2009 call option against it. The cost of this strategy is $2,566 per option contract, and if the stock is assigned at September expiration the profit from this position is $234 per contract or 9.12%. This position will be profitable as long as JP Morgan is at or above $35.66 a share by September 19, 2009. The current options market is factoring in a 54.1% probability JP Morgan will be at or above 38 a share at September options expiration.
Calendar Spread Option Strategy #6: Purchase the in the money KeyCorp (KEY) 2.50 strike January leap 2011 call option, and sell the 5 strike December 2009 call option against it. The cost of this strategy is $215 per option contract, and if the stock is assigned at December expiration the profit from this position is $35 per contract or 16.28%. This position will be profitable as long as KeyCorp is at or above $4.65 a share by December 19, 2009. The current options market is factoring in a 65.3% probability KeyCorp will be at or above 5 a share at December options expiration.
Calendar Spread Option Strategy #7: Purchase the in the money Morgan Stanley (MS) 12.50 strike January leap 2011 call option, and sell the 28 strike September 2009 call option against it. The cost of this strategy is $1,440 per option contract, and if the stock is assigned at September expiration the profit from this position is $110 per contract or 7.64%. This position will be profitable as long as Morgan Stanley is at or above $26.90 a share by September 19, 2009. The current options market is factoring in a 57.6% probability Morgan Stanley will be at or above 28 a share at September options expiration.
Calendar Spread Option Strategy #8: Purchase the in the money PNC Financial (PNC) 10 strike January leap 2011 call option, and sell the 35 strike November 2009 call option against it. The cost of this strategy is $2,170 per option contract, and if the stock is assigned at November expiration the profit from this position is $330 per contract or 15.21%. This position will be profitable as long as PNC is at or above $31.70 a share by November 21, 2009. The current options market is factoring in a 58.6% probability PNC will be at or above 35 a share at November options expiration.
Calendar Spread Option Strategy #9: Purchase the in the money State Street (STT) 10 strike January leap 2011 call option, and sell the 48 strike September 2009 call option against it. The cost of this strategy is $3,515 per option contract, and if the stock is assigned at September expiration the profit from this position is $285 per contract or 8.11%. This position will be profitable as long as State Street is at or above $45.15 a share by September 19, 2009. The current options market is factoring in a 57% probability State Street will be at or above 48 a share at September options expiration.
Calendar Spread Option Strategy #10: Purchase the in the money Wells Fargo (WFC) 7.50 strike January leap 2011 call option, and sell the 24 strike September 2009 call option against it. The cost of this strategy is $1,505 per option contract, and if the stock is assigned at September expiration the profit from this position is $145 per contract or 9.63%. This position will be profitable as long as Wells Fargo is at or above $22.55 a share by September 19, 2009. The current options market is factoring in a 53.3% probability Wells Fargo will be at or above 24 a share at September options expiration.
When I open option calendar spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return if assigned or greater). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
I've been using this strategy to sell near the money calls on my leap options for the short term, and find it to be a great source of generating income for my portfolio. If I want to be long a stock I simply purchase in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if I don't get called out), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.
In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange (CBOE). The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.
Below is a printable spreadsheet of the stocks in this analysis ranked in order from least to greatest return (click to enlarge and print).
Currently the market is having a huge day - the S&P 500 is up 2.6% as of 3 PM! However there is a rare occurrence taking place... The Volatility Index (VIX) is also up, when you may have expected it to have been down big. Historically the S&P and the VIX have a negative relationship as shown in the chart below.
I blogged about a similar occurrence which happened one June 1, 2009. The market set a new high on June 1, 2009 with the VIX also trading higher for the day. The market sold off the following week, until it retested the high which it could not break. The market was then in a downtrend until recently. The charts look very similar, so I would not be surprised if the market is due for a short term correction.
This is a paper I wrote in November, 2008 for an environmental economics class. A research paper on the Chicago Climate Exchange (CCX). Cap and Trade is a topic many Americans are interested in as the Obama Administration is pushing for it. The basics of what a carbon contract is, how it works, and where it is traded. My original research paper is embedded below. Read, print, or download my paper from the Scribd box below.
