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Stock Collars

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kidgas

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I am going to attempt to create a thread to share my experience trading stock collars in this forum since the group here seems more willing to learn compared to the RDPD forum. I will update as I make changes in my positions in a corporate account.

On Friday, I initiated a position in DRYS. I purchased the Sept 55 puts first at 5. Then, I purchased DRYS at 57.89. The plan will be to wait for about one week and see what develops with the stock, possibly selling the Sept 60 calls to create a collar when the stock has run up. I also plan to ease into the stock over the next several weeks.

I took the total amount of my purchasing power and divided by 12. I plan to allocate an equal amount into positions over the next 12 weeks essentially purchasing a full position over a quarters time.

The reasoning is that over that time the stock may increase, decrease, or remain virtually unchanged. If decreasing, I can purchase more shares. If increasing, my initial purchases are becoming increasingly profitable. If unchanged, I need to start selling some calls to pay for the puts but can still make money while waiting for some movement. I look to make the next purchase on Thur or Fri of the upcoming week.
 
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MJ DeMarco

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Awesome, I'm looking forward to seeing your results of the strategy. Any particular reason for the stock?
 

kidgas

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DRYS is a highly volatile stock which will work better with selling covered calls as part of the collar. The higher volatility will make for higher premiums on the calls. It also means the puts cost more but people tend to be more optimistic and the natural bias of the market is up over time meaning the calls should pay for the puts creating a zero cost collar. The volatility will allow for more opportunity to make adjustments over the next month.

For example, on several stocks I have been able to lock in a guaranteed profit. If DRYS were to increase to about 62, I could buy the 60 puts for about 4/share, sell the 55 puts for about 2/share and sell the 60 calls for about 7.00/share. My basis in the overall position would be 57.90 (stock) + 5 (55 puts) + 4 (60 puts) - 2 (sell 55 puts) - 7 (60 calls) for a total of 58/share plus some commissions. This creates a conversion (put and call at same strike) that locks in profits. Then, all I have to do is hold til expiration. Usually, I end up closing out the position early by buying back the call, and selling out the stock and puts when I want to move on to something else. The key is the volatility.
 

kidgas

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Well, it was a busy day in the market yesterday, and the futures don't look that good this am. In keeping with my plan, here is what happened yesterday. I purchased 25% more shares of DRYS with my investment aliquot yesterday after I had purchased the Sept 45 puts at 3.20. Got into DRYS at 49. Then toward the end of the day rally, I sold the Sept 50 calls on that aliquot at 6.5 giving a basis of 45.7. So, only 0.70/share at risk with potential reward of 4.30/share before commissions.

As to the original shares, I exchanged the Sept 55 put for Sept 50 to generate a credit of 3/share. That brought the basis from 62.9 to 59.9 for those shares. So, I can sell the Sept 60 call for any price and that determines my profit.

There are 2 issues going forward. First, it is a potentially crappy market and DRYS could easily decline significantly. However, my overall basis for the entire position is 52.07. My risk is between 50 and 45 (about 47) or about 10% overall. This is not much different than having a stop in place. Second, DRYS reports earnings on Tuesday after the bell. Obviously, that could create some volatility. Downside risk is stated above. I may even buy some additional puts over and above the position to mitigate some of that risk. For upside potential, I have about 40% of the position uncommitted to the calls.

It should be an interesting few days.:icon_fU:
 
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kidgas

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Most recent update:

Well, as it turns out, I am unable to get portfolio margin at optionsxpress since the account is too recent. They said they want 3-6 months of trading activity in that account so I will try again in October (despite the fact that I sent in info from the past 3 years). They also said that DRYS was a little too volatile and would want about 10% more equity. I don't think that will be a problem. Currently, there is $105,000 equity. By October, I plan that the profits will be sufficient.

As to DRYS positions: I was a little concerned going into earnings so I bought 5 extra Sept 50 puts to protect against a major decline. I also on Monday purchased an additional 8 Sept 50 puts at 3.4 to protect the 800 shares I bought that day at 54.44. Then, yesterday, I sold 8 Sept 55 calls at 5.20 to give a basis of 52.64 for those 800 shares. With that, however, I have used up most all of my margin purchasing power. I still have 800 shares free to run.

