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 !

Some Thoughts & Views

Its been a while that this blog got updated. Do not have much time, it is time consuming to do this regularly.

Plus, we have been beaten up too much that there was less motivation to post anything. However, I think prudent investors need to position whereby they do not have to depend too much in near term, or the job market, learn what can be done looking into the future, as well as protect the portfolio with whatever is left.

Too much negative news & fear in the market have torn apart all theories & analysis.

Anyways, some of the readers are involved in UYG, FAS, or XLF now with average quite low. Congratulations on waiting all this time so you entered when we know nationalization of banks is sort of ruled out & the ETF is so low that it is near zero with not much to lose anymore. Plus the Fed is a partner investor in these financial institutions.

One lesson learned here is that we should have had married PUTs accompany our trades to protect the down side. Holding stocks without any hedging or having a downside protection is painful.

So going forward, additional strategies should be applied whereby:
1) Stock gets purchased
2) Buy a suitable PUT for 2010 or 2011 to cover downward side
3) Sell a covered call to generate income
4) Sell a deep PUT to generate income
5) Monitor & adjust the positions.

No need to have too many positions so as to better manage.

Stocks by itself, is a big no no !!!. Definitely needs some combination of above to hedge.

Investigate & research: EP, GE, OIH, USO, INTC, BRCM, ISRG, FAS, BAC, C, FLR, DOW, using the above strategies. There will be a pull back soon. This rally is a bear market rally.


What else?

Looking into the near term, stuff that one needs to study & learn trading Emini & Treasury Futures , Commodity Futures ,& Forex Options.

Why?

Now, economy is bad, the Feds have been printing dollars, so that implies in theory that dollar will be weaker & there will be inflation. However, given that the phenomenon is worldwide, the currency will remain fairly stronger thru 2009.

Of course, US dollar may weaken in 2010 because of all this. Net result on weakness will be that Oil & Commodities, which have taken a big beating will ultimately go up & so will the interest rates.

Oil futures for example, are trading in high 40s to 50 bucks for next year already.

So one should to analyze & learn the currency FX market too. Options for Australian & New Zealand dollar will benefit in future with commodity prices & so will other commodities futures (Wheat, Corn, Sugar, Oil etc)

Anyways, these are some of the thoughts.

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UYG - Covered Calls & Puts

Analyse the following two example trades with current prices on paper & see if you get the picture on how covered calls work & how a selling of a naked out works:

Trade 1 (Covered call example) :

Buy UYG at $5.3193
Next - Sell to Open Call UUFBE (Feb, strike price 5) at $0.90
Return = 11.xx% for 1.5 months

Stock gets sold at 5 if at expiration it closes at or above 5. You keep the stock if it closes below 5 & the cost basis now is 4.10 going forward.

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Trade 2: (Selling naked PUT)

Sell to Open Put UUFOD (March Strike price 4 bucks) for .45

Return = 10% for 2 months

Committment will be that if it closes below 4, you have to buy the stock at 4 bucks, but you already got .45 for it in advance. You will be assigned the stock, with a cost basis in that case of 3.55 going forward.
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UYG Chart & Movements on Dec 31

Here we analyze UYG using the charts.

In past 1 day, UYG went up quite a bit.

So we need to analyze that if one did not take any position, what should be the next move. Or, if positions were taken, then should they be unloaded.

As a day trading candidate, with 5K shares, a 20 cent move accounts for 1K before commisions. For the long term position takers (based on previous posting) with covered calls, UYG has already given a nice % return & such movements can be ignored through expiration because they are in positive territory with a low cost basis from the spreadsheet.

Let us analyze the chart that is attached here. UYG is approaching a cluster of past resitance indicating that there will be sellers who will take a profit & there may be a pullback in this upward movement.

Also, the S&P futures dropped alot in overnight trading after the so called rally of S&P on last day of trading.

So it may be best to wait & watch to see if it pulls back to the levels of 5.7 to 5.9, which should be the case base on various Fibonacci retracements plotted or further wait till it even pulls back down to 5.4.

On the upside, if it moves upward & breaks through 6.4, then it may March towards 6.8 or 6.9

The fact that it moved up more than 10% in just 1 week, & the charts indicate resitances, the probability is that there will be a pullback.

