Replies to post #233 on Snacks INFO board

[Lord DarkHelmet]

I will look into it for you when I get a chance, but check out the article I am linking to you...

http://www.cnbc.com/id/39097299

Most big investors don't see the S&P500 hitting 1200, so be wary because SPX has already corrected somewhat and you might have missed your chance.

I will do some DD for you though.

I will also look into so me options plays for Pirate when I get a chance.

Take my advice at your own risk...lol

[Lord DarkHelmet]

I haven't looked at SPX yet, but I was looking at possible options plays.

Here is a decent one...Selling a Sept PUT option on FAZ. It expires on Sept 18th (7 days). The volatility of the underlying security makes the option pricy (which is good when you are selling). I attached a few graphs for discussion...







Looking at the third attachment which shows the options' prices for PUTs with Sept and Oct expirations. A FAZ 13 SEPT PUT sells for $0.25 contract (note that you need to multiply by 100 to get the actual price). If you look at the charts, it is unlikely that FAZ will hit $13.00 before next Friday. If anything, it is oversold and due for a correction. You could sell 40 contracts for a return of premium of $1000.00 ($0.25 x 100 x 40). Easy $1000.00. The only caveat is that you need the funds in your account to purchase the shares if you are assigned. If the PPS of the underlying security goes under $13 then you can be assigned and force to buy the security at $13/share regardless of market price. I used 40 contracts as an example because I have about $58k in cash in my account right now and buying 4000 shares of FAZ (ie 40 contracts) would cost me $52k. That money would be locked up for 7 days until the option expires. If you only have $10 in your account then you could only sell ~7 contracts. That would be a return of premium of $175 into your account, but lock up your $10k for the week.

That is a solid 2% return for the week for doing nothing. The risk is minimal. Worst case scenario, the FAZ drops below $13.00. Then you own x shares of the security. If you look at the technicals, FAZ probably won't stay below $13 long and you could sell the security for a profit if it starts to retrace its recent correction.

Another option is to sell the SEPT 14 PUT for $0.74. I think there is a great chance FAZ will be over 14 again by the end of Friday. If I sold 40 contracts that would give me a return of premium of $3000.00 for the week, but lock up $52k for margin requirements. I would make about 6% for the week. If FAZ didn't hit $14 and I got assigned to fulfill the contract, I would not be that discouraged. FAZ will be over $14 again soon and I will sell the security at the market price...and I still made $3000.00 for the sale of the PUT contracts.

You would need level 3 or 4 options abilities to sell any put. Better to ask your brokerage firm what requirements they need. Usually you can just tell them that you have alot of experience with options and wish to start trading advanced strategies. They will send you a form to fill out. These types of opportunities happen every month near expiration of the options (3rd Friday). If not FAZ, then another stock will seem like a viable gamble.

Note the second to last column in the PUT spread. That is the Implied volatility. The higher the number, the more expensive the option becomes. Don't forget that those options "in-the-money" have intrinsic value as well.

I did want to point out one observation when figuring out which option to sell (or buy). Compare the prices of SEPT PUTs for a strike of 14 and 15.



14 strike is priced at $0.74, where 15 strike is priced at $1.50. You may ask yourself why not sell the SEPT 15 PUT and get more money. The reason is this...both options are currently "in the money" (ie they have "intrinsic value). The intrinsic value is the Strike price - the market value of the security. If FAZ closed at $13.63 on Friday (9/10/2010), they the 14 strike as an intrinsic value of $14 - $13.63 or $0.37. The 15 strike has an intrinsic value of $15 - $13.63 or $1.37. Thus, there are different time values to these options. The time value of the 14 strike is $0.74 - $0.37 or exactly 37 cents. The time value for the 15 strike is $1.50 - $1.37 or 13 cents. The entire reason to sell the option is to sell as much "time value" as possible and allow it to degrade as fast as possible. Thus, the 14 strike is more attractive. You would actually make $24 / contract in profit buying the 14 strike option over the 15 strike option. (ie $0.37 - $0.13 x 100). If you add in the 13 strike for comparision then you would note that this option has no intrinsic value (out-of-the-money), so the entire $0.25 it cost is entirely "time value". Thus, the 14 strike actually is a better profit maker by $0.14 or $14 / contract. That is $560 more in profit (assuming 40 contracts) just by calculating which option to sell. There is no change in risk. Just realize that you are more like to be assigned, since it is more likely to be in the money.