Chicago Climate Exchange (CCX) Marco Hickey November, 2008 A research paper on the Chicago Climate Exchange (CCX). The basics of what a carbon contract is, how it works, and where it is traded., Today, many people worldwide engage in making some additional income, or even a living from the financial markets. People buy and sell equities, the most common instruments being common shares of a company. People purchase these shares based on their expectation(s) of the company’s future. A more complex instrument to invest or speculate with, is the buying and selling of options. Each “standard” option contract is for 100 common shares, and gives the buyer the right but not the obligation to purchase the underlying shares for a set price (strike) within a specific time frame. Through the options world has evolved a new type of instrument, this is called a Chicago Climate Exchange (CCX) Carbon Financial Instrument (CFI) Contract. Each CFI contract is equivalent to 100 metric tons of CO2. The standard or target emissions level is set for Greenhouse Gas (GHG) emissions among all industries. The amount a company can emit or pollute into the environment depends on the size and product capabilities of that company. “CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument (CFI) contracts” [1]. By selling these contracts it allows for some companies, who chose to invest in technologies to reduce emissions, to offset the cost of the technologies. Through this system it creates additional incentives for companies to invest in technologies which reduce emissions, because they may be able to fetch descent premiums by selling their surplus emissions offsets to other companies. A recent article states that by registering these offsets through the Chicago Climate Exchange, it makes it possible for the state of Virginia to reach its goal of reducing emissions by 30% by 2025. CNX Gas announced today it has registered 8.4 million metric tons of emission offsets for trading on the CCX, a legally binding greenhouse gas reduction and trading exchange for emission sources and offset projects. CNX Gas' offsets arose out of CNX Gas' coalbed methane capture project in Buchanan County, Virginia, for the years 2003 through September 2007. Additional offsets are expected to be generated in the future. "This is a win-win-win situation for all parties involved here today," CNX Gas President and CEO Nicholas J. DeIuliis said about the significance of the relationship between CNX Gas, the Chicago Climate Exchange and the Commonwealth of Virginia. "Not only are we creating value for our shareholders through the registration of emission offsets on the Chicago Climate Exchange, we are furthering the goals of Governor Kaine's 2007 Virginia Energy Plan, making Virginia a leader in addressing one of the most important issues in the country today." Dr. Richard Sandor, Chairman and CEO of Chicago Climate Exchange, echoed Mr. DeIuliis' thoughts: "The Chicago Climate Exchange facilitates private sector approaches to addressing the climate change issue and we are very Original Research by Marco H. OptionMaestro.com pleased to partner with CNX Gas and to see the positive impact that our partnership is having on Virginia and the country." "CNX Gas' methane capture project in Buchanan County is exactly the type of private sector initiative that will enable Virginia to achieve our goal of reducing the Commonwealth's total greenhouse gas emissions by 30% by 2025,” remarked Governor Kaine. "Just to put it in perspective, the 8.4 million metric tons of CO2 equivalents being registered by CNX Gas today, is equivalent to the annual carbon emissions of 1.6 million automobiles. Moreover, because CNX Gas sells the methane it captures, we are simultaneously increasing the Commonwealth's indigenous energy production, which was one of the goals I laid out in my 2007 Virginia Energy Plan [2]. This article is one example of how the Chicago Climate Exchange has been very successful in getting companies to reduce emissions. The reason CNX would have the incentive to reduce emissions is because they want to create some additional revenue off of their saved or “banked” emissions. According to the market price (as of November 25, 2008), 2008 and 2009 sell for $1.35 per ton or $135 per contract, and 2010 sell for $1.40 per ton or $140 per contract, CNX could sell their offsets for a total of $11,340,000 for years 2008, and 2009, and $11,760,000 for the year 2010. This additional $11,000,000+ could certainly help CNX reinvest in technologies to even further reduce emissions, allowing them to sell even more future offsets, causing even greater future profits. Not to mention the state of Virginia is becoming less polluted through this system, which allows for other states to become more aware of the benefits of trading carbon offsets. Chicago Climate Exchange is growing at a phenomenal rate, starting with just 13 members in 2003, now has over 300, mainly due to increased concern over the environment and global warming. Some people may argue saying the growth of the CCX will not help the environment at all, because the same amount of emissions will escape into the air, because firm 1 will just sell offsets to firm 2, therefore the same amount of pollution is released into the air. However that is not the case; take the law firm Sullivan and Cromwell for example. “In April, New York's Sullivan & Cromwell joined the Chicago Climate Exchange, becoming the first major law firm to formally commit to neutralizing its emissions of greenhouse gasses through the purchase and retirement of carbon credits and the purchase of offsets. The move is the "socially responsible" thing to do, according to the firm's chairman Rodgin Cohen” [3]. One can see that something can be done to reduce emissions altogether, by purchasing CFI contracts and letting them expire, or not using them for credit. This allows there to be less of the CFI contracts available for the use of emissions, and one less contract used for emissions credit is 100 metric tons less of CO2 released into the air. This article proves that something can be done by a company or an individual to help reduce emissions globally. One could sign up for an account on the CCX, and for just $135 could currently purchase a contract for 100 metric tons of CO2 and let it expire, this would account for 100 metric