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Posted by Martin April 14, 2016

Handling a losing trade after assignment

It is interesting how things in the stock market can turn on a dime. Yesterday all my stock positions were great, and the sky was at the tip of my fingers, today, everything is the exact opposite.
A few trades which i have opened yesterday and which were doing well are now in the money (ITM).

For example Mosaic (MOS) put selling trade had a nice cushion when I was opening the trade. Seagate (STX) was even better and well above my strike. It almost looked like there is nothing what could stop this trade from being a success.

Today, it is all about a disaster. Seagate sank 18% on the dismal Q3 outlook and it is deep ITM. It will be difficult to handle this trade now.

Although, I will make money on the put I sold against STX, the stock is now almost $600 loss. There is still 38 days to go until expiration and unless I see an early assignment the stock may still recover before then.

I had a similar experience already with stocks like LULU which i sold put against it and the stock went down deep in the money. It is now recovering and it is close to my strike already.

Or TRGP. Another example of a put selling strategy where I sold a put and the stock sank deep ITM. Three days before expiration the stock rallied and I could buy it back almost worthless.

Same was COP trade. I sold the put, it sank deep ITM but six days later the stock rallied again and I could buy the position back at 50% credit.

Or KMI stock. It was too “dancing on the floor” being mostly in the money (not deep in the money) and three days prior to expiration it went up and I could buy it back worthless.

So there is always hope in every trade and no need to panic when things turn around. The important thing is to have a plan and know what to do when certain things happen. This was the lesson I was learning last two years.

 

 · How to handle a losing trade then?

 

If you follow my posts and my blog, you may know that my strategy is to be selling puts as long as you get assigned. Once you get assigned, you keep the stock, collect dividends, and sell covered calls as long as you get assigned.

I sold put against STX with 33 strike and collected 1.47 credit.

My break even price is 31.53 a share.

The stock is selling at 27.67.

If I get assigned at 33 a share. I will realize 1.47 or $147 gain on the put trade, but my stock will see 5.33 or $533 loss (3.86 or $386 net loss).

When selling covered calls, mostly I will not be able to sell a covered call at the same strike as was the assignment (33 strike) as it will probably be worthless already.

I will have to be selling as high strike as possible (for example 28 strike) to collect enough premium but not get assigned and have the stock called away. Hopefully, in this way I will be able to collect enough additional premium to lower the cost basis and end at least break even.

If I get assigned to the call at 28 strike, then I will realize a gain on the call, but close the stock trade at $500 loss (33 put assignment minus 28 call assignment).

Let’s see how this trade develops over time.
 
 

Posted by Martin February 29, 2016

Put selling against dividend paying stocks strategy: sold (ESV) April puts

Taking on the damage control from trading SPX spreads. I tried hard to get into SPX trading but I wasn’t able to make any profit.

I actually lost everything I ever made selling puts against dividend stocks.

I am not saying that I will never trade SPX again. Never say never. I might go back one day, but currently I am so under-capitalized for trading this instrument, that I cannot trade it successfully anymore.

You really need at least $50,000 dollars to trade spreads against SPX successfully. If you trade smaller account, you are undertaking bigger risk than necessary and most likely lose money.

Why? Because of your emotions. I could see my emotions getting me into a huge pressure over possibly losing $100 dollars! Yes, just $100 dollars loss became a burden to me.

Then I knew, that was my end of trading this instrument until I rebuild my account (again, yes I must admit I wiped out my account).

Is it possible to recover an account and grow it from $1,500 or so back to $50,000 dollars?

I believe it is possible. It will not happen overnight, but over the course of a few years yes, it is possible.

I have enough data to show my trading career looking for the right strategy which works for me:

 
Account Value Comments
 

As you can see, at first I was a bit successful trading whatever I could. Yet I lost money and had to start again. I found, learned, studied, and adopted put selling strategy. I increased my account from about $1,900 to $21,000 account in a year. I was so full of myself and I wanted more. I started trading (selling OTM) naked puts and naked calls at the same time (short strangles).

I overdone it (traded more than I could afford in case I got assigned) and the tide started turning against me.

Then I blamed the stocks (assignment risk, earnings risk, etc.) and continued trading SPX only.

But my strategy for trading spreads against SPX was bad (actually non-existent). You can see how quickly I lost my money.

