Stock Collars

[kidgas]

Sorry, I didn't get to this yesterday. I have a little more time today. So to recap the events of the past week:

I certainly thought that some of the GG shares would be called out either the March 40 or March 45 calls. Alas, it wasn't to be. So, I ended up buying some Apr 40 and Apr 37.5 puts to add to the Apr 30 that I had so that I could cover all the shares that I would own going into April. Also, I repurchased the Apr 37.5 calls that I had sold a while back. The net result is that I increased my basis by 0.70 per share but all shares are uncovered but protected. So, in the next month if GG runs up again, I will sell some calls. I will give it a week or two and decide what to sell. If GG continues to collapse with the gold price I have half protected with 40 and 37.5 puts which I will sell for profit and add to the position. I don't think we are out of the woods economically yet. If we are, the other stocks should get a pop.

No change in YHOO or EMC. Waiting til April to make some decisions.

VCLK was looking crappy. I ended up exercising the Mar 20 puts on Tuesday taking a 3.67 loss per share. It ended up being more than necessary since I didn't sell calls thinking that VCLK might be a buyout candidate. I was wrong. The overall loss was 15.5%. Oh well, I learned something. It could have been much worse without the puts.

CY has been bouncing around 20 and the March 20 calls were exercised. So, those shares ended up being profitable. Since it looked like I might end up keeping all shares, I purchased Jun 17.5 puts. Now I have some extra. My basis on the shares I have left is 28.51. I will be looking to purchase some additional shares to decrease the basis but will make a decision this next week. Furthermore, I have no outstanding calls so I can ride the stock up if it goes that way. I will probably sell some and hold out on others until I see what happens.

DRYS: With the exercise of VCLK puts, I had some extra cash and was able to double my position and decrease my basis to 68.15 including Jun 50 puts to cover all the shares. I have no calls outstanding so that I can see what I will do over the next month or so. I am sure that DRYS will remain fairly volatile.

If anybody has any questions, be sure to ask.

 

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[jdub]

Kidgas,

When opening positions, do you ever look at doing a bull put spread? For example, XYZ stock is at $26 and your interested in buying a stock if it drops to $25. You enter the bull put spread by selling the put with a strike of $25 and buy the put with a strike of $22.50. It would seem like a good way to enter into a collar, with the protective put partially paid for.

Thanks for your insight!

 

[Edge]

Kidgas,

When opening positions, do you ever look at doing a bull put spread? For example, XYZ stock is at $26 and your interested in buying a stock if it drops to $25. You enter the bull put spread by selling the put with a strike of $25 and buy the put with a strike of $22.50. It would seem like a good way to enter into a collar, with the protective put partially paid for.

Thanks for your insight!

jdub - You still have the risk of the stock trading well below $25 when you are assigned the stock for $25, but if you wanted to buy it at that price anyway I guess that is the risk you are comfortable with.

FWIW - A bull put spread is the synthetic equivalent to a collar.

 

[kidgas]

With the bull put spread, you do have the risk of assignment but you still have the put to protect against massive loss of the underlying. So, in the example, you only are risking 2.50/share.

jdub - I have not looked at that. It is possible, but I'll tell you why I choose to hold the underlying. Using your example, if the stock increase from 26 to 30, you will make the difference between the price received for the 25 put and the cost of the 22.5 put. No more, no less. However, if I buy the stock at 26, purchase a put and sell a call, what is the difference?

Say the stock goes to 30 and I want to close the position early. With the spread, I will earn less than the maximum profit unless I hold to expiration. But with the collar, the cost to re-purchase and close the call will be less than the increase in the stock price because the relative amount of time value decreases. Time value is always maximal when the underlying is close to strike. As the underlying moves more OTM, the time value decreases. As it moves more ITM, the time value decreases and more becomes intrinsic value. Is this technically gamma scalping? I don't know, but I am using the gamma "hill" to my advantage.

To put some numbers to it: Buy stock at 26, buy 22.5 put at 1.10 and sell 27.5 call at 2.50 for net basis of 24.6. If stock goes to 30, put drops to 0.45 and call goes to 4. To close out, I buy back call for 4 and sell stock and put for 30.45 netting 26.45 vs basis of 24.6. This scenario can easily happen within a week of initial purchase. Of course, you are upset that you sold the call.