tons less of CO2 to be released into the air. Another company to become a member of the CCX is Bank of America. Bank of America is “doing well by doing good”, this is that they are working on a trading platform for companies to make it easier to engage in trading their offset contracts, and they are making it more known to the investor world, Bank of America also expects to create additional revenue and profits from Original Research by Marco H. OptionMaestro.com their partnership with the Chicago Climate Exchange. Bank of America, being one of the superior financial institutions will help build the reputation of the CCX in the financial realm. Bank of America will play an active role in the growing emission trading industry through our membership and investment in the exchange," said Richie Prager, head of global rates, currencies and commodities for Bank of America. "As we partner with CCX and launch our carbon emission credit trading platform and products later this year, we will ultimately do well by doing good. Helping individuals and corporations understand their carbon footprint, hedge against it and reduce emissions to reach carbon neutrality is of paramount importance in achieving an environmentally sustainable economy." Richard Sandor, Chairman of Climate Exchange PLC, said "Financial solutions promoting environmental sustainability lie at the heart of Climate Exchange. Our ability to succeed is about the quality and focus of our members and partners. In Bank of America we have a working, commercial relationship which takes our initiatives into the day to day financial activities of a great number of corporations and consumers. We are excited about the prospects presented by the agreement and look forward to working with the Bank of America team [4]. This is a leap in the right direction for the Chicago Climate Exchange. By partnering with one of the most popular financial institutions in the world, the CCX will be able to attract more business within the corporate world, which allows more people and businesses to become aware of their carbon footprint, and will reduce emissions altogether. The more companies that are aware of the opportunity to generate additional revenue by investing in technologies and selling their surplus carbon offsets, the better the world is, this is also in part because there will be more buyers aware who want to purchase offset contracts strictly to let them expire such as the Sullivan and Cromwell law firm, allowing these contracts to expire means that there are less pollutants emitted into the air meaning a cleaner world. “As part of its CCX membership, joint venture and minority investment stake, Bank of America has committed to: expand its greenhouse gas emission reduction target, provide liquidity on the CCX, ECX and CCFE, Join CCX's Offsets Committee, purchase a minimum of 500,000 tons of offsets over a three-year period of time, treat CLE exchanges as preferred providers for exchange traded environmental product execution, and develop and launch later this year, carbon-related products and services for Bank of America's retail and institutional customers who wish to reduce their own carbon footprint” [4]. With Bank of America providing liquidity, this partnership makes it possible for the CCX to grow larger much easier. Also Bank of America is setting an example among all financial institutions by agreeing to purchase 500,000 metric tons of CO2 over a three year period. If one firm is doing something that is adored by the public eye, chances are that there will be other firms soon to follow to get the same admiration. This would create an even higher demand for the offset contracts, which causes the price per contract to increase, which in turn makes it more attractive for firms to invest in technologies, causing a surplus of emissions contracts which they will be able to sell them for additional revenue. In theory, this will cause an even greater benefit to the environment, because there are large financial institutions purchasing large sums of offsets, just to let them expire, and more firms striving to cut back emissions to generate revenue from selling their offsets. Original Research by Marco H. OptionMaestro.com However, due to the recent global economic crisis it has caused the prices of carbon units traded on the Chicago Climate Exchange to decline in value from almost $7.50 over the summer (2008) to nearly $2 per contract in November (2008). This is mainly due to investors seeing an economic downturn, which would result in fewer emissions because production will decline. However a recent economic study suggest that the carbon trading market has “legs”, or that it will not decline any further, because investors are starting to see value in investing in the carbon emissions contracts. “On the financing side of the emerging carbon market in the United States, a number of financial institutions and private equity players have begun to invest. Some investment banks have set up carbon-credit trading shops on their commodity desks in anticipation of the rising value of these speculative investments” [5]. This implies that when the price has declined so rapidly investors start to see value in future contracts for carbon emissions and will speculate to make a profit on the trading of these instruments. Some big investment banks have added carbon contracts to their portfolios in the hopes that they will be able to sell them for a higher price in the future. One reason they could be speculating is likely because they are estimating a set date when the economic downturn will be over, and they will be able to sell their carbon traded instruments for more than they bought them for at that set date in the future. Many private investors are also speculating with these instruments as a way of diversifying, by getting alternate investments outside stocks and bonds, so they will have a chance to make capital gains from these when the economy starts to grow in the future. Due to the recent economic turmoil, it may be worth it for companies such as CNX to wait until the economy starts to expand before they sell their banked emissions, this would allow them to get an even greater premium. As one can see from the chart below the CFI contracts have traded above $7 per ton or $700 per contract in May of 2008, before plummeting to recent levels