No, I’m not talking about politics (don’t even get me started!). It’s really about some rolls and changes I did on the Conservative Account and why I did them. Here’s the detail… (also click on the Conservative Account tab for trade detail)

Kraft (KFT)

Many times during my days of trading Buy/Writes (Covered Calls), I would have my short Call exercised early. Most of the time the reason was the DivEx date, which is the date that you must be holding the stock in order to collect the next dividend. When that date is close to expiration and the stock is ATM or ITM from your short Call strike price, there’s a good chance the person holding your Call will exercise it if the time value is low or almost non-existent – especially if it’s less than the dividend.

Normally, in my Buy/Write World this is fine with me – I just book the profit a few days early. But when I want to hold on to the stock I need to do something to avoid possible assignment and having my shares called away.

Kraft has not notified the world about their DivEx date yet, but 3 months from the last one is around mid to late March with payment the first half of April. This could put their DivEx date prior to my existing MAR 29 Call 3/19 expiration date.

As a safeguard, I decided to roll the MAR 29 to APR 29 and take an additional 20¢ credit. Then, when the dividend is paid in early April, I collect another (est) 29¢ for each share for a total cash gain on this move of $98. Makes me wish I had a couple thousand shares!

NYSE Euronext (NYX)

This is a slightly different story. In the last week this has blown past my Naked Put at 26 and is currently at 28.10. Their DivEx date is 3/11 and I want to own the stock on that date, so here’s what I did:

I bought back my short Puts for 13¢ for a realized gain of 56¢. Because of day trading rules in an IRA, I have to wait for tomorrow for the second part which will be a Buy/Write to buy the stock and sell APR 28 Calls for (around) 95¢ and collect the dividend of (confirmed) 30¢ for a total of (est) 1.25 on this trade. Of course, the picture may be different tomorrow and the dividend may be already priced into the stock, but I still plan to do some sort of Buy/Write tomorrow anyway.

If you are interested in Covered Calls, don’t forget to check out CallWriter’s services and lists.

AT&T (T)

Thanks to its flat price, my calendar spread is starting to make some money: ⋲$5 as of today. Woohoo!

February Results

Last but not least (well, it is something but not much) I have updated the Closed 2010 page with the February monthly results. Not a lot to brag about there, but I am still beating the S&P 500.

Coulda/woulda/shoulda subject: PCLN. I back tested it and if my rules didn’t state NOT to hold through earnings we would have made over $1,200!

“Well Tonto, looks like we are surrounded by Indians.” “What you mean ‘We’, Kemosabe!”

Spread Account

This week I adjusted AMZN and OEX to account for the recent Bull moves on both of them. The adjustment did cost me some capital, but it put the price into the middle of my risk tent and still in line to make some nice change.

I may have to make an adjustment on GS too, since it’s almost at the break even.

◄ Jeff ►

John Brasher is the publisher of the CallWriter service. John and I have been friends for a little over a year and I greatly respect his opinions and methods. I am also a user of his CallWriter service and affiliated with it. Back in November of 2004 he wrote an article on Credit Spreads. Although it is now more than 5 years old, his advice and observations are still valid. The latest printing of his “Ultimate Covered Call Book” (Spring 2009) is by far the best Covered Call book I have ever read. ◄ Jeff ►

Some Credit Spread Tricks

By: John Brasher

Plenty of CallWriter members like to write a credit spread, which is the sale of a call (or put) and simultaneous purchase of a call (or put) that is further out of the money. The call purchased is cheaper than the premium received for the call sold, which generates a net credit on the trade. That’s right, you get paid to run the trade. If the trade goes wrong, then of course a loss can be realized. But as with every trading strategy, there are tricks to the trade. This article will cover some of the more useful ones.

The net credit is the difference between the premium received for the call (or put) sold and the cost of the call (or put) purchased – in other words, the amount the trader pockets. The net spread is the difference between the spread and the net credit received. The net spread is the maximum amount the trader is at risk if the trade goes wrong. The break-even point is the strike price of the call sold plus the amount of the net credit, or in the case of a put spread, the strike price of the put sold minus the net credit. The credit spread is a type of covered write, actually; the call or put sold is not naked because the long call or put bought positions the trader to buy (sell) the underlying stock at a set price. The call or put sold is “naked” only to the extent of the net spread – this is the net amount not covered by the long call or put.

If the stock price stays below the call strike sold (22.50 Call in the above examples), or stays above the put strike sold (17.50 Put in the above examples), the credit spread generates its maximum profit – the original net credit. In the examples above, the $20 stock has to advance $2.50 to begin putting the bear call spread in danger, and has to fall $2.50 to start putting the bull put spread in danger.

