Options expiration day will be this coming Friday, August 20, 2010. No doubt it is premature to jump into this strategy if you are not familiar or comfortable with it at this point. If your first exposure to this strategy is this blog, my suggestion is wait a while until you fully understand the strategy. Participating in an investment strategy you do not understand is a sure way to lose money. I advise my clients that if you don’t understand any strategy or are not comfortable with it, DON’T DO IT! Opportunities to make money come and go, be patient, no sense in chasing something you don’t understand. If you stay with my blog in time your comfort level will grow and you will be able to independently evaluate the trades and determine their suitability for your risk and portfolio needs.
The significance of expiration later this week is that sometimes opportunities present themselves that can be viewed as lower risk because they are offset with high rewards. The suggestions below present risk as do all investments. The short-term nature of the tactics is balanced by several considerations, among them: 1) these are stocks that we typically trade in, 2) specific stock option volatility is high, 3) special situation.
There are a finite number of stocks at any given time that the strategy works well with. By working well I mean the stocks pass the screens and have adequate fundamental profiles. These stocks can either be transient or long term “keepers”. By transient I mean they appear attractive within the confines of the rules of the strategy only one time. After that that they “fade” into obscurity again. Long term keepers are stocks that more than not have attractive elements for our strategy.
With one trading week to go until expiration any trade is risky. The fact that there is a high stand still return (SSR) means something is going on that represents risk, mispricing or both. Therefore, keep your eyes wide open. I typically limit these really short term trades to stocks I am familiar with and are comfortable owning.
Now let’s look at these few sample ideas that should make some money. As always these may reflect strategies that we may or may not have on at any given moment depending on what has been called, individual portfolio risk tolerance’s and a few other circumstances. The strategies are in no way one’s we would not be willing to do and have come about as we look to optimize our existing positions.
TransOceanic – RIG
Long Stock RIG at $54.15/share
Sell Call strike $55/share at 0.33¢/share
Stand Still return 1.83% un-annualized for 5 days.
Risks
law suits pertaining to BP spill.
No dividend payout
The stock is currently trading 2.12% the mid for its 52 week range
Intel – INTC
Long stock INTC at $19.15/share
Sell call strike $19.00/share at 0.39¢/share
Standstill return 1.25% un-annualized for 5 days
Risks
The stock is 10.25% below the mid for its 52 week range
Blow out earnings announced a month ago.
Volatile stock
Dividend was paid 2 weeks ago
Caterpillar – CAT
Long stock CAT at $68.01/share
Sell call strike $67.50/share at $1.55/share
Standstill return 1.53% un-annualized for 5 days
Risks
The stock is 17.24% the mid for its 52 week range
P/E is too high
Deer & Co. – DE
Long stock DE at 64.85/share
Sell call strike 65.00/share at $1.62/share
Standstill return 2.50% un-annualized for 5 days
Risks
Stock is at the top of its 52 week trading range
P/E is too high
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