The lesson is – stay with what works for you.

This is why I am returning back to trading options against dividend paying stocks.

 

 · Here is my strategy:

 

You must trade this strategy only against stocks you are willing to own.

1) Sell puts against dividend stocks as long as you get assigned.
2) If you get assigned, keep the stock and sell calls against the stock
3) Sell calls against the stock as long as you get assigned
4) While waiting for assignment collect dividends.

 

 · Put selling against Ensco (ESV)

 

For the reasons above I am selling puts against Ensco (ESV) which pays dividends. It is a risky stock. The company is involved in offshore contract drilling services to the oil and gas industry worldwide. Thus it is tied to oil price and if the oil stays this low, who knows what can happen. Yet, I am willing to take this risk and I am willing to own this stock should I get assigned.

In my previous post I wrote about selling puts against PSEC. The difference with ESV is that the volatility of this stock is a lot higher and I could afford to sell shorter term – April and collect nice premium 0.63 or $63 dollars.

If by April the option becomes worthless, I will be able to sell another put option. If the stock gets to 0.05 before expiration I will buy it back to release money and sell a new option.

If I get assigned (either early or at expiration) I will start selling calls (covered call strategy).

 
ESV
 

I now will be trading both stocks – PSEC and ESV as long as I grow my account enough to switch into more expensive and somewhat better, less risky, dividend stocks such as ABT, CO, O, ADM, VLO, etc.

As of now I need to stay with the cheap stocks and work it up. I did it once. I am positive I can do it again.

 

 · Don’t go anywhere! Subscribe!

 

Yes, stay with me and follow my trades to see how they work and how you can make money following the same strategy.

I created a Facebook group where I post my put selling strategy. Join me and see for yourself!

 
 

Posted by Martin February 18, 2016

Going back to selling puts against dividend paying stocks strategy: sold (PSEC) Aug put

Going back to selling puts against dividend paying stocks strategy: sold (PSEC) Aug put

Correction: I collected $89 dollars and not $75 premium as mistakenly shown in this post.
 
 

I must admit that I am getting frustrated trading spreads against SPX (S&P500). It is extremely hard trading that damn index. The market is volatile and whenever I sell calls, the market follows for a few days, then reverses and goes against me hard. So I sell puts and the saga continues. So far, I wasn’t successful trading spreads against the index. It makes me mad as a hell, really mad, but I need to stop bleeding my account.

Some time ago I wrote a post about trading options against dividend paying stocks.

In that post I wrote that it was a win-win situation trading options against dividend paying stocks. The strategy is simple and it goes like this:

 

 · Selling puts against dividend stocks

 


1) You sell puts against the dividend paying stock as long as you get assigned.
2) Once you get assigned to the stock, you start selling calls as long as you get assigned.
3) In the meantime, while waiting for the call assignment you keep collecting dividends.
4) Rinse and repeat.

What can go wrong here, right?

Honestly, I do not see many wrong goings here. If the dividend stock is a good one, the worst case scenario is that you get assigned and the stock goes lower, so you end up sitting at a losing stocks. But, your cost basis is lower than if you bought outright and you keep collecting dividends. So, who cares?

I asked myself why I even stopped doing this. Then I realized, that I was trading options against stocks which I never wanted to be assigned.

And the rule #1 here is – sell puts only against stocks you are OK to own.

I didn’t want to own those stocks, or I was trading options against stocks using margin thus I could not afford to be assigned. And when the option got exercised early, I had a margin call problem.

Then the early assignment was a problem to me. Then trading options that way became dangerous. I started losing money. And I decided to abandon that strategy.

So, I decided to resurrect this strategy and trade options against dividend paying stocks. But, this time I am really OK if I get assigned. This is a big relief. You do not have to worry about the stock price or assignment. You just sell the put option and then wait. It either expires worthless, so you are free to sell it again, or you will be required to buy 100 shares (or more if you sell more contracts) of the stock and start collecting dividends.

Since I trashed my account recently, I am at the beginning of my journey again. I have to start small and work my way up again.

So here is my strategy to start with a small account. I can only dedicate $600 dollars to this strategy. Not ideal, but I have no choice. I will sell my first contract and in the meantime while waiting for its expiration/assignment I will be saving money to be able to sell more contracts. Working it slowly back up.