The trader’s objectives are to (1) pocket the net credit, and (2) if the opportunity presents itself due to a collapse in the option premiums, close the spread at a profit by selling the long call or put and buying back the short call or put.

The bear call spread is bearish in nature, and the trader creates it when the stock is expected not to advance before expiration as high as the call strike sold. The bull put spread is bullish in nature, and the trader creates it when the stock is expected to advance or at least stay above the put strike sold. It is not necessary that the stock advance or decline for the trade to win; it only needs to not rise or fall too much by expiration.

Credit Spread Tricks

• Create them out of the money. Credit spreads should be created out of the money, in order to leave room for the stock to oscillate. For example, if the stock is 29.50 and you create a Short 30C/Long 35C bear call credit spread, you have left only $0.50 of room for the stock to advance before it starts eating into your breakeven. The strike sold (much less the entire spread) should never be in the money, or even at the money.
• The ultimate credit spread stop loss secret. We don’t find it useful to set a stop loss on a credit spread in relation to the stock’s price or the spread’s breakeven point. When writing a credit spread, only write one with a strong resistance level (bear call) or support level (bull put) between the current stock price and the strike price of the short call. In other words, construct the trade so that the stock has to break a significant support or resistance level in order to put the trade under water. If the support or resistance level is broken, you should close the spread before the breakeven is violated. Make the stock work hard in order to hurt you – in other words, put every obstacle possible in the stock’s way. To enter a stop order, use a contingent order: if the stock hits the stop price, the broker should close the spread.

Example: In the hypothetical XYZ trades above, there should be a strong resistance level between the $20 stock price and the short 22.50 Call if a bear call spread is created, or there should be a strong support level between the $20 stock price and the short 17.50 Put if a bull put spread is created.

• Be picky; be very picky. Volatile stocks are poor choices for credit spreads, as are stocks expecting major news before expiration. For bear call spreads write lousy stocks or those that otherwise present little chance of advancing, and for bull put spreads write good solid stocks very unlikely to fall. As with covered calls, we use a combination of technical analysis and fundamentals. Keep in mind that stocks can move hard after the bell, at a point when you cannot close the spread.
• Look for early closing opportunities. Sometimes the implied volatility causing high option premiums will collapse, allowing the spread to be closed (sell the long call and buy back the short call) at a nice profit. This will not happen in every spread, but be looking for the opportunity.
• Will you be exercised early? If you are exercised when the short call is in the money, a loss is possible, but how likely is early exercise, really? US equity options can be exercised at any time before expiration. They are only exercised when in the money, of course, and generally are exercised before expiration only when there is no time value left (and thus no point waiting for expiration).

How to Find Good Credit Spreads

Whenever you see a play on CallWriter’s Real Time Lists™ that you suspect might permit a good credit spread, it only takes a few seconds to figure it out. First, click on the option symbol on the list, which will pull up the CallWriter Research Page with covered call chains displayed. Simply change the Chain Type from covered calls to put spreads or call spreads for the month desired, which will bring up a list of possible spreads.

Credit spreads put instant money in your account, which is very nice. And unlike the case with debit spreads or long option trades, the stock does not have to move in order to make the trader money. Done properly on non-volatile stocks and those not expecting significant news, credit spreads are a walk in the park.

Good luck and good trading!

John Brasher, CallWriter Publisher

I have been testing an option strategy that was suggested by Alan, one of my readers. He said that I should try using the OEX weekly expiration cycles for some quick plays – using any successful existing option strategy. The idea being that you have a maximum of time decay since the cycle is only one week, with a weekend built in. My tests showed me that using the same strategies that I currently use, I was able to close trades within 2-3 days with 90% of my profit target reached.

The OEX weeklies are loaded up each Friday except when the normal month expiration is the next week (then you just use the normal month expiration cycle instead). Today they were available for next Friday’s expiration. One word of caution: the bid/ask spreads are huge until the strike starts to get some volume – so be careful.

The market has been in a rather tight trading range, so I decided to do a MAR1/MAR 500/510 Double Calendar at about 10:00 this AM. Right now the delta is at -1.39 and the trade is up 32.34. The objective here is to have the price near what it is now and get out either Monday or Tuesday – all I am looking for is around $100 on this trade; a 16.6% gain in just a few days.