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UYG Virtual bank

After being beaten up on several fronts, once wonders what to do if the job situation sucks & if the investment environment is messed up. Add to that, the money offered in the bank CDs, which are now supposedly safe upto 250K, is not much. Bank CDs now give anywhere from 2.5 to 4% maximum. Majority of the so called investment analysts & advisors got us nowhere anyways, so let us fire them & take charge of our portfolios.

So how do we generate income. Introducing the UYG virtual bank.

So how about analyzing UYG as if you are putting money in the bank as a CD. Analyze the scenario that if someone takes 100K & invests in UYG & sets up a revolving covered call selling approach.

UYG is an ETF, beaten down, & with the money being pumped into the system & by the government, the lower side potential is marginal, though it may stay flat between 4 to 7 dollars.

Refer to the screen capture for reference, it give a better idea. This is from a spreadsheet that analyses several scenarios.

One can either invest into only one position or a few or all.

The nice thing is that it shows the return based on per month & using other approaches for 3 months versus upto a year. One can choose a strategy that is suitable to make choices based on the average maximum return based on a monthly basis if a strike price is not reached, versus if it is reached.

What is the worst case scenario? Will UYG ETF go to zero ? I hope you respond No! ; Then the worst case scenario is that UYG goes nowhere or goes down. Okay, in that case wait & then invest into selling covered calls at a future date once again. In the meantime, the cost of stocks one invested into went down already (refer to the extreme right side column).

If one invests 100K or so in a bank CD, the money we get here upfront is equivalent of renewing that CD for several additional years.

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UYG and S&P for Dec 23

UYG came down to nearly 5.25 & then bounced back to close at 5.42
For scalpers, it may be worth watching its behavior.
If it pulls back to around 4.9, it is an opportunity for entering.
The trigger can be pulled to offload around 5.6

........

SPY showed very strong support at 85.5. It has small support at 88.40
In overnight market, the (ESH9) Emini futures for S&P are moving sideways.
The overall long term trend for S&P has been downwards.
If it moves upwards, then anaylyze the charts that indicate SPY to go till 87.5 or ESH9 till 877.

On the downside, we may see a ride for SPY till 85 or ESH9 till 855

The behavior indicates that will definitely come down to retest the 85.5 (SPY) or 855 (ESH9) in near term.
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Analyze Selling Dec PUTs

Analyze the risk & reward for following December PUTs.

EEM:
Sell to Open Put -MBYXR DEC 18
Limit at $1.15
Return=1.15/18

KOL:
Sell to Open Put -QLEXL-PUT DEC 12
Limit at $0.90
Return= 0.9/12

UWM:
Sell to Open Put -ULXXO DEC 15
Limit at $1.55
Return=1.55/15
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Got UYG ?

Got UYG ? Well, the financial ETF may be good at this price if you analyse selling a covered call.

Analyse the following:

One & a half week for November expiration on Nov 21.

If one sells the call for strike price 7 call & earn a premium of .70, it is a 10% return for 10 days.

......
For December expiration on Dec 19.

If one sells the call for strike price 7 call & earn a premium of 1.25, it is a 17% return for 5 weeks.

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UYG - Selling PUTS - Nov Dec

Here, we discuss examples of selling PUTs. Take a look at the captured image from the spreadsheet that was used to perform the analysis. You can try something along these lines for various equities.

Analyse how one can generate an income for November / December for UYG in this example for various positions. For the conservative trader, the lower values sold are the best. For those who beleive that ultimately a stock will go up, they can use this to own the stock at a lower price.

Here is a brief tutorial on how selling PUTs works (this has been discussed previously on my blog; as well as several sources exist on the web).

---- Selling PUTs can be applied to either earn premium if Strike Price (SP) is not reached [Implying that the stock will not go down too much], or if a trader won't mind to buy a stock at a lower price. Of course, margin requirements have to be met with the brokerage firm so as to fulfill the obligation should a stock go down & hit the SP.

The obligation that a trader has is that if the stock closes at that strike price (SP) at expiration, the trader will buy the stock.

This is considered as a way to earn premium if it does not reach the SP, or a way to get a stock at a cheaper price because trader has pocketed the premium in advance.

If SP is not reached, trader keeps the premium. The premium received divided by the obligation to purchase is the ROI.

If SP is reached, then:

- The trader owns the stock at a lower price than SP, & can hold on to the stock or can turn around & sell a covered call against the holding.

- Or, if the trader does not want to own the stock & wants to bail out & not purchase the stock, then a reverse order needs to be executed to "buy back" (Buy to Close) the PUT & incur some loss/profit.