Summarizing:
1000 shares with basis of 45.7 to sell at 50. Protected by 45 puts.
800 shares with basis of 52.64 to sell at 55. Protected by 50 puts.
800 shares with basis of 62.89 with no obligation. Protected by 55 puts.
5 extra 50 puts. I will either sell these or try to purchase a few hundred shares if I sell calls on the last 800 uncommitted shares.

Now there is just watching and waiting til Sept 21st.
 

kidgas

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kidgas

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Well, as luck would have it, I was approved for portfolio margin yesterday. So, I promptly picked up another 900 shares of DRYS yesterday. It is getting somewhat complicated to continue to relate everything that is happening. Suffice it to say that my goal for the portfolio using collars is $1/share profit each and every month.

I am seeking to accomplish this goal by legging into my positions and protecting every block of stock that I purchase with puts. Then I either sell the call right away or let it run for a few days to see if I can capture more upside. The position in DRYS was started on August 10. I plan on picking up some more shares tomorrow and then probably some next week using options from September. After that, I will move on to October options and just keep recycling.
 

kidgas

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I did some calculating over the holiday weekend and decided that my capital is too exposed for my comfort. I calculated a "worst case" scenario of an opening gap in DRYS to 40 and found the potential for significant loss. Therefore, tomorrow my task will be to purchase 20 Sept 60 puts. This will protect virtually all of my original capital for a relatively small price.

Currently, I have 5600 shares of DRYS, of which 3600 are committed via the selling of calls. I have 56 put contracts but at strikes which are too low for my comfort. I can take care of this tomorrow and will continue to purchase additional shares this week.

I also am considering purchasing NVDA shares since I feel the stock is in an upward trend, but I have not fully committed to this yet.
 

kidgas

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Well, I still haven't bought any NVDA yet. I did, however, manage to purchase additional puts at the Sept 60 and 65 strikes. Plus, I still have puts at 50 and 45 as well. I also purchased additional shares of DRYS and sold some more calls.

What I have found interesting is that with the portfolio margin, my buying power has held virtually constant as I purchase puts, buy shares, and then sell calls on the way up. This has allowed me to keep purchasing shares but does seem to add some risk because of the margin.

More interesting, however, is that because I have more puts than shares, even if DRYS were now to fall to 40, I would still be profitable. In fact, that profit would be about the same as if it stays in the 70's.

To summarize my current positions:
DRYS 7000 shares
Sept 50 calls 10 contracts
Sept 55 calls 8 contracts
Sept 60 calls 5 contracts
Sept 70 calls 13 contracts
Sept 75 calls 24 contracts
Sept 45 puts 5 contracts
Sept 50 puts 21 contracts
Sept 60 puts 36 contracts
Sept 65 puts 34 contracts

I won't have access to the market tomorrow. On Friday, I may buy some more. If not, next week will start looking at the October puts and calls since that is within 2 weeks of expiration and that is what my plan states.
 
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kidgas

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Bought 3000 more shares of DRYS today protected by 30 Sept 70 puts. Sold 20 Sept 75 calls leaving 2000 shares free of calls. Still just watching NVDA--am not committed to it yet.

Next week I will begin looking at October puts and calls. The plan will be to slow down a little since I was fairly aggressive this week. I did like how DRYS held up in a down market today.
 

ProInvestor

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Check out Van Tharp's - "trade your way to financial freedom" for protection strategy.
I will add some text from the book a bit latter on...

Rgds.
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kidgas

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I have read through the first 3 chapters so far. I plan to read some more this weekend. I am looking forward to learning about position sizing.

Please feel free to post some info plus your interpretation, thoughts, and experience. I am always looking to learn more. Thanks.
 
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kidgas

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Got through chapter 5 today. Plan to read some more tomorrow. Also, I calculated a "worst case scenario" on my portfolio. For me, a worst case would be DRYS gapping down to 40, so I base calculations on that type of disaster. With the current puts providing protection, I actually have a profit "locked-in" and just have to wait until Sept 21 to see what that profit will be.
 

RAiMA

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Check out Van Tharp's - "trade your way to financial freedom" for protection strategy.
I will add some text from the book a bit latter on...

Rgds.
proinvestor

Currently reading this atm. I bought the book back in 1999 and read the first 5 chapters then. For some reason I didn't take in ANY information then and what I'm reading through this 2nd time round is making so much more sense. Can't wait to finish the book :)

I have read through the first 3 chapters so far. I plan to read some more this weekend. I am looking forward to learning about position sizing.