Closed Today

I closed my FSLR and JOYG positions today. FSLR because it was at 75% of possible profit and I wasn’t taking too kindly to the gap up this morning. I closed JOYG due to earnings next week at it too was at about 75% of possible profit.

JOYG Earnings Play

Oddly enough, I also opened a reverse Iron Condor on JOYG in preparation for their earnings next Wednesday (AM). All the stock needs to do is move below 45 or above 55 at expiration and the profit would be $155.

You can see from my last post that PCLN took a lot of my ‘hoped for’ profit off the table. Like I mentioned, I was counting on the 3 day weekend to load up on time decay – but volatility took all that and more away. I am currently up $130 for February – so far.

The winners were AMED, SPY, JOYG, CREE, ISRG and part of my PCLN triple calendar. The big winners were SPY and CREE. The losers were CLF, BIDU (again), ANF, PCLN (the other two calendars) and FSLR. See my Closed 2010 page for details.

Since I am trading much smaller lots, the profits aren’t up to what I forecasted, but I’m not worried about that at this time – it’s improving my technique, analysis and winning percentage that I’m most concerned about. Right now the winning percentage is 54.5% – not all that bad (60-65% would be better). The bad part is from a $$$ perspective, the winners are 55% of the losers, and that’s a number that I have to improve on. I have been working on limiting my loses and making the number smaller, but 2 events prevented that: 1) is the PCLN move and I won’t rehash this here, and 2) FSLR Bear Call gapped up against me unexpectedly. Sure, then right after I bail it gets downgraded

March Expiration

A lot of stocks on my watch list seem to be directionless and AMZN is one of them. I opened at MAR/APR 115/120 Double Calendar on it.

On 2/22 I added the Put side to the AAPL MAR/APR Calendar. I had intended on doing that at some point and the recent down move in the price provided incentive for that. The tent has quite a sag in the middle, but if the price moves to the mid-190’s or around 210 it should work out well. Regardless, I have a really nice wide base.

I also opened a FEB 120 Bear Call on FSLR. It seems their fortunes continue to allude them as their earnings were OK but a few analyst downgraded them. Check out the In Play page for details.

Conservative Account

AT&T (T) refuses to get out of the 24.75-25.50 range it’s in. That’s too low to sell any Calls that make sense without risking an assignment below my cost basis. Since it’s hanging in that range, I bought a MAR/APR 25 Calendar spread. To me that still qualifies as a conservative play and a way to lower my cost basis even if I only make $50 on it (max gain is $134.17) and the risk is only $90 (that’s much less risk that a Covered Call). The breakevens are 24.26 and 25.64. I plan to exit early.

◄ Jeff ►

All weekend long I was thinking of PCLN – maybe I shouldn’t have. I was up $355 last Friday. The market opened on Tuesday and I immediately lost $150, and it kept going down. Couldn’t get my jaw off the floor! A quick check showed me that the volatility of my short FEB Calls and Puts almost doubled. The result is that they were worth almost as much as I had sold them for almost a month ago and climbing fast. Seems the whole world was playing this game and causing extreme volatility. Not a game that I particularly like or want to play – mainly because I don’t know all the rules and don’t have the proper equipment (ie vast capital). Turns out a few hours later I was down to zero gain and by the time I could pull the trigger I actually ended up with a $100 loss!

Lesson learned and reinforced by FSLR. Similar situation with my Bear Call. Sure it’s expiring this Friday and sure it’s still OTM, but because of increased volatility it cost me $266. Expensive lessons, right? What is the lesson? If you think volatility is going to increase you better be long options, not short!

March Expiration

I wanted to open a bunch of trades of Tuesday, but I was pretty busy with personal stuff – I also didn’t like the bullish market conditions. I did, however, enter a MAR 210 Bull Put on Master Card (MA).

Conservative Account

I opened a Buy/Write on Nokia (NOK) on Tuesday with shares at 13.00 and APR 14 Calls at .28 for a cost basis of 12.72 and a sweet 9.1% gain if ITM at expiration. If it’s not ITM, I write more Calls and wait for the annual dividend in May of (hopefully) $0.50. After that, I won’t care to own it any more since I would have to wait another year for the next dividend. But, if it’s still making me good money, then I will do what is best for income.

I rolled NYX from FEB 26 to MAR 26 for a total $207 credit just before the close today. I can wait a while before acquiring the stock since the Ex Div date is still a few months away (probably in June).

I am not happy with my Duke Energy (DUK) Naked Put. Volatility has dried up and there is no premium in any Calls for several months out. I will probably close (buy back) those Puts for a small loss tomorrow, then look for something else.