Position can be closed at a profit (if stock goes up, PUT loses value) or loss ( if stock goes down, PUT gains value) even prior to reaching the SP by simply buying back the PUTs
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PUTs - at near bottom amidst the turmoil

Perform an analysis of the following whereby if one sells PUTs for November or December, what is the ROI should the equity stay above the Strike price.

The calculations should indicate a return of 6% to 10% before commissions.

November - WNR ; Strike price = 5 , premium recd. = .45
November -UYG ; Strike price = 8 , premium recd. = .50
November -TIE ; Strike price = 7.5 , premium recd. = .75
December - UYG ; Strike price = 6 , premium recd. = .60


Of course, the investor will be assigned the stock should the equity drop & close at or below the strike price. In that event, either one can hold the position at a lower cost to sell it or sell a covered call against it in future. Other option include closing the position prior to expiration.

Look at the 52 week & 2 yr & 5 yr lows on the stocks, and perform the overall analysis.
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Still on board the wrecked ship ?

Well, the current turmoil hit all sectors & at a global level.

It is an interesting case study to see how we live in a global economy that even fraud & bad moves in one sector in a country can cause turmoil all over triggering such an overeaction.

Yes, "cash is king" right now for those who were in that position & now can start picking up in nibbles.

It also appears to be a 'once in a lifetime opportunity" to pick up financial ETFs.

The thought that always crosses the mind now is that you can fire the analysts (as always,.... though they do influence the ups-n-down in short run) ; throw the technicals out of the door (they have no meaning right now in this market), & perform your analysis on fundamentally strong companies & ETFs.

This oversold scenario after hitting quite hard has made UYG, SSO, DDM, UWM, UNG, EWH, EWZ as very attractive ETFs.

Along the same lines, equities such as C, GE, INTC, MSFT, TSO, PCU, FCX, FLR, KFT, TXN, MOT, ISRG, BA, MCK, STJ, SYK, .... (we can go on & on).

So analyse a few scenarios where you can buy some strong positions & then sell covered calls against them, for example UYG below 10 is great with a covered call for November yielding an execellent return or selling a PUT for November strike price of 9.

Alos, analyse simply buying LEAPS for strong companies, (for example Jan 2011 call for INTC strike of 15 )and then wait for some upward movements to sell a call against such positions.

Now of course, many though that we had hit the bottom couple months ago, & were wrong. but right now, it seems we may be there.

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Few more Nov Covered Calls for analysis

Three more months to end this year. Time flew by too fast.

Anyways, these are some of the November covered calls (expiration is Nov 21) that may be worth analyzing. Plug & analyse these into the spreadsheet for covered calls.


........ The Following are ETFs ....................

UYG is at 20.4 ; Sell Nov Call Strike Price = 18 ; Premium= 4.50; Return before comm= 14%

UYG is at 20.4 ; Sell Nov Call Strike Price = 17 ; Premium= 5.10; Return before comm= 12%

QLD is at 58.80 ; Sell Nov Call Strike Price = 58 ;Premium= 5.90; Return before comm= 9.6%

DDM is at 57.04 ; Sell Nov Call Strike Price = 56 ;Premium= 5.3 ; Return before comm= 8.2%

UWM is at 48.05 ; Sell Nov Call Strike Price = 44 ;Premium= 7.2 ; Return before comm= 7.7%

UNG is at 34.02 ; Sell Nov Call Strike Price = 33 ;Premium= 3.30 ; Return before comm= 7.4%

SSO is at 54 ; Sell Nov Call Strike Price = 51 ;Premium= 6.40 ; Return before comm= 7.2 %


........ The Following are Stocks ....................

FTO is at 20.67 ; Sell Nov Call Strike Price = 20 ;Premium= 5.3 ; Return before comm= 10.5%

AIG is at 3.15 ; Sell Nov Call Strike Price = 3 ;Premium= 1.15; Return before comm=50%

LCC is at 6.15 ; Sell Nov Call Strike Price = 5 ; Premium= 2.05; Return before comm=22%

DAL is at 7.95 ; Sell Nov Call Strike Price = 7.5 ; Premium= 1.80 ; Return before comm=22%

NT is at 2.55 ; Sell Nov Call Strike Price = 2.5 ; Premium= 0.60; Return before comm= 16.7%

GM is at 9.76 ; Sell Nov Call Strike Price = 9 ; Premium= 2 ; Return before comm= 16%

AMD is at 5.16 ; Sell Nov Call Strike Price = 5 ; Premium= 0.62; Return before comm= 16%

TSN is at 12.69 ; Sell Nov Call Strike Price = 12.5 ; Premium= 1.55; Return before comm= 12%

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Few Nov Covered Calls

Analyze the November covered calls using the above screen capture as a reference.