If I get assigned I will not be able to start selling calls right away. Only one contract on the stock such as PSEC is close to worthless and it will make no sense due to fees and commissions. So I will keep the assignment in my portfolio collecting dividends and waiting until I save more money to sell a new contract. Once I have at least 400 shares (4 call contracts) I will start selling calls as long as I get assigned and sell the shares.

 

 · Trade detail

 

I decided to start this strategy with Prospect Capital Corporation (PSEC).

It is an affordable stock for me and my strategy and I think it is an OK stock to start with. I own this stock, I have owned it for years and I am OK to add to my position should I get assigned.

I sold 1 naked put contract last Tuesday against PSEC:

 
Sell to open 1 PSEC August 19th ’16 6.00 put @ 0.75
 

 

 · What’s next?

 

I collected $75 dollars premium. I also put aside $600 dollars in case I get assigned.

Now the trade outcomes are:


1) The option gets to 0.05 price two or three weeks before expiration – I buy it back to release money.
2) The option will have value all the way until expiration (if the stock will be trading at $6.00 a share “dancing at the floor” or around, but expires worthless – I keep the premium, release cash and repeat the trade.
3) The option gets ITM (in the money) and I get assigned – I keep the stock, start collecting the dividends and continue saving money for the next trade.

 
Here is a current record of the trade I opened last Tuesday:

 
VLO
(Click to enlarge)
 

Earnings Season Can Be Bountiful With Options Trading

Earnings season is in full swing, with a third of S&P stocks scheduled to report this week. If the S&P 500 is any indicator of how companies performed during the first half of the year, stock investing continues to be one of the best ways to line your financial coffers.

That being said, there are plenty of ways to play the market during earnings season, and one of those is through buying options. For this blog, I’ll keep it simple. I won’t go in to the various, complicated strategies that very experienced traders, and those with high tolerances for risks will use.

Instead, I’ll lay out the basics of options trading so you can decide if earnings season is a good time to play the options market.

 · What Options Entail

Before tackling how to play the market during earnings season using option strategies, let’s be clear on what they entail.

As defined by Nasdaq.com, options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period. Because they are considered to be derivative products, their value comes from the value of an underlying investment, which usually is the stock of the company.

Here are some main terms you’ll hear when talking about options: call and put contracts, strike prices, expiration dates.

While call options allow the buyer to purchase a stock at a set price on or before a determined date, put options allow the buyer to sell a stock on or before a later date. That determined date is referred to as the expiration date. It is typically the Saturday following the third Friday of the expiration month. Expiration dates can also fall at the end of the quarter.

Exercising the option means you buy or sell the stock via the option contract. The strike price refers to the price at which the options contract can be executed. In the case of call options, the strike price is the amount the option can be bought any day leading to the expiration date. For put contracts, the strike price is the price it can be sold.

The last day to trade options before they expire is the Friday before expiration, or the third Friday of the month. This is also generally the last day an investor may notify his brokerage firm of his intent to exercise an expiring equity call or put, notes Investor Place. The website also notes that brokerage firms, can set earlier deadlines for notification of an option buyer’s intention to exercise. “Therefore, you should check with your brokerage firm about its procedures and deadlines for instruction to exercise any equity options. If Friday is a holiday, the last trading day will be the preceding Thursday,” states Investor Place.

 · Show Me the Money

A key element of options trading deals with the strike price, which can help you determine the best time to buy or sell an option.

When the strike price is the same as, or is close to, the price of the underlying stock, it is considered to be at the money. If that strike price is less than the price of the underlying stock, it is in the money. And if it is above the price of the underlying stock, it is out of the money.

 · Open Interest

During earnings season, one of the ways I look at options is to gauge where other investors and traders think a stock will move. That may entail the stock climbing as it’s believed the company will beat analysts’ estimates. It could also entail the stock moving lower if it’s believed the company will miss its earning’s estimates.

More open interest is better because it tends to mean there is more liquidity for the call option you are trading, according to BornToSell.com. It notes that more liquidity means smaller spreads between the bid and ask , which is good for the trader if they need to close out a position before the expiration date.

