SPY PUT'S Outweigh CALL'S BIG, But I'm Still NOT "that" Bearish

The top 4 traded option contracts today were the SPY JAN 91, JAN 90, JAN 92, and JAN 93 PUTS. The SPY according to TDAmeritrade is: "The investment seeks to correspond generally to the price and yield performance, before fees and expenses, of the S&P 500 Index. SPDR Trust is an exchange-traded fund that holds all of the S&P 500 Index stocks. It is comprised of undivided ownership interests called SPDRs. The fund issues and redeems SPDRs only in multiples of 50,000 SPDRs in exchange for S&P 500 Index stocks and cash". This indicates many are bearish on the market at least for another 10 days. The JAN 90 PUT (with 10 days left until expiration), which is not yet in the money, traded as high as $225 per contract and closed at $191 per contract up over 74% today. I am a bit surprised to see this many bears in the market considering Obama will be announcing a more detailed stimulus plan tomorrow, and with his inauguration coming in less than 2 weeks.

Therefore with the market getting hammered today, I sold some covered calls on my SDS for a juicy premium, and speculated by buying the FEB 30 CALLS on EEM for $65 per contract, and the FEB 30 CALLS on SSO for $120 per contract. I was waiting for a pull back in the market to purchase both of these CALLS, so today I finally got my chance and unloaded. I plan to swap out my cost if the market is stronger tomorrow and hold some "free" contracts until expiration. So with the money I received from selling the SDS covered CALLS, I turned into a speculation bet on EEM and SSO. These are the types of gambles I like to take!

We are about flat for the first 4 trading days of the year and tomorrow being the fifth trading day of January, which if you follow historical data, the probability is high that the first 5 trading days of the year will indicate the direction (+/-) for the entire year... So we'll see how we finish tomorrow. Personally I think and hope the worst is over, therefore I have completed all of my shorting for the time being. I still hold some SDS which I cannot seem to get called out on (my cost basis is below 40 a share now with the covered calls I have been writing!



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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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