But, my main reason for trading the way I do is to protect capital. This is my retirement account we're talking about. The married puts and collars take the place of stops. My goal with the collar is to bring in some income and maybe pick up some capital gain on shares that I didn't sell calls on, or pick up some capital from the increased price since I usually sell OTM calls.

I am happy to discuss more. I love the discussion.

 

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[kidgas]

Also, here is what I did today:

GG-waiting to see if it gets nearer to 40. Had a nice gain early in day but closed at no change.

EMC and YHOO-watching

CY-bought back the shares that were called at 20.99 and sold the June 21 calls. This lowered my basis to 26.88. If the stock keeps increasing, I might look to sell some progressively higher calls.

DRYS-bought some May 60 puts when stock hit 63. If the stock falls over the next few days, looking to make a few fast ones.

 

[randallg99]

DRYS-bought some May 60 puts when stock hit 63. If the stock falls over the next few days, looking to make a few fast ones.

I cannot believe its volatility... lots of premiums built into the options. have you considered daytrading the options ?

 

[kidgas]

Yes, I have considered it. But that is not possible in the retirement account since margin is not allowed. I have to wait for funds to clear and keep myself out of trouble. SO, I am looking at swing trading which I have done recently. I usually buy puts on a big spike. I am long the shares if there is follow through. The puts will lose less than the shares pop so I can still make something. More than likely, however, the shares will give back something so I can profit on the puts. Right now I have Jun 50 puts for capital protection and the May 60s to play with.

 

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[jdub]

I appreciate everyone's help so far, especially with different perspectives on bull put spreads.

Kidgas - Have you ever looked at dynamic hedging, like Peter Achs from Optionetics does? It sounds like you may be doing something similar so I was just curious. Thanks!

 

[kidgas]

I have read many of Peter's posts at the Optionetics and am trying to do something like dynamic hedging. I am still getting my legs under me and figuring out certain aspects of my overall system. I started using collars extensively in Oct 2006 and met my goal for the retirement fund in 2007.

 

[kidgas]

This past Friday was option expiration, so I thought I would post an update on my positions and my thoughts regarding future trades.

GG--I went into the expiration with some puts at 40 and some calls at 40, so I knew that something would be exercised. It turns out that the outstanding calls were exercised taking roughly half of my position. I bought some July 35 puts early last week and picked up some July 40 puts today. As soon as the cash from the stock sale clears later this week, I will look to replace the majority of my shares. Currently, the shares I have left have a basis of 32.90. My plan is to by some shares and sell the May or June 42.50 calls to lower the basis of those shares while leaving the ones I currently own free to participate in any upside. However, historically I need to consider that summer is usually a slow time for gold.

YHOO--All puts and calls expired worthless. With added cash, I increased my position by about 8% and purchased July 25 puts covering all shares. My basis is 26.40. Earnings come out tomorrow, so I expect the possibility of volatility. I still view YHOO as buy-out bait, and most analysts suggest that a price above the current offer from Microsoft is likely. I plan on holding out for a little while and then selling calls on about half the position on any spike nearing 30.

EMC--This is one that I screwed up on, initially, by not selling any calls (I did the same thing with VCLK to some extent earlier). The stock declined and so I am underwater with this one. However, I have recently added slightly to my holdings and purchased the July 13 puts. I am willing to spend some time watching and adding to my positions on this one as I feel that the industry is cyclical and will rebound. Earnings are coming in on Wednesday and tech has shown some promise so far this quarter. We will see. My basis is 20.82.

CY--I am most excited about this one. I added to my position on the way down and profited on the puts (protected capital) on the way down. Now I am reaping some benefit on the way up and gradually selling calls on the way up. I have all shares covered with the June 17.5 puts. I have sold some calls at June 21, 26, and 30 (each representing 1/6th of my position). So, I still have half of the position available to participate in any upside. Once CY reaches about 32, I will look into covering that half by puts. Current basis is 26.56, so I have to keep in mind that the basis will increase when CY gets called out at 21 and 26. But, when I look at those shares in isolation, they are profitable. I will probably look at selling calls at 35 and 40 as CY rises.