To get an idea of what direction investors think a stock will move, I look at the amount of open interest there is in that company’s options. It is imperative the option traders understand open interest; doing so can help you to see how much liquidity there is in an option. You want that option to be liquid so that you can essentially sell it if the trade goes against you. Options that have no open interest als have no secondary market. On that same note, options that have a lot of open interest means just that – there are many interested sellers and buyers. Furthermore, there is likelihood that orders for that option will reap good prices! That will make it easier to trade the option, with a spread between the bid and ask that you may be able live with.

 · Ideas

Let’s look at some of the companies that have reported, and who are reported earnings this week. More specifically, we’ll look at those that have option expirations this week, too.

Tesla (NASDAQ: TSLA) on Wednesday reported earnings on Wednesday. Although it reported that its losses triple during the second quarter, and cut the number of deliveries for the rest of the year, options activity indicated traders and investors have some faith in the auto/battery maker.

Specifically, its $300 call contract that expires on Friday, Aug. 7 had open interest of more than 5,000, This is the most open interest than any of its other call contracts. This means that many watching the stock think it may trade up to $300 a share from roughly $270 a share where it closed Wednesday.

As far as puts, its put contract with a strike price of $235, and also expires Friday had open interest of about 2,100. The thought is that Tesla could sink this low as of Friday.

For equity options expiring prior to Feb. 15, 2015, the expiration date is the Saturday immediately following the third Friday of the expiration month.

For equity options expiring on or after Feb. 15, 2015, the expiration date is the third Friday of the expiration month. The day expiring equity options last trade is the Friday before expiration, or the third Friday of the month. This is also generally the last day an investor may notify his brokerage firm of his intent to exercise an expiring equity call or put. Brokerage firms, however, may set an earlier deadline for notification of an option buyer’s intention to exercise. Check with your brokerage firm about its procedures and deadlines for instruction to exercise any equity options. If Friday is a holiday, the last trading day will be the preceding Thursday.

 · Conclusion

How much you will profit on the transaction depends on whether you’re right. On that same note, how much you will lose depends on how wrong you are. Anything can move a stock price, but it is the near certainty that the price will move during the days following the release of earnings is what makes buying the around this time appealing to many traders.

Some rules of thumb: buying a call typically means you are bullish on the stock; and buying a put means that you are bearish. Open Interest

If you see a lot of call activity, it usually means that traders think the price of a stock will go up by the time the contract expires. On that same note, if you see a lot of activity in put options, it may mean that traders are betting that the stock will trade lower by the time the contract expires.

 

Posted by TwillyD July 26, 2015

Want To Get In On Apple? Consider Its Suppliers as Investments

Apple (NASDAQ: AAPL) is still trying to recover from the negative reaction to its third quarter earnings report last week. While the reasons investors were unhappy varied, the main reason related to the recently unveiled iPhone 6. Worried that Apple may have reached its pinnacle in selling the high-end smartphone, investors sent the stock lower.

The leaner than anticipated iPhone 6 sales caused angst among investors, but how are Apple suppliers for the iPhone 6 faring? They include: Skyworks Solutions (NASDAQ: SWKS),  NXP Semiconductors (NASDAQ:NXPI), and ARM Holdings (NASDAQ:ARMH) chip design.

Apple Disappoints

Before getting into the details about how Apple’s suppliers were affected by its stock decline, let’s take a look at how the tech giant fared during its third quarter, ending June 27.

Company officials chalked up the quarter as having record sales of the iPhone and Mac, all-time record revenue from services and the successful launch of Apple Watch.

According to Apple’s earnings press release, the company posted quarterly revenue of $49.6 billion and quarterly net profit of $10.7 billion, or $1.85 per diluted share. These results compare to revenue of $37.4 billion and net profit of $7.7 billion, or $1.28 per diluted share, in the year-ago quarter. Gross margin was 39.7% compared to 39.4 % in the year-ago quarter. International sales accounted for 64 percent of the quarter’s revenue.

Luca Maestri, Apple’s chief financial officer, had the following to say about the quarter in the earnings press release.

“In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33% and earnings per share up 45%,” said “We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program.”

When the market opened for trading last Tuesday, Apple was trading around $131 a share. After it reported the Q3 earnings for the period ending on June 27, the stock dipped as low as $119.20. It closed at $120.33, effectively wiping out about $60 billion of its estimated $753 billion market cap.

Although smartphone sales are typically lower during the spring and summer months as consumers wait until the holidays to make purchases, partly due to holiday deals, the lower sales for Apple’s last quarter was different.