Same, I'm looking forward to that too. What have you learnt so far?
 

kidgas

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RAiMA,
I have not been ignoring your question, just very busy. I am almost through the 7th chapter. After I get through that, I will post a book review thread on those chapters, hopefully this weekend.

Now, as to the stock collars. I will give another full update this weekend as well. Today, my concern is that DRYS might continue to drop. I don't know what it will do but I want to be prepared no matter what might happen. I have 3000 uncommitted shares (no covered call) that I know will carry over to the October expiration. Earlier this week when DRYS was in the 77-78 range, I picked up 10 Oct 70 puts. The plan was to pick up more as DRYS climbed but that didn't happen. I suppose it might rebound, however, I need to have some more puts by next Friday at the close. Also, I have 4400 shares that have outstanding Sept 75 calls that might need to be protected. So, today I will need to buy more Oct 70 puts.
 
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kidgas

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I made some put purchases going into October to protect equity in the event of a continued decline of DRYS. I also hold some CELG and GG in the same account but DRYS is the major position and the one I am using to illustrate and condense my thoughts. Starting equity on 8/10 was 105,000. Current equity is 111,250. DRYS positions are as follows:

DRYS shares: 11000
Oct 70 puts 110
Sept 70 puts 30 -- will try to sell this week sometime for some value
Sept 50 puts 8 -- these will expire worthless barring some calamity
Sept 45 puts 5 -- same here
Sept 60 calls 5 -- will let these get called out
Sept 70 calls 13 -- same if DRYS closes above 70 on Friday 9/21
Sept 75 calls 44 -- may expire worthless unless rally this week
Oct 55 calls 10 -- rolled out at cost of 3.80/share for 5/share in equity
Oct 60 calls 8 -- rolled out at cost of 2.80/share for 5/share in equity

I stand to gain more if DRYS rises but should be reasonably protected if DRYS continues to fall. If it does fall I will keep adding October 70 puts to profit to the downside and maintain purchasing power to add more shares at lower prices. That is the plan, anyway.
 

kidgas

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I've been very busy in the last week so I haven't been able to update much nor check this site. However, I do have a few minutes tonight and will give a brief update of my activities.

I have begun to diversify the portfolio somewhat, although I am still heavily invested in DRYS. I did add some more equity since as DRYS began to decline, the portfolio equity came close to the 100,000 threshhold for portfolio margin. This was before the fed decrease and the recent rally. I took that opportunity to diversify and have made some modifications to my strategy that I believe will pay off in the long run.

Currently, the portfolio holds:
CELG protected with Oct 65 put and Oct 70 call sold
CTXS protected with Oct 35 put and outstanding Oct 40 call
DRYS protected with Oct 70, 75, 80 puts and outstanding 75, 80, 85, and 90 calls
GG protected with Oct 22.5, 27.5 puts and outstanding 27.5 and 30 calls
VCLK protected with Oct 22.5 puts...I have not sold any calls yet as I am giving this several days to see if it will keep rising. I do not want to stay exposed for too long though as this is one of the risks. I almost got burned by this as DRYS was falling watching the equity decline. I have some more leeway now.
WDC protected with Oct 22.5 puts and outstanding Oct 25 calls.

The underlying theme for this portfolio is monthly income generation from the sale of collars with protection of capital followed by appreciation.
 

kidgas

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Briefly, did look at the risk of the portfolio on Friday. Because of the high level of leverage, I did run the risk of ruin if all 6 stocks had an opening gap down of 30% or greater. Obviously, the odds are remote but I wanted to protect myself and sleep well. So, I took the most highly levered stock, DRYS, and purchased 100 Oct 70 puts. With this, I gave up 3600 of future profits (thru Oct 19) but would still be in the game if a disaster happened.

The ultimate plan is to double my capital, then pull out the profits and play with only house money (ala Livermore). I fully anticipate a double by February (ie 6 months) since I am on pace to be up about 40% from Aug 10 to Oct 19. From Aug 10 til now am up 23%.
 
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randallg99

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kidgas, I was watching some of your holdings. It seems like the collars limit the upside... ie DRYS... how do you adjust your position accordingly?
 

kidgas

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Indeed collars can limit the upside, but they can also protect the downside. I am convinced that the way to make the long term gains is to avoid giving up the big loss.

