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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