of the $100-$200 per contract range. (Chart from Chicago Climate Exchange website, Market-Chart) Original Research by Marco H. OptionMaestro.com The reason these CFI contracts have decreased in value so drastically is because the uncertainty of the future of the United States’ economy, and the chances of a pro-longed recession. During recessions manufacturing is reduced, which causes less emissions, which causes less demand for CFI offset contracts, thus the price has been reduced. Based on historical data recessions typically last twenty months, this would assume manufacturing to increase within a year or two (or a much greater premium for the 2010 offset contracts versus the 2008 and 2009 contracts), but these contracts suggest a pro-longed recession due to a measly five cent spread between the2009 and 2010 contracts. If CNX were to hold and “bank” their current and near future emissions, and the United States’ economy starts to grow rather than shrink, the demand for the CFI contracts will most likely increase back to $700 or more, meaning that CNX could get nearly $58,800,000 for these same 8.4 million emissions offset contracts. This could act as a huge benefit to the company in the future. However this is a very tricky game, and CNX may be forced to sell these contracts for less assuming they would not be able to use them for emissions credits due to decreased production, and that they would not let them expire getting absolutely no revenue from them. All of this trading has caused these instruments to become very volatile as noted in a recent article: “Prices in the emerging carbon market have been highly volatile, due to influences as divergent as politics and weather. EU emission allowances and Kyoto trading instruments are currently trading around 20 units per metric ton of carbon dioxide. Prices for units traded on the Chicago Climate Exchange were as high as $7.50 per ton of carbon dioxide (approximately 5.57 units) over the summer, but have collapsed to around $2 per ton currently” [5]. This implies that these instruments are extremely volatile ranging from $7.50 to $2 in a span less than 6 months. This article also shows that some of these contracts called “voluntary carbon credits”, or carbon offsets bought not necessarily by investors but those who strictly want to reduce their carbon footprint, are trading at higher premiums. Some of the recent individuals and companies who are reducing their carbon footprints vary from rock bands to fortune five-hundred companies as noted from a recent article: “Asked five years ago what we did for a living, we got blank stares when we responded "carbon trading" and "carbon investing." Now, with everyone from PepsiCo to Google to Pearl Jam striving to offset their carbon footprints, placing a value on carbon reduction has become commonplace” [5]. Interestingly enough these specific non-investor contracts have not declined, but increased year over year, as more celebrities find it necessary to fight global warming as found in a recent article: “A recent U.S. study noted that voluntary carbon credits are trading at approximately $6.30 per ton, a price increase of 26% over 2007 prices and 60% over 2006 prices” [5]. Whether it has been the influence of these celebrities and or companies, or solely the common interest of man to fight global warming, something has sparked the interest of society. One can see this by evaluating the growth of the Chicago Climate Exchange since it was created. “The global market for "carbon trading" grew 36 percent between January and September, to $84 billion from $67 billion, according to New Energy Finance, a London-based company that tracks activity in energy markets. By year's end, the market is expected to surpass $100 billion” [6]. This is a huge feat for the Chicago Climate Exchange and proves it is serving the purpose for which it was created. With more companies and role models worldwide stepping up to fight global warming, by purchasing these contracts, it could have quite an impact on the world. Original Research by Marco H. OptionMaestro.com The Chicago Climate Exchange has also influenced the emerging markets to create similar exchanges. As recently noted in a research study conducted by Merrill Lynch “Another piece of empirical evidence that Asian countries are serious about addressing CO2 emissions is the fact that several countries are setting up carbon related exchanges. So far, according to industry specialist IDEAcarbon, altogether 8 exchanges are being set up: two in Australian and in India each, and one in Beijing, one in Hong Kong, one in Singapore and one in Tokyo. These carbon-related exchanges will undertake such activities as Carbon Emission Reductions (CER) futures, Voluntary or Verified Emission Reductions (VER) and other Carbon products amongst others” [7]. This proves that Asian countries are jumping on the bandwagon to fight global warming. As shown in the chart below one can see that China and India are leading Asia by generating the most carbon credits through Clean Developmental Mechanism (CDM) projects. Through these CDM projects, companies from these countries are generating carbon credits which they will be able to sell on an Asian exchange, similar to the Chicago Climate Exchange. China seems to be showing increased interest in getting these CDM projects underway by the growth exerted in such a short period as stated from research by Merrill Lynch “According to World Bank figures, the market of greenhouse gas tradition doubled last year to $70bn. China, the world’s largest emitter, accounts for 73% of all CDM projects in 2007. As of August 2008 China had close to 1,500 CDM projects in the pipeline out of over 3,000 globally. China has accomplished a very high issuance success rate and has over 60mn MT (metric tons) of CER followed by India of 45mn MT” [7]. China and India through CDM projects have issued over 100 million metric tons of carbon credits, a phenomenal amount. A list of the countries generating the most carbon credits (in millions of metric tons) can be seen from the bar chart below. Original Research by Marco H. OptionMaestro.com From the chart above one can see that Almost 200 million metric tons of carbon credits have been generated from just these 10 countries. If these countries keep investing in greener technologies and continue to reduce