DRYS--I have June 50 and 70 puts, plus some May 60 puts. I have sold some May 70 calls, but still have over half my holdings available for upside. I plan on selling some June 80 calls and have a GTC order in for 9.10/share. I will give it a few more weeks and see what happens. My current basis is 72.68. If the May 70 gets called, then the basis will tick up, but I will have additional cash to purchase more shares and puts. I am still fairly happy with this stock since my initial purchase price for shares in December was 82.04. I don't think it will be too much longer, and I will be solidly profitable with this stock.

I will also mention that so far, I am on pace for meeting my retirement account goal for the end of 2008. That goal called for a 12% gain for the year on the amount plus the additions. Right now, additions in May and June will put me at the appropriate total after the first half of the year.

 

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[kidgas]

Brief update--
GG-Bought just a few shares at 37.50 today equal to the amount covered by the July 40 puts. So, worst case, is that these get put out at 40. I will wait to see if GG keeps declining and may end up replacing all shares that got called at 40 under 35 since I would automatically be able to sell at 35 in July regardless.

DRYS--The June 80 calls were sold generating some cash for the account. Basis is now 68.65 so the May 70 calls will be profitable. I am just watching and waiting otherwise on this one.

EMC, CY, YHOO--no change. I am disappointed that YHOO seems to be gradually fizzling. I will remain patient, however.

 

[kidgas]

Here is a nice link to an article on collars:

http://collarinvesting.com/images/D...ars_as_an_alternative_to_Asset_Allocation.pdf

 

[kidgas]

GG--picked up some shares at 34.90 today. Because I owned some July 35 puts from earlier in April, I cannot lose. I also picked up some July 40 puts from when GG was up around 42. The shares that I am replacing were called out at 40 when the April 40 calls were exercised. I replaced some at 37.50 and these at 34.90. I will allow the 37.50 to be put at 40 if the stock fails to rise between now and July replacing those at a lower cost. Currently, my overall basis for everything is 34.15. I still have more puts than stock at this point, so if the stock continues to decline past my basis, I will add more and wait til July collecting a minimum of 35/share. Currently, I have no outstanding calls and so I am waiting for the next upleg to start selling some. I am curious to see what will happen with the gold price pending the next Fed decision tomorrow.

 

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[unicon]

Can you summarize all your transactions from beginning of thread? For example:
Timeframe : 2 years 6 months

Bought 500 calls @ cost of $$
Sold 400 calls @ cost of $$
Bought 800 puts @ cost of $$
Sold 300 puts @ cost of $$$

Total Net profit on 2000 transactions = $
Original investment = $$
Ending cash pool = $$

Anything else contributing to the big picture story??

 

[kidgas]

Unicon,
Thank you for your interest.

First of all, let me say that I don’t want to get too personal in the posts, but I do understand that it might be hard to follow the thread from the beginning. I also understand that it is one thing to have gains off a small capital base vs a large capital base. I started using collars in October of 2006 and began using them exclusively for my retirement account in January of 2007. I will share some info related to these accounts since the point of using collars is to provide a long term consistent strategy that will protect capital.

I don’t have the data handy to answer all of your questions, since once I close out a position, I delete that portion of my spreadsheet. The retirement accounts will be taxed when I take money out, so I don’t track each individual transaction after the position is closed. I do keep the annual statements, but I am not going to spend that kind of time to track down the data.

Here is the information from all my closed out positions since Jan 2007:

Stock Date In Date Out Basis Profit/share Percent Gain Days Annualized
YHOO 1/25/07 2/14/07 30.55 0.12 0.39 20 7.17 %
HAL 1/25/07 4/20/07 29.12 0.87 2.99 86 12.68%
KG 1/20/07 4/20/07 16.65 0.84 5.05 81 22.73
STX 1/25/07 9/22/07 23.99 1.01 4.21 240 6.40
GG 1/25/07 10/19/07 24.7 2.79 11.3 267 15.44
CHK 4/25/07 10/19/07 33.52 1.47 4.39 177 9.04
WDC 4/25/07 10/19/07 18.88 3.61 19.12 177 39.43
BTU 1/25/07 12/21/07 45.53 9.46 20.78 330 22.98
PAAS 1/25/07 1/3/08 24.16 5.56 23.01 343 24.49
VCLK 9/25/07 3/17/08 23.67 -3.67 -15.5 174 -32.52