I’m still waiting for AT&T (T) to get back to around $26 so I can write Calls on that. I don’t want to do anything that is below my current cost basis ($26.24).

◄ Jeff ►

Gee, can I pull any more out of this trade? I say yes! Here’s what I’ve been thinking…

Take a look at the risk graph below. It shows just the long MAR 200 Put and 240 Call. Theoretically, if I close all the short FEB options and the long MAR 180 Put, I could still pull in several hundred MORE dollars if the stock makes a big move after earnings Wednesday afternoon. Has PCLN done that before? Heck yes – I made a bundle on a straddle in their last earnings. This is not much different although the strikes of the long Call is not positioned well for a big up move. The question is, will PCLN blow away the estimates again, or will the market interpret their earnings as a disappointment? They have been beating estimates and missed only once since FEB of 2003. This should be fun!

Click here for a higher resolution graph.

I still have to work out the details and I will get back to you with my decision. Meanwhile, enjoy your Valentines ♥ Day and for those in the US – yes, Uncle Sam gets another day off at our expense on Monday – Happy Presidents Day!
◄ Jeff  ►

This is even better than the 4 day weekend of Thanksgiving, since it’s so close to expiration. There will be huge evaporation of premium on FEB short options, so if you are in this boat then enjoy your weekend knowing that you will make a lot of money!

For example, the Option Guru’s Priceline.com (PCLN) trade is at +355 today. At the same underlying price on Tuesday, it will be +812! I suspect there will be a lot if exciting things happening on 2/16, so make sure you are ready to exit with any winners you have. I will exit PCLN regardless since they announce earnings after the market close.

With the long weekend in mind, Mr. Guru began to open trades for MAR expiration. For convenience sake I placed the In Play chart here.

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The first trade was on 2/8 with a GRMN 30/34 Double Call Calendar. This is already making money. I will let the charts below act as our commentary – after all a picture is worth a thousand words, right?

On 2/11 the Guru entered an Iron Condor on DIA (MAR +92/-94/-107/+109)

Also on 2/11 we entered what might be the first leg of a Double Calendar on AAPL – thinking that the price could move either way but also thinking more bullish than bearish.

Today the Option Guru entered what could be the first leg of a double calendar on GS and a MAR 42 Bull Put on JOYG. We are not 100% confident in the JOYG trade since earnings are 3/3 – we figure we can pull $80-90 out of this before earnings if the stock makes a bullish move.

Also this week I closed many FEB spreads that were way OTM or might have been at risk over this long weekend. Check out the Closed 2010 page.

I wanted to let you know that I was pretty shook up with the JAN 2010 results. For FEB expiration I took on much smaller positions just to help build my confidence back up. Considering that I never had more than 30% of my account a risk, the results are pretty stunning – as you will see in a few weeks.

Oh yeah, for you TOS folks, you need to watch the Wednesday 2/10 Chat that you can view via the TOS thinkdesktop and on their web site. They have integrated GainsKeeper with Penson and you can get all your 2009 data you need to file your taxes in many different formats. Just check out the video and you will see what I mean. ALL AT NO CHARGE! Sure IB is cheaper, but I just ♥ TOS!

- Jeff

It wasn’t as bad as I had previously thought. I am still learning how to download and correlate data from TOS so I ended up counting some losing trades from December into my January summary that I posted a few weeks ago (You can find all the details on my Closed 2010 page.) Overall, The Option Guru beat the S&P 500 for January in both the Spread Account and the Conservative Account:

S&P 500: -3.7%

Spread Account: -3.21%

Conservative Account: -2.14%

Don’t get me wrong, I am not bragging! Let’s look at a few things here…

Double Down Danger

Back in December I opened a Bull Call spread on GOOG because it was in a well-defined upward trend. In January I opened a Bear Call on BIDU because of its down trend. On 1/12 (the very day I entered the BIDU Bear spread), GOOG announced their change of policy regarding the censorship in China after the market close. BAM! GOOG drops and BIDU shoots up – burning me in both trades! Usually I like to keep more diversified and I let this one slip through – mostly for greed! So it cost me almost $2,500, where if I had stayed diversified it would only have been $930.

Conservative Account

Not much activity in this account – it was intended to be that way. I was assigned T last month and I should have purchased some insurance in the form of a protective Put, but I didn’t. Now I am waiting for a price recovery in order to start writing Calls.

I bought another 200 shares of TZA when the price was down at 9.32. TZA is a Direxion 3X Bear on the Russell 2000  that I am using as a hedge for a possible bad stretch. Turns out to have been a good idea so far. If that gets above $13 and starts to pull back, I will sell some Calls.