emissions by at least this much, it is obvious the world will be a much cleaner place. There are many technologies which help reduce carbon emissions. The pie chart below shows a complete breakdown of which CDM projects the Chinese are implementing. Through these projects, China, the largest emitter of carbon worldwide, is cutting back at a rapid rate. It is necessary to get complete global involvement to make a change in the global environment. Though these projects may reduce only a small portion of overall emissions, it is a step in the right direction, and is better than nothing. If the emerging markets continue to reduce emissions at this rate, it will be very healthy for the global environment. The efforts of the Original Research by Marco H. OptionMaestro.com Chicago Climate Exchange have been somewhat responsible for the global push for change toward a greener environment. Without the idea of the carbon traded exchange, there may not have been any really good incentive for companies to invest in greener technologies today. Though it is too early to evaluate any major effects the Chicago Climate Exchange has had on global warming it is certainly a step in the right direction. With the efforts of many individuals and companies worldwide, whether it is for investment purposes or simply to offset their own carbon footprint, it seems this system could dramatically reduce future emissions worldwide. If the Chicago Climate Exchange continues to grow at its current pace, and influence emerging countries, the future of the world will most likely benefit even greater. One must think with increased interest and exposure in the market for trading carbon offsets it will cause more contracts to expire unused, due to individuals and companies trying to offset their carbon footprint. A key factor to maintain rapid growth would be to make carbon trading more understandable to the common public, this could be done by creating an easier to use trading platform. Perhaps another way interest could be gained from the public would be to allow the buyers to be eligible for a tax credit, assuming they never exercised the contract for emissions credit. If individuals and corporations could write the expense of these unused offsets off of their taxes, this could have a large effect on the amount of contracts that expire unused. If someone were speculating and purchased a carbon offset contract near the annual high back in the summer of 2008, that individual may choose to “do good” and let the contract expire for an overall loss of $750, versus a loss of around $600 and allowing for that contract to be used for emissions credit in 2008. Overall, as the Chicago Climate Exchange and the interest for carbon trading continue to grow the world should become a less polluted place. Sources [1]Chcicago Climate Exchange. 2007. Chicago Climate Exchange. 26 November 2008 [LINK] [2]"Governor Kaine Recognizes Efforts of CNX Gas to Reduce Greenhouse Gas Emissions in Virginia: CNX Gas Registers 8.4 Million Metric Tons of Emission Offsets for Trading on the Chicago Climate Exchange(R).” PR Newswire 11 June 2008: 1 ABI/INFORM Dateline. ProQuest. 26 November 2008 [LINK] [3]Steven T Taylor. "Sullivan & Cromwell Makes Right Move by Joining Chicago Climate Exchange." Of Counsel 1 Jun 2005: 3-4. ABI/INFORM Trade & Industry. ProQuest. 26 November 2008 [LINK] [4]"Bank of America Joins Chicago Climate Exchange, Makes Strategic Investment in Climate Exchange PLC; Expands its Greenhouse Gas Reduction Goal.” PR Newswire 25 July 2007: 1 ABI/INFORM Dateline. ProQuest. 2 December 2008 [LINK] [5]Ann Grodnik, Radha Kuppalli. "Guest Words: Investors Willing to Bet U.S. Carbon Market Has Legs.” Bond Buyer [New York, N.Y 17 Nov. 2008: 1 ABI/INFORM .] Trade & Industry. ProQuest. 25 November 2008 [LINK] Original Research by Marco H. OptionMaestro.com [6]Elwin Green. "'Carbon trading' now big business.” McClatchy - Tribune Business News 30 October 2008 1-2 ABI/INFORM Dateline. ProQuest. 26 November 2008 [LINK] [7]Lu Yeung, Spence, Parekh, Chow. “Asia Carbon Snapshot.” 29 September 2008: 116 Merrill Lynch. 1 Dec. 2008 [LINK] Original Research by Marco H. OptionMaestro.com
With a massive rally taking place in the stock market across the board today, I will be paying extra close attention to where the money is moving in the options market. As of now, the top ten most traded option contracts are listed in order from greatest to least below.
In this post I will be writing about an option strategy known as the Calendar Call Spread Option Strategy. To understand this post you'll need somewhat of a background in stock options. To learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front click here.
A Calendar Spread option strategy is very similar to the Bull Call Spread option strategy, except that it uses different option expiration dates instead of the same. I will be using three very popular ETF's for my analysis. The ETF's are the: Diamonds Trust, Series 1 (DIA), PowerShares QQQ Trust, Series 1 (QQQQ), and SPDR S&P 500 (SPY).
Calendar Spread Option Strategy #1: Purchase the in the money DIA 50 strike January leap 2011 call option, and sell the in the money 90 strike August 2009 call option against it. The cost of this strategy is $3795 per option contract, and if the stock is assigned at August expiration the profit from this position is $205 per contract or 5.4% (30 calendar days). The position will be profitable (not taking into account commissions) as long as the DIA is at or above $87.95 a share by August 22, 2009 (August options expiration). The current options market is factoring in a 68.0% probability this position will be profitable at August options expiration (above the 88 strike for DIA).
Calendar Spread Option Strategy #2: Purchase the in the money QQQQ 20 strike January leap 2011 call option, and sell the in the money 39 strike September 2009 call option against it. The cost of this strategy is $1760 per option contract, and if the stock is assigned at the September expiration the profit from this position is $140 per contract or 7.95% (58 calendar days). The position will be profitable as long as the QQQQ is at or above $37.65 a share by September 19, 2009. The current options market is factoring in a 64.6% probability this position will be profitable at September options expiration (above the 38 strike for QQQQ).