Now, so that you can follow the flow of a series of trades, I will provide information related to my current open position in YHOO. I keep a spreadsheet that looks at inflow and outflow of cash (including fees and commissions) so that I can get an overall basis for the stock position. This allows me to make decisions based upon that overall basis and includes all option transactions. Ultimately, my spreadsheet would look like this:

Date Stock/Option Number Cashflow Comments
2/14/07 YHOO 800 -24440 Initial position
2/14/07 Apr 30 c 8 1713.94 sold slightly ITM calls
2/26/07 Apr 25 p 9 81.98
2/26/07 Apr 30 p 8 -494 rising stock moved up put protect
4/17/07 Jul 30 p 8 -894 getting set for next quarter
4/17/07 Apr 30 p 8 197.58
4/17/07 Apr 30 c 8 -1892 bought back to uncover
4/17/07 Apr 32.5 p 5 -611.75 just before earnings
4/18/07 Apr 32.5 p 5 1988.21 down on earning -- take profit
4/19/07 Jul 30 p 8 2305.96 additional profit on declining stock
4/19/07 Jul 27.5 p 8 -1174 rolled down puts
5/4/07 Jul 30 c 8 3105.95
5/14/07 Jul 30 c 8 -1334 bought back calls
7/6/07 Oct 25 p 10 -1015.5
7/6/07 Jul 27.5 p 8 945.98
7/6/07 YHOO 200 -5418
8/6/07 Oct 22.5 p 10 -1265.5
8/6/07 Oct 25 p 10 3026.44 more put profit on falling stock
10/12/07 Jan 22.5 p 11 -478.25
10/12/07 Oct 30 c 10 414.49 sold some calls on small spike
10/12/07 YHOO 100 -2778
10/23/07 Jan 32.5 c 11 1358.72 selling more calls after expiration
1/7/08 Apr 20 p 13 -1265.75
1/7/08 Jan 22.5 p 11 555.74 small put profit
1/7/08 YHOO 150 -3458 try to decrease basis
2/1/08 Apr 30 c 12 1482.96 sell on buyout spike
2/4/08 YHOO 50 1454.48 sell leftover shares (odd lot)
4/16/08 Jul 25 p 13 -1707.75
4/16/08 YHOO 100 -2823
Basis -24.94 (on 1300 shares)

As you can see, I started purchasing YHOO on Valentine's day 2007 and bought 800 shares for 30.55 per share (which includes commissions). I had already owned some April 25 puts so I didn't need to buy any (see the closed out position in YHOO). Intraday, I had sold at a higher price and bought back in at a lower price. Negative numbers mean that I purchased and positive means that I sold. When I am done with the position, the basis will be a number that represents total profit or loss. With this info, you should be able to track my order flow. (I have also added some commentary above). I always make sure that I am covered by the puts so that when you see put transactions on the same day, I am buying some and then selling the others.

In regards to the other currently "open" positions, the initial transaction date and current basis are as follows:

GG opened on 10/22/07 at stock cost of 30.81. Now basis is 34.15 from adding shares at gradually increasing prices.
EMC opened on 10/29/07 at stock cost of 25.33. Now basis is 20.81. I have worked to decrease the basis by adding more shares at lower prices, but this has been more difficult since I have not sold any calls yet (just using protective puts).
CY opened on 12/24/07 at stock cost of 36.40. Now the basis is 26.56. I have added shares in the high teens. Plus the March 30 puts paid off well when the stock got hammered. This is the beauty of collars to me since I can survive a major stock sell off. I had also sold the March 40 calls, which were bought back at a profit to help offset the stock loss and lower the basis. It is a good illustration, and I might save it for future use.
DRYS opened on 12/28/07 at cost of 82.04. Now basis is 68.65. I will sell some shares at 70 in 2 weeks (assuming the May 70 calls get exercised) and will then purchase some more shares with the proceeds.

