What is on radar for week of June 30

Investigating USO, SWN, HAL, AUY, GLD, DBV, KOL, XLE, XSP, IWM , DIA as potential candidates for upcoming week.

USO, XLE, & KOL are great energy ETFs that may help in hedging against the energy crisis & can help in paying for additional amounts we pay at the pump for gasoline. Although oil appears to have been overbought, everyone is saying it is driven up by speculators, & is a bubble, but then it still continues to go up. The global political crisis does not seem to ease at the situation.

HAL & SWN - watching for a small pull back & then analyze taking up some positions.

AUY, GLD, DBV - Gold related positions & Currency baskets help in hedging in uncertain times.

XSP, IWM, DIA seem to be beaten down too much, but considering cautious positioning for 6 months ahead may provide good returns.

Markets are driven alot by emotions too, so who knows what lies ahead.

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VIX

VIX , a favorite one for diagonal spreads.
-Looking at buying December 18 Call and then selling a July 27.5 (or even 25) Call against it. Several combinations can be investigated.
-Percent return on the diagonals using VIX is quite good & the fact that there are several other months to trade, allows traders to make trading VIX into a cash generating machine as long as the Long Position Dec call is quite a bit in the money (ITM).

Wanna Swim against the current ? - IWM RUT DIA XSP

IWM - August BULL PUT Spread: Analyze to Buy 59 Put & Sell 62 Put for a credit of .35 for a 3 dollar spread for a 10 - 12% return if IWM stays above 62.

RUT - Analyze a position buying August 790 Call around 1.45 and wait for RUT to bounce so as to sell as call against it or merely sell it on rebound.

DIA - Holding a position in each, March 2009 114 Call AND Jan 2010 110 Call look attractive given the beating it is taking & expected rebound in future.

XSP - March 2009, 130 Call looks good too.

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XOI

For July

Buy 1350 PUT at 7.70
Sell 1360 PUT at 8.60
Credit = $.90 Margin/Spread = 10
Return for this example = .9/10 = 9% before commission

Few more for July

These are some good examples for July (see the picture).

Of course, the return in case of RUT may be low or the one for SPX may be too conservative. However, there is not much action, market is sideways, & not too much risk should be taken in summer months.

DUG may be something worthwhile with Oil supposed to pull back on pressure for correction. This thinking is a far fetched one but with a correction overdue. So, a deep in the money with almost 90% intrinsic value is being considered for the diagonal & still fetch a 10% on the SHORT position.

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RUT - Bull PUT Spread

For July

Buy 650 PUT at 3.20
Sell 660 PUT at 4.20
Credit = $1
Margin/Spread = 10
Return for this example = 1/10 = 10% before commission

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OEX - Bull PUT Spread

When market is down, it creates a great opportunity for a Bull PUT Spread.

IRON CONDOR - RUT

Analyze the above Iron Condor example.

for this analysis, the diagram shows you the credits for each vertical spread, the Bear Call & the Bull Put credits.

For a 10 dollar spread, credit will be 1.35 which is a conservative 13.5% return.

If you trade 1 contract, the credit is 135 for 1000 of margin.

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IRON CONDOR - SPX

In this case, we combine both BULL PUT Credit & BEAR CALL Credit together

If you want to read about Bull Put or Bear Call credit spreads, read the other postings below.

Execution of trades can be done in several ways – bottom line is you will have 4 legs of trade.

You can exit from each side when either the Bull Put or Bear Call is making money or just let it expire. Key point is that we prefer the stock to trade between the SHORT positions.

In this example you make money & keep the credits from ea vertical trade.

Look at the diagram. If something goes wrong, it will go wrong for 1 side only, either SPX will go to right side or left side. So you simply close that one side position by buying back the short position you sold at or near the expiration. For such IRON Condor trade, you definitely keep the credit for 1 end or if it stays between the 2 Short sale positions, you keep the credit from both sides.

Max profit will be realized when SPX will remain between 1425 & 1245
Profit = .60 + .55 = 1.05
Margin = $5
So, % return will be 20%

If you trade 10 contracts, margin/risk=5K & Credit=1050/-
Similarly, for 5 contracts, margin/risk=2.5K & Credit=525/-

XSP Bull PUT Spread

Example of Bull PUT Spread for July 2008

Buy 121 PUT at .42
Sell 124 PUT for .65
Net credit = 23 cents
3 dollar spread. Return =8% if XSP stays above 124

BULL PUT CREDIT

High Level Concept:
1. Choose a stock or symbol that research indicates that it may remain steady & not go Down too much, implying that it is bullish. Or it is okay if it will be going up.

2. Then choose two strike price with a SPREAD of few dollars that is out of the money.

3. Then you BUY a PUT … the lower of the two strike prices.

4.Next, you SELL a PUT … the strike price is higher than what you bought.

5.You pocket the difference in the premium that you receive between the 2 strike prices … for each contract.

Example:

XOI is trading at 1540

You choose to BUY a PUT with Strike Price = 1400 & pay a premium of $13.20
This is a LONG position

Now, you Sell a PUT with Strike Price = 1410 & receive a premium of $14.70
This is a SHORT position

It is best to have both positions for same expiration month. In this example – July.