Calendar Spread Option Strategy #3: Purchase the in the money SPY 50 strike December 31 2010 call option, and sell the in the money 97 strike August 2009 call option against it. The cost of this strategy is $4485 per option contract, and if the stock is assigned at the August expiration the profit from this position is $215 per contract or 4.79% (30 calendar days). The position will be profitable as long as the SPY is at or above $94.85 a share by August 22, 2009. The current options market is factoring in a 65.5% probability this position will be profitable at August options expiration (above the 95 strike for SPY).
When I open option calendar spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return or greater if assigned). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
I've been using this strategy to sell near the money calls on my leap stock options for the short term, and find it to be a great source of generating income for my portfolio. Using these ETF's versus stocks, is a much safer strategy, but won't return as much either. If I want to be long a stock I simply purchase in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if it's not assigned), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.
In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange [CBOE]. The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.
Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A) reduced its stake in Moody's Corporation by 17% conducting the sale of almost 8 million shares over the open market in the past week. This comes after Moody's (NYSE:MCO) has posted 7 quarterly declines in a row. Is this smart investing, or could it be bitter payback, as Moody's downgraded Berkshire Hathaway's credit back in March 2009? Moody's fell on the news, and certainly looks to have had a very negative impact on it as it is down by almost 14% as of now.
There are some more big names reporting earnings today. The stocks I am most interested in are Ford Motor (NYSE:F), Amazon (NASDAQ:AMZN), and American Express (NYSE:AXP). I am curious how the American automaker will report earnings for the quarter where it's biggest U.S. competitor (General Motors, old ticker NYSE:GM) filed for chapter 11 bankruptcy. I have a feeling Amazon will have another great quarter due to strong sales of the Kindle Electronic Book Reader. I am not too concerned about whether American Express trumps earnings or not, but I'm more anxiously awaiting the outlook on business spending the management team over at American Express is going to give - this is a great economic indicator. The stocks I'll be keeping a close eye on are listed below.
As of now the U.S. stock market futures seem to be green across the board. Its an early indicator that the bulls will chalk yet another win, but a lot can change with another big earnings day ahead.
The DOW Futures are higher by 26 points, NASDAQ Futures up by 4.25 points, and the S&P 500 Futures higher by 3.00 points. Sphere: Related Content
The calendar spread option strategy is a strategy I don't usually write about on OptionMaestro.com, the reason being is because they're hard to grasp at first for most people. However I want to inform you, that once understood, they come second nature. Therefore to understand this post you'll need an understanding of stock options. To learn more about options, how options can help protect your portfolio, and allow you to speculate with less money up front click here or check out my E-Books.
The Calendar Spread Option Strategy is very similar to the Bull Call Spread (a.k.a option spread), but both strike expiration dates are not the same. In this post, I have a table of 20 popular stocks which indicates: which options expiration dates are used for the strategy, the price of opening the position, and the % return (if stock is assigned).
All data as of market close July 22, 2009.
HOW TO READ THE TABLE
Strategy - This is the strategy used to open the calendar spread option strategy. The option contract which expires at a later date is purchased first (in my examples all happen to be for the January 2011 leap option expiration), and then the option contract which expires at an earlier date is sold against it.
Theo. Price - This is the theoretical price as of market close July 22, 2009. This is the premium paid for the option contract purchased less the premium received for the option contract sold.
Return - This is the return assuming the stock is at or above the indicated strike price from the option contract being sold at that expiration date. Currently all but one of these strategies are in the money (Procter & Gamble not above 55 a share as of market close).
The first stock listed in the table below is Abbott Labs (ABT). An example of this option strategy would be interpreted as:
Purchase the in the money Abbott Labs (ABT) 30 strike January leap 2011 call option, and sell the in the money 44 strike September 2009 call option against it. The cost of this strategy is $1230 per option contract, and if the stock is assigned at September expiration the profit from this position is $170 per contract or 13.82% (58 calendar days). The position will be profitable (not taking into account commissions) as long as Abbott Labs is at or above $42.31 a share by September 19, 2009 (September options expiration).