To answer your question: As the stock, in this case DRYS, has increased in value, my buying power increases, so I use additional margin from a profitable position. Jesse Livermore would only purchase a small portion of his position initially. If it goes up, you are right about the stock and can purchase some more. If it goes down, you end up losing less than if you had bought it all at once. I am using the same theory with the collars since I have no idea which way a stock will go after I purchase it.

An example: I purchase the puts for DRYS at a strike of 80 for $2/share, and purchase the stock at 84. Then I sell the 85 call for $5/share. So my basis is $81. Well as DRYS increases in price over 90/share, I can be fairly confident and purchase additional shares since I have a profit of $4/share from 81 basis to the 85 call.

Furthermore, my goal is to make my money with the credit from the collar, not necessarily appreciation of the stock. Mentally, I am viewing the stock as an asset that I rent out (covered call) and insure (put). If I get some appreciation, great, but my main goal is cash flow.
 
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kidgas

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randall,
Here is an example of what I did with DRYS for an adjustment today...

I had previously sold several October 85 calls and so today I bought back 22 for $30.40/share and sold 22 November 115 calls at $12.40/share (net debit of 18). Essentially then I paid 18/share cash for 30/share in equity for a $12/share profit on 2200 shares or over $26,000. My risk is that I have to hold for another month. Ultimately, I will probably spend some of that profit on buying some puts for protection into November.

But, my buying power is increasing each step of the way. I was able to purchase an additional 4000 shares of DRYS at 110 after buying the Nov 100 put at 7. I sold the Nov 115 call at 10 so my actual basis becomes 107 with upside to 115 and downside to 100. My absolute reward-to-risk is 8 dollars to 7 dollars. But if DRYS starts to decline, I can buy back the 115 call and sell the 110 or even the 105 to lower my basis closer to 100. The biggest risk is a sudden gap down to 102 or so.

Keep in mind that this is being done with portfolio margin which allows for more borrowing power. I am getting to the edge of my comfort level and will allow several positions to be called out on Oct 19. My initial equity in the portfolio was 105,000; I added 15,000 when the equity got close to 100,000 which is the threshhold for portfolio margin (this is all borrowed money from 2nd mortgage on a rental house and 2 $50,000 lines of credit--I lost $80,000 in borrowed money back in 2001 so I am anxious to pull out some profits and begin playing with house money). I pulled out $5,000 last week to check the electronic debit features so I currently have 115K in the account. The current equity is $223K so I have almost doubled since August 10th. However, I am getting slightly nervous since I have borrowed on margin over 3.5 million.

The required equity on a collar is fairly small about $5,000 for a $100,000 position. My current state is such that I could essentially double my stake with the buying power I have. The problem is that when I calculate a 30% gap down on all stocks at the same time, my equity would be wiped out. Admittedly, it is somewhat of a gamble that I am taking for the next week and a half. I could purchase some additional Oct 90 puts for disaster protection which should only cost about $0.55/share. I did that with the Oct 70 puts which ended up protecting about 85,000 in equity (a small price to pay to sleep at night until Oct 19th arrives). I will plan on doing this in the morning. When I did it before, my purchasing power shot up, and I was able to diversify into other shares.

Now I own...CELG, CTXS, DRYS, GG, GILD, IMCL, PAAS, VCLK, WDC. One of my biggest concerns is how the performance will be in a down market. My thinking is that after establishing a position, I will wait to make sure the stock is rising before adding to it. If the stock starts declining right away, I have the choice of buying back the call and selling a lower strike, rolling out a month or two to collect time premium, or selling the stock and taking the loss on it and selling the put that I held for protection. I can't envision losing much unless I am highly levered. Most of the collars I have set up are risking from 2-4% of the capital invested. The wild card is the amount of leverage. That is why I feel it is important to take some money of the table so that I can stay in the game when the market turns against me.
 

kidgas

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kidgas, I was watching some of your holdings. It seems like the collars limit the upside... ie DRYS... how do you adjust your position accordingly?

Here's another way to look at it...a more concrete example. Let's compare my conventional Etrade account with the optionsxpress account. I start with 120,000 and DRYS is at 60.

ETrade: Buying power is 240,000 so I can pick up 4000 shares of DRYS. At 115, the value of the shares is 460,000. Sell, pay off the margin, and I have 340,000.