The last thing I want to point out is that you do tie your funds up for the week if you make this play. Your brokerage house won't allow you to trade with those funds, since they are securing the contract. So, if you think you can make more money in that week elsewhere, don't make this trade. If you think that you are unlikely to make more money elsewhere, it is a good use of funds.

Sorry for the long example.

[Lord DarkHelmet]

Just finished looking at SPX. I attached an article describing the advantage of trading in and out of SPY instead of SPX.

http://www.condoroptions.com/index.php/strategy/spx-or-spy-the-case-for-etf-trading/

If you are able to trade in SPX's ETF (SPY), it offers several advantages listed above.

I was looking at the charts and I don't see the S&P 500 (SPX) being a great place to put your money right now. It seems to have hit alot of resistance around 1100. I don't see any positive news coming out soon that will blast it past that resistance either. If anything it is due for another correction.

Here are some charts of SPY...





If you are dead set in investing as it were a bull market coming, it might be best to hedge your purchase with selling covered call options with a 40 day expiration. Remember, if you are selling options, you want time decay to work in your advantage. Selling a near call option will have a faster time value decay than a far option. Here is a list of the OCT CALL options for SPY...



I highlighted the SPY 112 CALL because it offers you the most time value to sell. It never helps to sell intrinsic value...that is value you already have if you end up having to purchase the securities in the event you are assigned. If you can't figure out why the 112 Strike offers the most time value, I will explain it in a future post.

Now realize that the Call option(s) you are selling are "covered", which means that you have to purchase the securities first. So, if you are to sell 5 contracts, you need to own 500 shares of the security first. If you bought 500 shares at market value, then the purchase would require $55,741.00. Selling 5 SPY 12 CALL contracts at $2.12 each would give you a total return of $1060.00. This decreases your basis of the underlying security to $54,681. Your breakeven point would be $109.362 / share. Any share price drop under this level and you are losing money. If the security gets over $112 before expiration, you will be assigned. However, you made $1060 on the option and $259 profit selling the security for $112 when you bought it for $111.48 (current value). Win-Win. The other thing I would point out is that even though the 112 Strike has the most "time value" to sell, you end up making more money if you sell a deeper "out of the money" option. You take a hit on the time value, but the underlying security has more value, so if your strike is hit and you are assigned, the profit still ends up being better. Calculate the difference if you sold a 112 strike vs a 115 strike and they both got assigned. You make more money in the end having sold the 115 strike option. But, the security has to get to 115 first...

Personally, I think the S&P is going down and I wouldn't buy the SPX or SPY right now. If anything I would short it or sell a PUT. Selling a PUT allows you to pay the price you want for a security. Here is the PUT options sheet for OCT...



Selling 5 SPY 105 OCT PUTS gives you a return of $555.00. If the SPY doesn't drop to 105, you walk away with the money. If the SPY drops lower than 105, you are forced to buy at the market price, but you bought at $105, not $111.48 (today's value), and you still have the $555.00. In fact that lowers your basis to $103.89. The stock would have to drop lower than this amount for you to be in the red. This is in comparison to buying 500 shares Monday at market for $55,741. If the stock dropped to $103.89 by 10/16/2010, you would be down $3796.00 as opposed to being even money.

I used the 105 Strike as a safer option. You could sell the 111 Strike at $2.39 and walk away with a higher premium payout, but if the stock drops to $103.89, you are deep in the red. That is not as bad had you bought the shares outright at market on Monday. It is all about risk tolerance. the 111 Strike has the most "time value" to sell, but for some people, the risk of such a close "out-of-the-money" option is too much to handle and they would feel that a deeper out of the money option is more acceptable. It depends on which price you want to pay for the underlying security.

Wow...another long post. Sorry.