 

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The Wall Street Journal noted that the decline in iPhone sales dip to 47.5 million amounted to a drop of about 23% from Apple’s fiscal second quarter of 2015. Furthermore, that was a steeper rate of decline than the previous two years when quarter-on-quarter sales fell by 19% and 17% respectively, according to The Wall Street Journal.

Apple also briefly fell below its 200-day moving average Tuesday and Apple hasn’t closed below this metric since Sept. 17, 2013, according to news reports. At its lowest point around $120, Apple had lost $62 billion off its market cap, which had soared to $753 billion, making it the most valuable company the world.

What Apple’s Slump Means For Suppliers

Now that we’ve gone over Apple’s numbers for the last quarter, let’s look at the suppliers, specifically those whose parts power the iPhone 6.

There are two main we see you as getting in on Apple as investment.

If you are considering investing in Apple, there are viable options. First, buy now while it is trading lower because the stock tends to rebound nicely. It’s trading now around $125 a share, which is about $10 share of its 52-week high. Just keep in mind that the Q3 results may very well be a sign that the smartphone market is saturated and the good old days of record sales of the devices may be waning.

Another way to ride the coattails of Apple may be through its suppliers. The following is a list of some of the suppliers whose parts are in the iPhone 6.

Skyworks Solutions (NASDAQ: SWKS) had a good third quarter in terms of earnings. It supplied the chip for the iPhone 6’s 5.5 inch screen models. After beating the street’s estimates several analysts increased their price targets on the company. It closed Friday around $99.

Pacific Crest Securities raised the price target to $120 from $110. The analyst for the firm is banking on the increasing content on iPhone 6S and improving Chinese demand as reasons.

Skyworks reported earnings being up 61%, and revenue rose 38% to $810 million. Analysts had expected $1.29 and $801.5 million.

Then there is NXP Semiconductors (NASDAQ: NXPI). Apple uses its near-field communications technology in its mobile pay service. Following Apple’s earnings release last week, NXP’s stock fell 2.38% to $90.20.

The company produces several components for the iPhone, including a part required for the Apple’s new mobile Pay feature. Providing iPhone users a pay system is slowly catching on. Over the long term it’s likely that NXP could significantly benefit from supplying Apple with the parts for this feature.

Keep an out on the stock this week; it reports its Q2 earnings on July 29.

ARM Holdings licenses (NASDAQ: ARMH) its chip technology to several smartphone manufacturers, including Apple. ARM Holdings receives royalties from Apple and other smartphone manufacturers that pay royalties. While it performed

It reported earnings for its second quarter last week. While it missed analysts’ estimates, it did meet profit projections. Specifically, its revenue in the three months ended in June was up 15%, year over year, totaling about $357 million. Estimates were $359 million.

Its earnings per share were $.34, which met analysts’ estimates.

Do consider ARM Holdings for many reasons. One of them is the royalty revenue it receives when products using its licenses are sold. According to an interview ARM Holdings’ CEO gave to Bloomberg. Its chips are in 95% of the world’s smartphones.

He noted that the company is experiencing “very strong” growth in royalty revenue.

Posted by Martin May 18, 2015

My stock market prediction for tomorrow

When I say “stock market prediction” I do not necessarily mean predicting where it ends up. Just trying to assess the direction of the market. Yesterday, I called the market to go up based on all of my technical indicators pointing up.

Today the picture is not as clear as it was yesterday. I see a weakness in the trend. Well, the whole market is still weak. People refuse to believe in this market and yes, we still may see a return back down into the range or stay range bound in this new level.

SPX move

The picture above says it all. We had a nice move, but the indicators are weakening. The trend shows a sell signal and it is turning down. MACD is also weakening and turning down. However, this chart indicates more intraday trend and not a day trend on 1 year basis.

SPX move daily

The longer based chart shows a different picture though. We are still in nice uptrend and all technical indicators are still bullish. No reversal whatsoever.

Based on that I think the market will show some weakness, maybe in the morning, but at the end it will end up.

If weakness, what to expect?

SPX intraday

If we go down, it may happen in the morning to continue a trend from the end of today’s session and we may go down to 2128 level or a bit below it to 2126 level. Then we may reverse back up and go higher. In the worst case scenario, we may re-test 2124 level.