Optionsxpress: I put in 120,000 and bought some DRYS selling collars with each new purchase. Currently, my required equity on all my positions is 120,000 dollars (I have used up all my original purchasing power). However, my available equity is 101,000 meaning I can virtually double my positions. Just the share count and not the collars are listed below:
CELG 4000 shares
CTXS 2000 shares
DRYS 26,000 shares
GG 6800 shares
GILD 4000 shares
IMCL 4000 shares
PAAS 4000 shares
VCLK 7000 shares
WDC 5000 shares
If the closing price yesterday holds up through November, and I get called out (many of the shares will be called out in October), the total value of the account will be about $290,000.

So, yes, I am giving away some upside (about 50,000 out of 220,000). That means I am capturing 75% of the gain. But, could I have held from 60 to 115. For me, I doubt it. I would have been excited by about 80 and would have sold at least some. That is giving away upside as well. For me, collars simply increases the size of my kahunas so I can make the big trades.
 

kidgas

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Had 1000 shares of DRYS assigned and bought back some of the Oct 85 calls and sold the stock outright giving up only 0.50/share of time value. However, I think I will sleep a little easier now that I am less leveraged. I plan to allow several positions to be called out this coming Friday.
 
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Edge

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Hey Kidgas - Will you consider doing the reverse of your collar positions when your bias changes if/when we enter a bear market? Instead of looking for leaders, look for laggards and sell stock short, sell put, and buy call for protection? You can sell puts for killer premium in a high vol bear environment and change your strategy from a bullish one to a bearish one.
 

kidgas

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I like the idea of selling short, although I don't think that I would want to sell a put. That would force me to buy a stock at a potentially higher price than market value which would be counterproductive. Selling puts is more of a bullish strategy.

For example, short DRYS at 120. If I sell a put at 115 and DRYS goes to 100, I make 20 per share on the short but lose 15 per share on the put. Granted I can come out ahead provided the cost of the protective call is not too expensive. However, I think that if I end up with a bearish bias, I would simply purchase puts outright or short the stock and purchase a call for protection.

The other option for me is that since part of the collar is to be long stock is to possibly double up on the number of puts and create a delta neutral position. I also plan to purchase back sold calls and roll down in a prolonged market slump picking up cash along the way to add to my long stock positions and enhance the return from the inevitable rebound. Of course, none of this is set in stone and is a work in progress. But I did think about doing what you suggested but haven't done it yet. Maybe we will be seeing that bear market in the near future and I can see what happens.

I appreciate the discussion. Keep it coming.
 

Edge

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I agree that selling puts is a bullish strategy, but not when you sell a covered put. A short stock coupled with a short put is the synthetic short call which is a bearish strategy.

I'm not looking to modify something that works for you, i'm sure you'll always be able to find strong relative performers to fit your strategy in any market. I just wanted to point this out because I always think there is a statistical edge in any position that takes advantage of the high premium you can get from a short put in a bear (high vol) market that is full of fear.
 
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kidgas

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Absolutely, everything you have said is correct. My initial concern was what to do when getting put the stock, but I suppose that stock would be used to cover the short. The funds should already be in the account from the short. The entire position would be closed out at that point.

I will check and see if the numbers work for any of the stocks I am following now and let you know. Again, thanks for the discussion. I am always eager to learn.
 

kidgas

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Expiration is tomorrow so let's take a few moments to review what might happen:

CELG: half the position should be called at 70 so I picked up some Nov 65 puts for the other half...will sell Nov calls, either 70 or 75, next week. Cumulative basis is 70.4

CTXS: looked like it might not get called out after earnings. At the open, picked up Nov 35 puts for 0.30/share. However, stock bounced back and may get called after all. I don't really like this one. Will let it get called and sell the puts for whatever I can get. Basis is 38.61

DRYS: just holding until Nov...have 100 shares that will be called

GG: no issues. Will have some called at 27.5 and 30. Have positions going into Nov.

HAL, IMCL, PAAS: Nov positions. No adjustments.

VCLK: Have some shares that may end up carrying over to Nov so bought Nov 22.5 puts today. If they get called, I may go ahead and buy back next week and sell the 25 calls.

WDC: Should be called unless market down big time. Will have to watch into the close.

I don't plan on any additional stocks going into November but may add to current positions if there is some movement over the next few weeks. I plan on being able to extract some of the profits after tomorrow. Have $115K of borrowed funds into it, and closing equity today $221K.
 

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