You pocket the difference in the premiums of $ 1.50 (this is the credit per share)
Note: Trading is conducted in contracts, each contract = 100 shares. Also, we will not take into account the commissions for both transactions, which are generally quite low (generally $25 for the entire trade).

If you buy & sell 10 contracts, you get a credit of $1.50 x1000 = 1500.00.


What happens at expiration:

If the stock remains above 1410, do nothing, you keep the credit received.

It is recommended that if it reaches very close to 1410 or the market is bearish, plus your research indicates that XOI will hit 1410 by expiration, then, monitor, & may be close the SHORT position. You do not want to be assigned the stock with a small loss.

Prior to getting into the position, conduct the research & analysis.


Margin, Risk, & Additional Notes:

Margin requirement is the difference between the strike prices times the # of shares. Here, it will be $10 per contract. For 10 contracts, it will be 10,000 dollars.

Maximum risk is the difference between the strike prices, less the net credit (difference in premiums).

This is a limited risk & limited income strategy.

You choose the right stock + the trend is bullish, as well as "Out Of The Money" (OTM).


A few words on what to choose?

Bottom line, investing in options is not for everyone & there are risks involved.

Options expire, you can lose the entire investment if the stock/ETF goes down substantially or crashes. Research & study details prior to investing in any form.

Do your homework, consult an expert &/or someone who is very familiar with investing in options.

Look into Index Options & E-Minis, especially that are liquid & settle in European style. You do not get assigned if it hits the strike price of the Short position.

XOI settles American style.

Bear Call Spreads

Bear Call Spread Strategy Summary

High Level Concept:

1. 
   Choose a stock or symbol that research indicates that it may remain steady & not go up, implying that it is NOT bullish. Or it is okay if it will be going down.
2. 
   Then choose two strike price with a SPREAD of few dollars that is out of the money.
3. 
   Then you SELL a CALL … the lower of the two strike prices.
4. 
   Next, you BUY a CALL … the strike price is higher than what you sold.
5. 
   You pocket the difference in the premium that you receive between the 2 strike prices … for each contract.

Example:

XLE is trading at 86

You choose to SELL a CALL with Strike Price = 90 & get a premium of $1.00
This is a SHORT position

Now, you BUY a CALL with Strike Price = 92 & it costs you a premium of $0.70
This is a LONG position

It is best to have both positions for same expiration month.

You pocket the difference in the premiums of $1.00 - $0.70 = $0.30 (this is the credit per share)
Note: Trading is conducted in contracts, each contract = 100 shares. Also, we will not take into account the commissions for both transactions, which are generally quite low (generally $25 for the entire trade).

If you buy & sell 10 contracts, you get a credit of $0.30x1000 = $300.00.

So in the above example for 10 contracts (1000 shares): Selling CALLs credits $1.00x1000 = $1000.00

Buying CALLs debits $0.70x1000= $700.00

Net Credit = 1000.00 – 700.00 = 300.00

What happens at expiration:

If the stock remains below 90, do nothing, you keep the $300.00

It is recommended that if it reaches very close to 90 or the market is bullish, plus your research indicates that XLE will hit 90 by expiration, then, monitor, & may be close the SHORT position. You do not want to be assigned the stock with a small loss.

Prior to getting into the position, conduct the research & analysis. We do not want or expect it to hit 90 in this case, else do not even enter into such a trade.

Margin, Risk, & Additional Notes:

Margin requirement is the difference between the strike prices times the # of shares.

The maximum profit is the net credit (difference in premiums). $500 in this example.

Maximum risk is the difference between the strike prices, less the net credit (difference in premiums). Here, maximum risk is $2000.

The above is calculated: 1000 shares x 2 spread = $2000 is your investment. Credit received = $300. So the worst case scenario is losing $2000 - $300 = $1700

You therefore receive a round figure 17% return w/o taking into account commissions. Or let us round off to 16% if you account for commissions. This is for duration of 40 - 60 days max. Not bad, if you can repeat & roll such strategy every month.

This is a limited risk & limited income strategy.

Your break-even point is the higher strike price (#1) minus the net credit.

In above example the break-even is at 90.00 + 0.30 = $90.30.

So you are not at a loss as long as the stock price remains below this number.

You choose the right stock + the trend is bearish, as well as "Out Of The Money" (OTM).


A few words on what to choose?

Here, in the example, we chose XLE. That is related to the Oil & Exploration industry, is an ETF. It is safer to choose ETFs or an equity in a strong industry (as in this example). Also, one point to note is that an ETF is not directly dependent on earnings calendar when compared to individual stocks which may get beaten up when earnings are reported. In simple words, choosing ETFs is comparatively safer.

Bottom line, investing in options is not for everyone & there are risks involved.

Options expire, you can lose the entire investment if the stock/ETF goes down substantially or crashes. Research & study details prior to investing in any form.

Do your homework, consult an expert &/or someone who is very familiar with investing in options.

Look into Index Options & E-Minis, especially that are liquid & settle in European style. You do not get assigned if it hits the strike price of the Short position.
Examples include – RUT, SPX, XSP, OEX, VIX, ….