Company
Strategy
Theo. Price
Return
Abbott Laboratories (ABT)
Buy Jan 2011 30.00 Call Sell Sep 2009 44.00 Call
$12.30
13.82%
AFLAC (AFL)
Buy Jan 2011 12.50 Call Sell Nov 2009 32.00 Call
$16.80
13.85%
Apple Inc (AAPL)
Buy Jan 2011 65.00 Call Sell Sep 2009 150.00 Call
$79.85
6.45%
AT&T (T)
Buy Jan 2011 17.50 Call Sell Oct 2009 24.00 Call
$5.88
10.54%
Bed Bath & Beyond (BBBY)
Buy Jan 2011 7.50 Call Sell 2009 33.00 Call
$24.40
4.51%
Caterpillar (CAT)
Buy Jan 2011 17.50 Call Sell Sep 2009 38.00 Call
$18.47
10.99%
Celgene (CELG)
Buy Jan 2011 10.00 Call Sell Sep 2009 47.00 Call
$34.60
6.94%
Coach (COH)
Buy Jan 2011 10.00 Call Sell Sep 2009 25.00 Call
$14.35
4.53%
ConocoPhillips (COP)
Buy Jan 2011 25.00 Call Sell Sep 2009 43.00 Call
$16.42
9.62%
CVS (CVS)
Buy Jan 2011 15.00 Call Sell Sep 2009 32.00 Call
$16.15
5.26%
EOG Resources (EOG)
Buy Jan 2011 30.00 Call Sell Sep 2009 70.00 Call
$37.15
7.67%
Express Scripts (ESRX)
Buy Jan 2011 20.00 Call Sell 2009 65.00 Call
$43.00
4.65%
GameStop (GME)
Buy Jan 2011 10.00 Call Sell Jan 2010 21.00 Call
$9.75
12.82%
Goldman Sachs (GS)
Buy Jan 2011 55.00 Call Sell Sep 2009 155.00 Call
$94.20
6.16%
Google (GOOG)
Buy Jan 2011 150.00 Call Sell Sep 2009 420.00 Call
$257.80
4.73%
Halliburton (HAL)
Buy Jan 2011 12.50 Call Sell Jan 2010 22.00 Call
$7.78
22.12%
Harris Corp (HRS)
Buy Jan 2011 15.00 Call Sell Sep 2009 30.00 Call
$14.20
5.63%
Procter & Gamble (PG)
Buy Jan 2011 35.00 Call Sell Sep 2009 55.00 Call
$18.45
8.40%
Transocean Inc (RIG)
Buy Jan 2011 30.00 Call Sell Sep 2009 75.00 Call
$42.70
5.39%
Bank of America (BAC)
Buy Jan 2011 5.00 CallSell Nov 2009 12.00 Call
$5.96
17.45%
When I open option calendar spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return if assigned or greater). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
I've been using this strategy to sell near the money calls on my leap options for the short term, and find it to be a great source of generating income for my portfolio. If I want to be long a stock I simply purchase in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if I don't get called out), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.
In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange (CBOE). The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.
Although Citigroup and Bank of America made up 6 of the top ten option contracts traded today, for the first time in 4 days C and BAC didn't dominate the top ten options contracts with all but 2 or less in the top ten. Today's top 10 option contracts traded are listed in order below.
Apple Inc. (NASDAQ:AAPL) is currently up 5.99 points to 157.50. I'm trading out of half of my Apple August 155 call options for a 30+% gain since yesterday afternoon. I will try purchasing them back on weakness, as that was an impressive quarter and I think they're headed higher. If we do experience weakness, I'll be trading out of my Apple 150 Put options as well (I purchased those yesterday also). The trade I used yesterday was the strangle option strategy. I strangled Apple while it was near 153 a share for the 150 Put/155 Call options. To see more about using this type of option strategy on Apple click here. Even with volatility down on Apple stock, because earnings are over with, there is still a month to trade these option contracts, I'm certain the road ahead will be volatile enough.
It is Wednesday July 22, 2009 and another big earnings day is among us. There are 150 expected earnings releases for today. The stocks below are some of the names I'll be keeping a close eye on and listening in on conference calls for.
As we enter another big earnings day for the U.S. financial markets, the current stock market futures are mixed. Still a long day ahead, but two of the three major indices point lower. The only major U.S. index that is up is the NASDAQ, and that is most likely because Apple Inc. (NASDAQ: AAPL) blew away Q3 estimates and traded as high as 159 a share in after hours trade. Will earnings continue to surprise on Wall Street, or will Apple have to pull the rest of the market with it to keep the bulls pleased another day?
The DOW Futures are down 14 points, NASDAQ Futures up by 2.00 points, and the S&P 500 Futures lower by 1.60 points.
Sphere: Related Content
In the past week earnings have propelled the stock market to rally significantly. Since Tuesday July 14, 2009 the Dow Jones Industrial Average leads all major indices up 6.66%, NASDAQ is higher by 6.47%, and the S&P 500 has gained 5.38%. The question a lot of people have been asking is: Can this rally hold? To tell you the truth, I'm not sure what to think of it, but I have some hedges in place, for the next piece of ugly news that the market sells off on. With that being said, as I've stated 100 times in my blog OptionMaestro.com, there's still a ton of cash on the sidelines, getting extremely low rates. This rally could continue for quite a while as this money could be moved into the market.
This is part one of two, in this article I'll take the bearish approach on the market, and give a Bear Put Spread option idea on each component of the Dow 30. In part two I'll take a bullish approach on the market with a Bull Call Option Spread idea on each.
To understand this post you'll need somewhat of a background in stock options. To learn more about options including this strategy, how options can help protect your portfolio, and allow you to speculate with less money up front click here.
Why use the Bear Put Spread Option Strategy instead of plain old put options?