Although in this market, everything can happen, I expect weakness, but move higher at the end.
 

Posted by Martin April 20, 2015

Legacy Reserves (LGCY) cuts dividend

LGCYLegacy reserves cuts its quarterly dividend today to 0.35 down from 0.61 cents. The company originally planned to sustain the dividend as it did in 2008, however, at the end of the day they gave up and reduced the dividend.

However, it is apparent that the market expected this cut months ago and already priced the cut in when the stock traded at $10 or even $8 a share. This price reduction was probably inspired by cuts made by LINE and BBEP previously. Thus now the stock price already reflected that.

As cutting the dividend was expected, then both outcomes were possible – no cut, the price would jump, – cut of the dividend, the price would jump too.

And that’s exactly what happened. Amid the dividend cut, the stock rallied by 9.15% today as it was appreciated that this cut would improve the company’s balance sheet ahead of oil recovery.

Thus this move helps our put options we hold in our account, but hurts our dividend income.

Hopefully, this trend will continue and as oil continues recovering the stock recovers in price, recovers its dividend and our options trades keep expiring worthless for full premium profit.

LGCY trend

When you click on the picture above you will see today’s trading with a large bullish uptrend. Even after hours the stock continued spiking up high. If this continues this way up, our trades will end up very well with very nice profits. I am even planning on selling more puts against this stock.

The put selling against this company also helps offset my loss on the stock. As you can see below, if I held a stock only, I would be losing $477.72 on my 36 shares I own. However, my put options I sold earlier are now helping me offsetting the loss. I am losing $235.72 only as of now.

But, if I add all dividends I already received from this stock in my TD trading account, my loss would only be $106.13 in lieu of $235.72!

LGCY positions

Granted, those trades are not over yet. One positions is set to expire in June 2015 and the second spread is set to expire in September, and many things may happen in the meantime. My expectation is however that this stock will go up as oil will be recovering so I believe that these trades are no brainer.

It still can be a bumpy way up, so if you mirror my trades (via our free newsletter where we publish our trades), you need to be prepared for the bumpy road. But, in my opinion, it will be a rewarding one if you hold tight.

This is one reason, why I like selling put options against dividend (or even non-dividend) stocks since the options would allow you to collect premiums which may be considered an additional dividend.

Happy trading!

Posted by Martin April 15, 2015

Kinder Morgan (KMI) increases its dividend

KMICurrently, this cutie (KMI) is paying 1.8 bucks per share annually. That translates it into nice income of 4.30% on invested dollar. Where else can you get such nice interest? No bank would pay you this. Not even bonds (they actually pay a negative interest). So unless you start your own consumer credit loans business where you will be legally allowed charging a usury interest of 20% or more you won’t get any better return on investment anywhere else.

KMI announced today after close that it is increasing its quarterly dividend to 48 cents a share, up from 45 cents in the fourth quarter of last year. The company plans to pay a full year dividend of $2 a share! And they are on track to meet this goal so far. Basically KMI plans increasing dividend by 50 cents every quarter.

The stock slipped about 1% in afterhours trading as the company announced revenue and earnings for the first quarter that were a bit light of analyst expectations. The stock closed Wednesday at $43.43. (Source Barron’s)

What can I say to this?

Yes baby, go down on all those anal-yst expectations so I can buy more!

Currently, I own 98 shares of KMI in my dividend growth portfolio and I am definitely LONG on this stock.

 

Posted by Martin April 05, 2015

Selling Seadrill (SDLP) & LGCY puts to add stock into my portfolio amid all negative sentiment

It is hard to be buying when everybody is negative on a stock, predicting its further collapse or struggle. These days we see oil exploring companies out of favor. Many had to cut on employment, investment and even vut the dividends.

When reading what other investors think about oil companies, you get scary stories, gloomy predictions, and stay away outlook.

I admit, that take a trade and buy a stock in such review and expectations needs a lot of courage. It is a gut wrenching approach sometimes to be a contrarian.

I recently took a position in Legacy (LGCY) for this same reason. Everybody was busting this stock and predicting its gloom and doom. I believe, this stock offers a great opportunity and it is worth to dedicate some cash to it. Lately I even opened a bull put spread against this stock expecting profits when oil goes up and the stock with it.