This is a long post and is only a small portion of my thoughts and processes. Feel free to ask any questions you might have, and I will do my best to answer them.

 

[kidgas]

sorry about some of the fonts, etc. I tried to add excel spreadsheets, but couldn't get it done...so I typed it all in freehand. Terrible looking result. sorry

 

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[kidgas]

So, here is a brief update since the beginning of May since tomorrow is the third Friday of the month.

GG--I sold some May 37.5 calls (which look likely to get called out) and some June 40 calls. I still have just over half the shares uncovered so I can take advantage of an increase with July puts.
YHOO--I sold 3 July 25 calls which leaves 1000 shares uncommitted, and the new basis is 24.35. With the July 25 puts in place, there is no way I can lose money. I have a locked in profit. It just becomes a matter of how long I wait to see what Icahn can do with his proxy fight.
EMC--Sold some July 17 calls today. Waiting for the stock to keep rising. Still have majority of shares uncommitted with a basis of 20.65.
CY--Sold some shares outright yesterday to get some cash to buy back DRYS calls. The new basis is 25.82.
DRYS--Bought back the May 70 calls and sold June 105 calls. Purchased some June puts at 90 and 100. Sold some shares at 105.50 today. New basis is 85.08. The aggregate of being called out is 92.5 and my average puts are at 95. Locked in profit if I do nothing for next 5 weeks.

 

[kidgas]

Kidgas,

I am new to this forum, but have learned much from your posts about collar trades. On Jan 26, 2008, you posted that you had lost money in your margin account due to over-leveraging with portfolio margin. Could you elaborate as to what happened that caused the losses? I understand that portfolio margin allows one to open a collar with much less margin, but I also understand that a collar is a hedged trade because of the long put, so how can one lose, even if the stock falls significantly? Thanks again for sharing your experiences.

learner

I received this question and thought I would address the answer publicly so that others might learn. I will present a hypothetical situation based upon reality.

This past Friday, you decide to utilize portfolio margin to open up collar positions in GG. Your initial equity is $100,000 and with portfolio margin, you decide to obtain 12,000 shares in GG at 41.28, purchase October 37.50 puts for 2.80 and sell the October 40 calls for 5.70 per share. Your net basis then becomes 38.38, and your account looks like this:

GG long 12,000 shares
Oct 37.50 puts long 120 contracts
Oct 40 calls short 120 contracts
Margin balance -360,560

Over the weekend, Google discovers the secret of alchemy and is able to turn any metal (copper, steel, nickel, aluminum, iron, you name it...) into gold. GG drops instantly on Monday to $5/share. Granted you have the puts, but what happened? You end of losing the difference in out-of-pocket costs and the strike of the puts (38.38 - 37.50 = 0.88/share). 0.88/share * 12,000 shares is a loss of $10,560! Certainly survivable but a loss nonetheless. Imagine using more leverage. Instead of roughly 5:1, use 30:1 which does become possible with portfolio margin and your loss (after paying off the margin loan) is 6 times as large or $63,360.

So, to summarize: The per share loss is not large at all, but the margin is what gets you. Even if the loss for the stock is small (say GG goes to 37), the end result is the same. Now you have the answer to your question.

 

[randallg99]

Here's a question for the options gurus-

I am bullish and own shares of FDG (non margined) and I am interested in doing an option strategy.... (this is in a retirement account)

(markets closed)
current FDG price 79.03

sell against my position Sep80c for 8.10
then buy Sep90c for 4.50
for net spread 3.60

scenarios:
if stock closes below 80 in Sep, then I keep all proceeds and keep position after calls expire worthless
if stock closes btwn 80-90, then I lose position and lose the spread and have to close out the Sep90 at a loss (is this the worst case scenario?)
if stock closes above 90 then I lose position but keep gain from the spread...

if the stock continues an upward trend between now and Sept, I can tweak by creating more spreads at higher strikes and simultaneously closing out the previous positions for small losses, but recoup those losses with the new spreads....

if the stock stays at current levels, that is hypothetically perfect scenario, no?

lastly, if stock drops well below the call levels, then the spread is all but in the bank and another spread can be made by closing the original spread which will effectively reduce my rate of return on original spread however that is easily recouped with a new open position at lower strikes....

is there an advantage to going out several months?

any holes in my theory? what risk am I missing?

thanks and hope you're enjoying holiday weekend.

