XLF Diagonal PUT Example

Let us analyze an example using XLF Puts. This example here teaches you about a diagonal Put spread.

1) Buy Jan 2012 Put , Strike Price 10.
Cost = 0.97 as of close today.

2) The above Put is purchased as a cushion + to provide the lower side of the spread.

3) Now, let us say if Dec 2010 Put is sold , Strike price 13.
Premium collected = .76

4) Margin held will be the difference in strike prices ; which will be $3

5) What is the ROI? Many ways to look at it. Let us analyze the traditional way.
Amount of money sank = $ 3 + .97 = 3.97
Premium collected = .76
Return = .76/3.97 = Approximately 19% on investment

6) In Dec, if XLF stays above 13, the premium collected stays with the investor.
Margin money of 3 bucks is also released.
Same steps can be repeated to sell puts in future months.
Upfront, after .76 is collected, the remaining amount to recover is 0.21
There is still 1+ year left to play the game.

7) What happens if by Dec close, XLF goes below 13 ?
Ideal scenario will be to roll down & roll out.
This implies that the Dec put can be bought back at a loss.
However, the amount paid to buy back, one can look into selling a lower or
equal strike price Put for future month, such as March. So the goal should be
to keep the same cash flow.

Rather than simply losing money, one should roll it so as to minimize the impact on cash flow or even make it positive. After all, what you sell can be bought back & a new position can be opened + you buy time.

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FAS Bull PUT Spread

Analyze the following example.

FAS: Sell Oct 15 Put & Buy Oct 13.33 Put

The margin requirements will be 15 - 13.33 = 1.67
Credit = .35

Return = .35/1.67 = approx 20% for 2 months if FAS at expiration does not close below 15 or goes down too much where someone may exercise the option & it gets assigned.

Max Risk = 1.67 - .35 = 1.32 (if FAS closes below 15 at expiration).

However, one thing to learn is that should a scenario occur whereby FAS would go below 15, then consider rolling out & rolling down.
Simply implying that close the position if needed at a loss & then open a new position, further down (lower in price) & far out (for example January) so that the NET CASH FLOW stays POSITIVE.



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S&P - Tough Road

I haven't posted for a long time due to time constraints.

This week we saw S&P futures touched the 1064 - 1062 area & then it rebounded.
Volume was low & the rebound may be due to short covering.

With no major economic news on Monday, there is little reason for markets to rally or take a direction. Since all indicators are pointing towards a bearish trend & the sentiment being negative, let us see if S&P will retest the 1062 support area.

The image uploaded here is the daily chart for SPX.




Now, if we plot the HA chart & draw the Fibonacci lines, notice that it bounce up after touching the 50% line. So the next targets on either side can be interpreted based on the directional movement.




In meantime, 1056 seems to be a highly likely target below the 1064 line.

Hopefully, there will be some announcement of a stimulus package, after all this is an election year !