Today, I plan on taking yet another gut wrenching opportunity and initiate a position against Seadrill (SDLP) stock. It is another oil involved company making money shore drilling. Recently the stock tanked as many others in this industry and investor have only a scary stories and expectations. Only a few of them out there are posting articles having something nice to say. And whe they do, they are immediatelly attacked by others who invested in the stock when it was at $30 a share and now they are at a huge loss.

 

But with companies like this, you need to define an investing style (or strategy) you want to apply:

1) Either hold and collect dividends and go thru the thin or thick of the stock.
2) Or trade the stock and when there is a sell off coming, sell it and buy back at the bottom (well, if you are good at market timing).

If you decide to hold on and go thru bad times, you can do a few things – hold the stock, collect dividends, and sell puts or put spreads. That’s exactly what I am doing with LGCY stock while waiting for it to go up. I collect the dividend and I collect premiums from options.

So I am going to do the same with Seadrill (SDLP) and LGCY (adding to my existing LGCY position). I will sell put options against these stocks to collect premium if the stock goes up and stays above the put strike price. If not, I am OK to accept the stock, actually I will be happy to buy those stocks at those prices.

There will be two outcomes:

1) the stock stays above the strike price, the option expires worthless and I will keep the premium
2) the stock drops below the strike price and stays there at expiration, then I will be assigned the stock and buy it at the strike price plus I will keep the premium.

Since the price of the stocks are so low I am very comfortable to buy stocks at those level.

If you want to see these trades details, strikes and expiration I am going to take, you need to become a subscriber to my free newsletter where I publish my trades.

Good luck and happy trading!
 
 

Posted by Martin March 29, 2015

Running a zig-zag trade: my worst trade ever ended relatively well

My dream is to trade SPX weekly options and generate weekly income, which I can invest into dividend paying stocks. I believe and hope that with dividends and options income I can boost my portfolio and grow it faster than when just investing into dividend stocks only. I believe, that it is actually my only chance to get up to speed with my retirement savings.

But to trade options, one must do it right. And this is proving to be the hard part of option trading.

Last year was very good although the end of the year ended as a disaster to me, this year seems to be worse. Not in terms of losses, because I, fortunately, created no losses so far, but from the volatility perspective.

Yes, 2015 proved to be the most volatile year to me. For experienced traders this is a great environment for trading. At least this is what traders claim. They say that this falling and rising market is the best for them.

I admire it at one hand, but struggle to follow it up. How they deal with those sudden reversals like we saw a few days ago? I have a hard time to believe it. But the reason of this post is not to expose those traders, dishonest them or envy them. I just say this to say that I admire it and I wish to get there. “There”, meaning to a state of trading that I will be able to see those changes coming on time and react to it properly.

The purpose of this post is to share a trade I recently took against SPX and what SPX did to me and how I reacted. Now, at the time of retrospective I can see my mistakes. But when the trade was happening I didn’t see those mistakes coming.

What is most important however, is that no matter how terrible the trade was, it actually ended well. I didn’t make any money, but I didn’t lose as well. In other words, I was able to turn a sure loss into a break even trade.

What happened?

On March 3rd I did my market review and I got a bearish outlook. I expected the market to fall further down. But on Monday, the next day, the market rallied strong up and I saw this as trend continuation. I saw the first green large candle as an invalidation of my previous bearish outlook. So I opened a bullish trade against SPX – a bull put spread with the following strikes: 2080/2085. If the market remained above 2085, it would expire worthless for a sure profit. At 2116 level, this wasn’t a problem. Below you can see what I was doing:

SPX history

As you can see, my thinking was proved to be wrong. On Tuesday the market continued falling. I was thinking that this was just a temporary pullback and that we will bounce off of the 2093 level. Unfortunately it didn’t happen and on Friday, the market basically crashed. And that forced me to react.

Should I have taken a loss by closing the trade or do something to salvage it?

Defending the trade

I decided to salvage the trade and roll it away in time. I still believed in the trend. I expected the market to shake this selling off, reverse and continue back up. So I moved those options away by two weeks from March 6 expiration into a March 27th expiration. I decided to keep the strikes same as I was bullish:

SPX trade history

The chart above shows where I took action and moved the expiration into a further away time. But the market continued heavily in selling the next week. Monday was green again, but Tuesday hit us again with heavy selling.