R

 

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[Edge]

Here's a question for the options gurus-

I am bullish and own shares of FDG (non margined) and I am interested in doing an option strategy.... (this is in a retirement account)

(markets closed)
current FDG price 79.03

sell against my position Sep80c for 8.10
then buy Sep90c for 4.50
for net spread 3.60

scenarios:
if stock closes below 80 in Sep, then I keep all proceeds and keep position after calls expire worthless
if stock closes btwn 80-90, then I lose position and lose the spread and have to close out the Sep90 at a loss (is this the worst case scenario?)
if stock closes above 90 then I lose position but keep gain from the spread...

if the stock continues an upward trend between now and Sept, I can tweak by creating more spreads at higher strikes and simultaneously closing out the previous positions for small losses, but recoup those losses with the new spreads...

if the stock stays at current levels, that is hypothetically perfect scenario, no?

lastly, if stock drops well below the call levels, then the spread is all but in the bank and another spread can be made by closing the original spread which will effectively reduce my rate of return on original spread however that is easily recouped with a new open position at lower strikes....

is there an advantage to going out several months?

any holes in my theory? what risk am I missing?

thanks and hope you're enjoying holiday weekend.

R

You say you are bullish, but the option position you outline above is bearish (depending on quantities) which I can't really tell from your post. In general, I can't think of any reason to open a short call spread on top of individual shares that I am bullish on. If you can maybe clarify your goal of incorporating options with your position (slightly bullish, very bullish, downside protection, volatility speculation, cash flow from sideways movement, crash type protection, lottery ticket speculation, etc) you will be able to get much better response. I'm thinking there is a better way to skin the cat depending on your answer.

From what I remember about your previous posts, you are generally a longer term investor and are bullish on the sectors you buy long shares in. Knowing that, I assume you are going to be looking for a 3-4 month out of the money call calendar. I'd rather hear your bias on this rather than assume anything more.

if the stock continues an upward trend between now and Sept, I can tweak by creating more spreads at higher strikes and simultaneously closing out the previous positions for small losses, but recoup those losses with the new spreads....

This part of your post really scares me. Each time you "tweak" your credit spread as the trade moves against you, you will be locking in a LOSS. You need to understand that risk.

lastly, if stock drops well below the call levels, then the spread is all but in the bank and another spread can be made by closing the original spread which will effectively reduce my rate of return on original spread however that is easily recouped with a new open position at lower strikes....

If you are selling 1 spread for each 100 shares owned, you will be losing money on your shares and won't be hedged on the downside. You sold the spread for 3.6 so if the shares drop lower than (79.03 - 3.6 = 75.43) you will be losing money on your position (shares not options). You are correct that rolling these spreads down as the stock falls would be locking in profits on the spreads and lowering your cost basis on the shares. I'd much rather see you just selling calls instead of call spreads though in this case.

Also, be as specific about position size (#of shares) as you feel comfortable. There are really two reasons for this. The main reason is that FDG only trades about 2M shares daily on average and based on the option volume and open interest volume, you won't get a good fill at a good price. Second reason is I can give you a profit/loss graph if you can at least say quantities such as 1 spread for each 100 shares or 1 spread for each 500 shares, etc.

 

[kidgas]

scenarios:
if stock closes below 80 in Sep, then I keep all proceeds and keep position after calls expire worthless
if stock closes btwn 80-90, then I lose position and lose the spread and have to close out the Sep90 at a loss (is this the worst case scenario?)
if stock closes above 90 then I lose position but keep gain from the spread...

if the stock continues an upward trend between now and Sept, I can tweak by creating more spreads at higher strikes and simultaneously closing out the previous positions for small losses, but recoup those losses with the new spreads....

if the stock stays at current levels, that is hypothetically perfect scenario, no?

lastly, if stock drops well below the call levels, then the spread is all but in the bank and another spread can be made by closing the original spread which will effectively reduce my rate of return on original spread however that is easily recouped with a new open position at lower strikes....

is there an advantage to going out several months?

any holes in my theory? what risk am I missing?