The reason I like selling the spread when hedging my portfolio is because it allows me to hedge for a cheaper premium, and although it gives me less downside protection, I believe it should protect the majority of the move lower if the market does correct in the month to come.
All data as of market close Tuesday July 21, 2009.
HOW TO READ THE TABLE
Price - This is the closing price [last quote price at market close] of the security
High - This is the higher strike price of the two Put option contracts, the one being purchased in my examples. To keep things simple I chose the option strike price closest to the closing price. Some strikes may be below current share price and some may be above.
Low - This is the lower strike price of the two put option contracts, the one being sold in my examples. I took the strike at least 5% lower from the current share price.
% Missed - This is how much the given stock will fall by before the higher of the two put options starts protecting your position. Stocks currently below the higher strike price do not have any % miss, as they are in the money.
% Protect - This is how much protection the option spread protects your position. The difference between the high strike and the low strike, or current share price to low strike (for in the money examples).
The first stock listed in the table below is 3M (MMM), and is currently in the money. An example of the Bear Put Spread option strategy for 3M would be interpreted as:
Buy the 3M (MMM) August 65 put and sell the August 60 put. This position gives you protection of up to 6.54% [$4.20 per share] on 3M (hedges position down to 60 a share until August 22, 2009). This position is currently in the money by 80 cents ($0.80) a share which means % missed does not apply. This spread strategy would cost $190 per contract to open, versus $265 for each August 65 strike put option contract purchased.
Company
Ticker
Price
High
Low
% Missed
% Protect
3m Co
MMM
64.2
65
60
0.00
6.54
AT&T Inc.
T
24.57
25
23
0.00
6.39
Cisco Systems Inc
CSCO
21.59
22
20
0.00
7.36
Intel Corporation
INTC
18.9
19
17
0.00
10.05
International Business Machines
IBM
117.04
120
110
0.00
6.02
Johnson & Johnson
JNJ
59.49
60
55
0.00
7.55
JP Morgan & Chase & Co
JPM
36.94
37
35
0.00
5.25
Kraft Foods Inc.
KFT
27.58
28
26
0.00
5.73
McDonald's Corporation
MCD
58.63
60
55
0.00
6.19
Merck & Co., Inc.
MRK
29.65
30
27
0.00
8.94
Microsoft Corporation
MSFT
24.83
25
23
0.00
7.37
Pfizer Inc
PFE
15.7
16
14
0.00
10.83
United Technologies Corporation
UTX
53.97
55
50
0.00
7.36
Wal-Mart Stores, Inc.
WMT
48.86
50
45
0.00
7.90
Alcoa Inc
AA
10.14
10
9
1.38
10.00
American Express Company
AXP
29.38
29
27
1.29
6.90
Bank of America Corporation
BAC
12.19
12
11
1.56
8.33
Boeing Co.
BA
43.02
43
40
0.05
6.98
Caterpillar Inc.
CAT
39.48
39
37
1.22
5.13
Chevron Corp
CVX
66.25
65
60
1.89
7.69
E.I. du Pont de Nemours and Company
DD
28.32
28
26
1.13
7.14
Exxon Mobil Corp
XOM
70.47
70
65
0.67
7.14
General Electric Company
GE
11.47
11
10
4.10
9.09
Hewlett-Packard Co.
HPQ
40.57
40
37.5
1.40
6.25
The Coca-Cola Company
KO
50.35
50
47.5
0.70
5.00
The Home Depot, Inc.
HD
24.46
24
22.5
1.88
6.25
The Procter & Gamble Company
PG
55.49
55
50
0.88
9.09
Travelers Companies Inc
TRV
40.71
40
35
1.74
12.50
Verizon Communications
VZ
30.32
30
28
1.06
6.67
Walt Disney Company
DIS
25.2
25
23
0.79
8.00
These options expire on August 22, 2009; therefore the last trading day is Friday August 21, 2009.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly. To learn more about the option spread strategy and other option strategies check out my option trading books.
If you're more bullish / bearish you’ll want to adjust the strike price accordingly. If you’re even more bearish, sell a put much lower than the one purchased, or don't sell a put at all. The cost will be more expensive to open the contract, however the downside protection will be greater.
This strategy is a great way to hedge your portfolio. One reason option volumes have exploded over the past 5 years is because they are a great way to hedge your portfolio (see chart here).
Below is a picture of the spreadsheet I used to calculate these values (click on the image to enlarge).
I'm a trader of stocks, options, currencies, and futures. I've been fascinated with the financial markets ever since I bought my first stock at 11 years old. On my free time I like to trade and write about stocks and options. I'm dedicated to educate my readers to the best of my ability about the financial markets, particularly about buying/selling options and option strategies. I trade based on technicals and fundamentals, so you may find many of my posts valuable. 2008 was one of my best years for trading stocks and options, but that only motivates me even more to learn and create new strategies. If you'd like to know more about trading options and stock market strategies, subscribe or bookmark my blog.