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Oct CALLs n PUTs

Analyze & calculate the returns for following October covered calls. Strike prices (SP) are mentioned based on the current closing price as of Sept 23.

DDM -SP=55 or 54 ; GM -- SP= 11 ;QLD -- SP=58 ; FTO SP = 20 ; TSO SP= 20 ; DAL SP=10 ; UYG SP=20 ; FLR SP=57.5 ; AMD Sp=5 ; F SP=5 ; GM SP= 10 or 11 ; AIG SP=5 or 6 or 7

Analyze & calculate the returns on selling the following PUTs:

UYG : Sell Oct 16 or 17 PUT ;

AIG: Sell lOct 4 or 3 PUT

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Selling Oct PUTs

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Analyze the strategy of selling PUTs for October. When a PUT is sold, one has the obligation to buy the stock at the strike price should it close at or below the strike price on expiration. So for 10 contracts (1000 shares), one needs that amount set aside or the amount based on the margin requirements set forth by the brokerage in the event the PUT gets exercised at expiration. Or one can buy back the PUT (but to close) to simply close the position.

So assuming 10 contracts for the analysis, calculate the return with margin. Note that the screen capture shows the return without margin.

Also, investigate the probabilities for these positions.
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Writing PUTs: AIG, DAL, MER

Perform an analysis of the following Sept PUTs so as to get an idea about this strategy to either earn premium if Strike Price (SP) is not reached, or if a trader won't mind to buy a stock at a lower price. Of course, margin requirements have to be met with the brokerage firm so as to fullfil the obligation should a stock go down & hit the SP.

Stock: DAL ; Sell to Open PUT for Sept; SP= 7.5 ; credit = 0.75

Stock: MER ; Sell to Open PUT for Sept; SP= 17.5 ; credit = 0.56

Stock: AIG ; Sell to Open PUT for Sept; SP= 15 ; credit = 1.18

The obligation that a trader has is that if the stock closes at that strike price (SP) at expiration, the trader will buy the stock.

This is considered as a way to earn premium if it does not reach the SP, or a way to get a stock at a cheaper price becuase trader has pocketed the premium in advance.

If SP is not reached, trader keeps the premium. The premium received divided by the obligation to purchase is the ROI.

If SP is reached, then:

- The trader owns the stock at a lower price than SP, & can hold on to the stock or can turn around & sell a covered call against the holding.

- Or, if the trader does not want to own the stock & wants to bail out & not purchase the stock, then a reverse order needs to be executed to "buy back" (Buy to Close) the PUT & incur some loss/profit.

Position can be closed at a profit (if stock goes up, PUT loses value) or loss ( if stock goes down, PUT gains value) even prior to reaching the SP by simply buying back the PUTs

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Sept 5 thoughts on a down day

Analyze

.... Covered calls ....

LCC, US AIRWAYS SEPT 7.50 ;
HANS , HANSEN NATURAL OCT 25 ;
AIG, OCT 21
TIE, Oct 12.5

.... Calls ....
Jan 2009 -- BA , the 65 Call , symbol BAAM position looks good. Once the strike issue gets resolved, & the tanker contract comes thru, it will be worth it.

.... Bull Put Spread ....
ICE - Sept Short 80 & Long on 75 for a 9-10% return
SPX - Sept Short 1190 & Long 1185 for a credit of .85 for 5 dollar margin (17% rtn)

.... Condor using 2 spreads ...
RUT , September -- Bear Call leg of Sell 750/ Buy 760 credit = .95 ; Bull Put leg of Sell 670/ Buy 660 for credit of 1.15 ; net credit of 2.1 for a margin of 2

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Covered calls for analysis

Analyze the following October Covered Calls: AEO (SP=15) ; TIE (SP=12.5) ; SBUX (SP=15) ; HUM (SP=45) ; GM (SP=11) ; ; TSO (SP=20) ; BRCD (SP=7) ; INTC (SP=21) ; IBN (SP=30) ; HANS (SP=25) ; SBUX (SP=16).

Watch for reversal in - Oil, energies, airlines, steel, & financials.
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