Randall,
Thanks for your question. First of all, I would like to review your scenarios keeping rule #1 (don't lose money) in mind.

1. If FDG goes to 50, all calls will expire worthless. Your basis would be 79.03-3.60= 75.43. You would lose just over one-third of your capital.
2. If FDG ends at 85, your long 90 call expires worthless (you don't need to close it out) and FDG is called away and sold at 80. Gain is 4.57 on basis of 75.43 or just over 6%.
3. If FDG closes at 120, your stock would be called at 80 but your long 90 call would be worth 30. Gain is 34.57 on basis of 75.43 for the entire position. However, without any of the calls, your gain would have been 40.97 on basis of 79.03.

Essentially, what you have done is to sell a covered call and bought an OTM call with some of the proceeds. As such, you have retained all the risks of the downside except for a small premium. But, you do have upside potential with the OTM call. I don't want to seem critical, but would question the motivation for such a trade. If you are bullish, the best scenario would be simply to hold the stock long.

Yes, the perfect scenario for such a trade would be for FDG to close at 79.99 in September.

Now, adjusting the spread downward would be one way of decreasing the loss on a declining stock. The risk is that you experience a gap down from 76 to 55. This is a major blow to capital.

For me, the advantage to going out several months means that I have time to see a trend establishing and not have to trade so often in a stock that is a little more volatile.

I don't want to tell you what to do, but looking at FDG, it is clearly in an uptrend. I don't know what you originally paid for FDG, but consider only buying a Sept put to lock in a floor price and give it room to rise. The puts are clearly somewhat expensive, but it depends on what you paid for the stock originally.

If you tell me what you originally paid, I could come up with some scenarios that I would consider.

I am having a good weekend. Spent the day at the Indy 500 yesterday. Hoping to golf this pm if it doesn't rain.

 

[randallg99]

thanks for your insight - after running a couple of scenarios, I understand how I absorb too much downside risk.

the obvious bullish step is to buy calls outright, but I want to limit that exposure as well...

I bought FDG across a couple of accounts between 60-62. I picked up a pretty nice uptrend just a couple of weeks ago after reading a few articles about their potential dividend in the next 4 quarters... if, there's always an if, all goes well for Fording Coal.... at today's price, yield will still be double digits leading me to believe we will hit 100's

my main objective is to leverage the gains I have already made.... in the past, I simply sold covered calls, but I don't want undertake the risk of being called out unless I am paid for it and/or have the ability to reclaim the shares... so hypothetically leveraging my existing position can help me avoid laying more cash.

let me know if this makes sense or not...

glad you're enjoying the weekend... it's been glorious here. Just a lot of family time and eating for me plus a little bit of work.

R

 

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[kidgas]

One of the big dilemmas that I run across is knowing when to sell. Some people advocate trailing stops. But, that doesn't protect you against a gap down. Selling too early can cost you plenty of gains. I don't know how many shares you have, but one of the techniques that I have been using is to divide my position into parts. I then sell the calls as the stock increases at various levels that I chose in advance.

Let's use your situation to illustrate. You have FDG shares at a basis of 62 and are sitting on 17 points of gain. You could sell now and take that profit. But what if it goes to 100? What if it drops to 50? If it were me, this is what I might look at doing:

I would try to pick up the Sept 75 puts at 7.50 or less tomorrow morning. This would make my basis about 69.5 and guarantee about 5.5 points of profit no matter what happens between now and September. Then, I would wait and see what happens. If FDG hits 85, I would sell the Sept 90 calls on half of my shares. When that happens, you are likely to get about $7/share which would lower your basis from 69.5 to 66. Now you have locked in 8.5 points of profit on a $66 investment. Nice gain. Plus, if FDG closes above 90 in September, you would get 24 points gain on half your shares plus have half your shares left.

If in September, FDG is 50, you still have profit and can get rid of all your shares at 75. Thank God you had those puts. Anyway, that is what I might do. Furthermore, after buying the puts tomorrow, I would not look at it during the day at all. I would put in a GTC order to sell the Sept 90 calls at the price I like and step away. After all, this is a retirement account.

