Got a question from a member recently:

I have been looking at stocks, and 1 expert says UNP has the highest value in the s&p 500.  It appears to be doing well.
Please look at the calls with me.

 The jan 2012 leap, at 60. I believe is selling at 33, which puts it at 93 and is trading at 93.5.   If you expect it to go to 100 by then , the gain should be 6.5 $ for a 33 $ investment or about 19.7%  over 10 months??  Am I seeing this correctly?? and the math right ???  It appears that the inthe money option is a better value than the out of the money ??
A 7 % move giving a 20 % gain????????

Looking at the 100 call, jan 12, it sells for about 5.80.  If it closes at slightly over 100, you may get a dollar gain ???????  or actually, break [...]

Credit spreads are a very simple trade.

You sell one option, buy another for protection and hope that your sold option is not in the money on expiration day.

In other words you sell the 100 put and hope the stock stays above 100. Or sell the 150 Call and hope the stock stays below 150.

And since credit spreads have such a high probability of profit, most traders make money with them most of the time. But when they lose….. ouch. Credit spreads are not very forgiving when you lose.

I learned this firsthand. I had been trading credit spreads in Apple, FXI, and Google. Doing well for several months in a row. But then there was a drop, and all the gains I had made, plus a lot more was wiped out.

It takes a while to recover mentally from a loss like that. I was reminded of this event when a member emailed [...]

Iron Condors

A friend emailed me the following. It was taken from an email commentary sent out by OptionsXpress.com

“The biggest options trade in the market so far Wednesday (1-12-11) is a block of 80,000 February 121 puts on the SPDR 500 Trust (SPY). The so-called “Spyders” is an exchange-traded fund that holds all of the S&P 500 stocks and is up $1.15 to $128.59. The big block of February 121 puts was part of a strategy called a butterfly spread. In this position, the strategist sold 80,000 February 121 puts, bought 40,000 February 126 puts and bought 40,000 February 116 puts. They paid a net debit of 53 cents per fly. This butterfly is a directional play, as it makes its best profits if shares fall to $121 by the February expiration. An institutional investor probably initiated the spread as a hedge.”

SPY closed today at 128.36
If you got into this trade at [...]

  by Edward Laporte

Question: How can you profit from a potentially strong bull move while protecting yourself from a second bear wave?

Answer: A ratio (unbalanced condor)

Can anyone think of a good reason to throw caution to the wind and go long equities? Listening to the “experts” can leave you feeling fear and trepidation, even when the market is advancing. The only ones making serious money (without losing sleep) in recessions are psychiatrists prescribing Xanax.

The media is constantly comparing this recession to the Great Depression; however, this recession is not that far from the mean of other recessions when measured by unemployment, duration and GDP. For example, unemployment was higher (10.8%) in the 1981-82 recession. If you combined that with the shorter 1980 recession, it was longer in duration, too (see “The Great Depression and after,” below). There are plenty of reasons to be bullish:

The markets are up an average of [...]

The following is from a Barrons article by STEVEN M. SEARS

Butterfly Option Trade on Sprint

IF THE FEDERAL RESERVE can print money, so can you. All you need is a little cash, and a ton of nerve.

Consider Sprint Nextel (ticker: S). The $4 stock is a dog; it has declined 12% in the past three months, and yet trading volumes are surging, demonstrating that distressed equities – what institutional investors call penny stocks – are incredibly alluring in this market because of the potential to make double- or triple-digit returns on small price movements.

If you want to make a potential 500% return on one trade, Credit Suisse advised clients Tuesday to position for Sprint to move to $5 by January.

The bank told institutional clients to consider a “call fly” that entails buying January $4 calls and January $6 calls, and selling twice as many January $5 calls.

With the stock around $4, [...]

The following is from a Barrons article by STEVEN M. SEARS

A STRADDLE FOR GE

SHARES OF GENERAL ELECTRIC (ticker: GE) have been a disappointment for much of the 21st century.

The stock has lost half of its value in the past five years, and it’s gone nowhere in the past three months.

But there is a way to bring back that loving feeling for a stock that was a Wall Street darling under Jack Welch’s management during the 1990s.

All you have to do is use a simple options strategy to kick-start returns by taking advantage of unusual options pricing.

GE’s options implied volatility remains elevated even though the company recently reported third-quarter earnings. Normally, implied volatility, which is the most critical component of options pricing models as it deals with how likely a stock price is to change in the future, declines after earnings.

Yet, concerns about GE’s earnings power are so widespread, especially ahead [...]

Oh oh, GLD jumped up today along with the rest of the market. You’d think that if the stock market goes up because the economy is getting better than Gold would go down. Nope. So I guess the economy is not the reason the market is up today – contrary to what the news tells us.

As long as the dollar gets weaker, the markets and GLD will both go up.

But there was an interesting post on another blog Slope of Hope that showed graphically that Gold might be heading towards a retracement. Check it out if you are a Gold Bug.

OK, back to business. The up move today took GLD outside of our upside Calendar break even.

Here’s what it looks like right now.

So what do we do? I don’t want to add more capital to this, even though that is an option.

Step 1. Take off the spread hurting us the most. [...]

Ok so GLD has continued to drift higher. It hit the upside breakeven of the calendar today and then pulled back a few cents. Time to add the adjustment. I added the 128 Oct/Nov Calendar in the same amount of contracts as the original. This doubled the amount of money in the trade.

Here’e the graph:

After Adjustment

 Notice the breakevens have moved to 123.61 and 129.59 on the upside.

The amount of money I have in the trade is now $2990 and so far I am down $85 since the trade has been opened. I am still looking to make 10-15% on the trade.

If GLD pulls back to 126 I will be sitting pretty. If it continues to advance I will make a move  when it gets to 129-129.50. And the adjustment I will make is to take off the first calendar – the 125 Oct/Nov. That will then reduce the amount [...]

Yesterday I added a GLD trade to the OptionGenius.com portfolio and I mentioned that GLD might be a good candidate for a Calendar Spread. Several members emailed me asking to explain how to set up the trade and the parameters so I decided to just post it on the blog. I tried making a video but I am a total non techie and screwed up the video. I got it uploaded to Youtube but everything on the screen is so small you cannot see what I am doing.

Anyway, here are some screenshots of the trade.

GLD Calendar Spread

Breakevens

The trade was to Sell the Oct 125 Calls and Buy the Nov 125 Calls. That sets up a simple calendar. You can use puts or calls, they are interchangeable but the puts are usually cheaper. The plan is to adjust when GLD hits a breakeven. The simplest adjustment is to just [...]