The Option Guru also closed KFT and LTD for a profit and used the money to do a Naked Put on DUK. There is still a nice chunk of cash sitting on the sideline waiting for a Bull move on something – anything!

Outlook for February Expiration

Right now it’s looking good! The Guru is in mostly Bearish trades and he hopes to have the opportunity to close some early.

The PCLN Double Calendar and its associated adjustment is working out quite well right now. In the Risk Analysis below, this is what it will look like next Friday (2/12) all things remaining the same. I have until earnings on the 16th to hang on to this – and if it stays in the fat part of the profit tent the Guru would be very pleased!

CLF is a FEB/MAR Put Calendar that I entered on 1/28 with the intent of entering another Calendar spread to increase the profit tent. Right now it’s in the profit tee pee and I will wait a few more days to optimize the next trade for the price direction.

I did enter ISRG on 2/1 with a 310/320/330 FEB Butterfly. I will do the same thing as CLF as soon as I have a good trade for a high probability double Butterfly.

Thanks for your time, and the Option Guru welcomes any comment or questions.

- Jeff

This is going to be a very quick post with a trade idea for Amazon.com (AMZN). They had their earning yesterday and they beat and raised guidance. However, the stock as of this writing is at 128.61 in pre-market. I would not do this trade until the price settled down after the open and indicated what direction it might move, if it’s any direction at all.

Below is a risk analysis and my chart showing the green profit zone for the trade. If the stock moves either up or down, all you have to do is move the Put and Call prices to keep the current price around the middle. The play as I have indicated is to buy a Double Calendar -FEB/+MAR 125 Put/140 Call. The trade’s debit is currently at$308 with a profit potential of over $480 for the maximum (between the two tent poles).

In my mind this is a high probability trade, but I won’t be doing anything until I get a firm confirmation this morning on what the price is going to do. If this trade works out, I will exit the week of expiration.

- Jeff

Some of you may have noticed that I did a different kind of trade on PCLN last week – it was a FEB/MAR double calendar with my short strikes at 200 and 230. This is a Debit and not a Credit trade and the returns, if the prices end up in the right areas, can be stellar. My intent was not to stay in the trade into earnings on 2/12 but to capture as much theta as possible between 1/19 and 2/11.

To get a good visual of what this trade looks like, please reference the TOS Risk Analysis below:

When I entered this trade on 1/19 the price was smack dab in the middle (@ $209.51) of the green ‘profit tent’ shown on the graph. This created a ‘delta neutral’ trade and would allow for maximum time premium decay and put money in my pocket each day. But alas, prices are not static and you can see that as of 1/25 the price has dropped to 202.48 and slipped to the left of center of the tent.

I was looking for a way to adjust this and bring it back to delta neutral – I needed to move the green profit tent to the left and get the price once again in the center without increasing risk or losing too much profit potential. Prior to the adjustment, my break evens were 190.21 and 246.87. I also changed my Simulated Trade Date to 2/11 in order to get a better view of where my profit would be before and after adjustment.

I knew I had to add height to the tent around the 170-190 level, get back to delta neutral and not impact the profit tent too much. Some of my choices were: long Iron Condor, Calendar Spread, a 4×4 Diagonal Spread (4 strikes apart and 4 months apart) or another Double Calendar.

I tried various scenarios of each one and settled on the Calendar Spread (-FEB/+MAR 180 Put) – the result is shown below:

Notice now the tent has 3 poles and the current price is once again smack dab in the middle. The delta at the end of this day is 4.67 – not bad. The effect that this adjustment had on my overall trade is this:

• I had to fork out $260 on top of the original $565
• My max profit (on 2/11) moved from $645.19 @ $217.83 to $551.71 @ $204.14
• My break evens (on 2/11) moved from 190.21/246.87 to 178.21/234.71
• I probably will not be able to adjust this trade again without it collapsing totally

I was motivated to make this correction today because the stock was down even though the market was up (sort of) and the sooner I did it the sooner I would collect theta. As I write this (after the close on 1/25) my PCLN position is up $65 today. The chart of PCLN below gives a another illustration of the adjustment.

The light green box is my profit zone before the adjustment and the dark green box is the profit zone after adjustment. So what are the chances the price will be at $204 the day before it gets to the black bar? Your guess is as good as mine. But, if the price moves down to the rising support of the long-term channel that I have drawn and bounces up just a tad, I will be there.

- Jeff