 

[Edge]

Randallg99 - Something else I forgot to mention in my previous post. I'm assuming people play FDG for the dividend. Knowing this, you would have to actively manage your short call if it goes in the money when the dividend is paid. If your short call is in the money, you will be assigned because the holder of the long call will want the dividend. This will leave your positon of shares either flat (so you wouldn't recieve the dividend), or short shares (yikes! the dividend comes out of your account when you are short!).

 

[randallg99]

Randallg99 - Something else I forgot to mention in my previous post. I'm assuming people play FDG for the dividend. Knowing this, you would have to actively manage your short call if it goes in the money when the dividend is paid. If your short call is in the money, you will be assigned because the holder of the long call will want the dividend. This will leave your positon of shares either flat (so you wouldn't recieve the dividend), or short shares (yikes! the dividend comes out of your account when you are short!).

very good point. not to mention the borrow charges... I learned the hard way with a high dividend payer a couple of years back with NFI

you are right that people are playing FDG's divvy plan, but they are one of the largest met coal suppliers in the world... they sold a product valued at $95 just a year ago that's now selling for almost $400...

so my plan:

FDG now at 79+/-
bought at 61+/-
paper profit = 18 +/-

in my mind, the perfect scenario is to sell a covered call for every 100 shares owned, a Jul 85.
With the proceeds, buy 2 calls of a Jun 90 (hypothetically)
these trades cost no money out of pocket.

of course, in my mind again, there is enough time value built into the option price that allows me to capture extra premium that I otherwise would not have had I simply just sold the covered call.

by purchasing other calls, I am hedging against the possibility of having my shares called out by the covered call...

am I close to something realistic?

 

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[Edge]

in my mind, the perfect scenario is to sell a covered call for every 100 shares owned, a Jul 85.
With the proceeds, buy 2 calls of a Jun 90 (hypothetically)
these trades cost no money out of pocket.

of course, in my mind again, there is enough time value built into the option price that allows me to capture extra premium that I otherwise would not have had I simply just sold the covered call.

by purchasing other calls, I am hedging against the possibility of having my shares called out by the covered call...

am I close to something realistic?

I don't really think this position will give you what you are looking for. The calls you are purchasing are going to expire worthless long before your short calls. You bought those for a hedge, but they only hedge your position for half the time. I'll graph out the profit/loss chart tonight when I get a chance, it seems like you are giving up a lot of profit potential for next to nothing.

If you are bullish and want to collect premium, have you considered selling an out of the money put spread? You collect premium and are profitable if the stock goes sideways or up.

You could also simply sell near month covered calls. I like selling the near month because the premium erodes at the fastest rate during the last three weeks. I know you like the idea of the extra premium 2+ months out, but you make up for it by selling premium each month, and you have more flexability as far as adjusting since you can sell a different strike each month.

Another bullish trade you might want to consider is a call calendar. I've been meaning to post the type of trades I have been doing with calendar spreads, I have been doing a lot of them lately. The call calendar in your case would be a debit transition initially, but the idea could be to roll month to month for a credit. When you get to the month that your long call is in, you own the long call for free or for a small credit.

One more idea since I read the thread with your current account allocation, it looks like you have a chunk of cash. Have you considered selling naked puts (cash secured)? You could put that extra cash to work by using it as margin to collect premium on a stock you are bullish on. You know the drill here, if it goes down, you essentially got paid to buy the stock at a cheaper price and then you sell a call against it to lower your cost basis again. If it goes up, you keep the initial premium and repeat.

Really my ideas for you are based on what I am assuming you are trying to accomplish with options. Am I correct that you are bullish, want to collect premium, and aren't considered with downside protection?

 

[kidgas]

I think one of the most important points of this discussion thus far is that you should know what you are trying to accomplish with the options.

 

[kidgas]

Randall,
I am wondering if you have done anything with your positions. Thanks for sharing.

 

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[randallg99]

Randall,
I am wondering if you have done anything with your positions. Thanks for sharing.

I have not traded any options as of yet since I haven't nailed down a good spot to write covered calls.... much of the info in this thread is very helpful since dividends play a large role in ownership of FDG.

 

[kidgas]

What is the dividend status on FDG? I could not find any easily retrievable data from my usual internet sites. Thanks.