I must say, I became nervous. Should I have acted or left the trade alone? If I have left it alone and the market continued in more selling, I would not be able to save this trade at all and it would be a sure loss. I thought that I needed a cushion. I needed to move the trade in case more selling was coming. Now I see this as panicking and being dragged into action by the market and not by a rational thinking.

Stay calm, everything is OK, panic!

After another set of heavy selling I decided to reverse the trade into a bear call spread with the same expiration of March 27th and the 2025/2030 strikes. If the market fell lower and remained below 2025 at expiration, the trade would expire for a nice profit, see the chart below:

SPX trade history

The market continued in heavy selling that day and the following day. But the selling in the following day became weak and stopped at 2040 support created by a lower Bollinger Band and a trend line. I started smelling trouble again. Then the market rallied hard and although after that there was selling again, it started to become apparent, that selling was over.

Is it right this time?

I decided to reverse the trade again from a bear call spread into a bull put spread with 2095/2100 strikes. This time the market had to grow up above 2100 and stay there by expiration. See the chart below:

SPX trade history

I must admit, that at this point I was totally driven by the market and trades were already based on emotions. Although the entire trade was still profitable, I had big doubts whether it could ever end up with a profit. But what was worse was that I was running out of margin buying power. The worst enemy of the trader. Once you get extended on margin, it can kill you without hesitation. I was risking $1,500 to make $285 and that was beyond my comfort zone.

But the trade was still showing a loss. Should I have ended it or continue the struggle? I felt like a hare running zig-zag in front of a wolf trying to save his life.

Soon the market grew above 2100 and was about to stay there. It even started attacking its previous all-time high at 2119 level. I now felt good about the trade that I was able to manage it even at a high cost of margin power. I was completely unaware of what was coming at me.

The market reached 2115 level and started reversing again into a big selling which was coming. Fortunately this time I was able to spot this on time and decided to act once again. I couldn’t roll the trade anymore as I had no margin buying power to do that, but I decided to try reversing the trade into a bear put spread. It is a debit spread and I knew that by doing so, I would lose all gains I made so far, but I would lose nothing.

No matter what I did it was wrong

To reverse the trade I did the following swap. I had a long 2095 put and a short 2100 put. I decided to buy back the 2100 put and sell a new 2090 put. So the original 2095/2100 credit put spread became a 2090/2095 debit spread. For this transaction I paid $5.20 or $520 per contract. This was a losing trade from the beginning because with a debit spread all you can ever make is the spread width, or $500 per contract. I paid more for it than I could ever make. But I had previous credits collected!

SPX trade history

My reaction proved to be correct and right on spot at the right time. I am grateful for this because this saved my trade. As you can see, that same day when I reversed the trade and the very following day the market crashed again.

This could set our trade to expire in-the-money next week. It could end the trade with a nice profit at about 11%, but because I will be traveling next week and I will not be able to watch any of my trades until Wednesday next week, I decided to close the trade earlier. It could be still profitable trade, we actually made $60 on this trade, but commissions ate it all up, se we ended with a small loss of $17.50 (-1.22%). Better than a full loss, right?

Below see a screen shot of my trade book recording to see the entire trade and all steps I just tried to describe above.

SPX trade history

It was a difficult trade full of emotions. I admit that. But I am glad I was able to manage it to end it with a small loss rather than a big one. It was also a very stressful trade but I learned a new strategy on salvaging a trade. Hope I will be able to use it correctly in the future to make money instead of losing them. It also proved one important thing – when trading options, you must stay small, do not overtrade. Once you overtrade and run out of available cash you are doomed to losses. You will be forced to close a trade in the worst time with a loss.

SPX is a canibal ready to eat you alive

SPX is a nice vehicle to trade, but it can be a very dangerous, evil savage, who can eat you alive. Don’t let it happen to you and don’t let it fool you like I got fooled before. This lesson ended well with a very little loss, but it could turn into a huge loss. With a knowledge of how to trade options and how to eliminate risk involved in them, you can win this battle even when it turns against you.

 

What was my lesson from this trade?

So once again – learn a lot about options, learn a lot about technical analysis, be patient and stay small to succeed. I say this again not just to be bossy, I say this again mainly for myself. It is the most important rule ever.

I wish you a great trading next week and I’ll see you the following one.

Happy trading!