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2 Butterfly Option Trades is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

So here is what I did:

Sell Oct1 11 1145 Calls and Buy Oct1 11 1150 Calls for a credit of .55 each

85% Probability of Profit. 12% Potential Return.

I don’t want to hold these all the way to expiration (Friday). I am expecting SPX to drop after failing to raise above 1100 and will exit the trade with a respectable profit. If SPX breaks above 1100 to about 1110, I will probably exit the trade as well because my guess was wrong.

A Quicky Weekly Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

The stock is NLY. The trade is a simple Put credit spread

Sell to Open Oct 16 Puts (.40)

Buy To Open Oct 15 Puts (.26) for a credit of .14 cents per spread.

Trade has a 74% probability of success. And can make 16.2% if left to expiration.

NLY is a financial company but a very boring stock. I love owning this one as well because it pays a little over 10% dividend right now.

So here is how the trade works: If NLY is above 16 on expiration day (right now it is trading at 17.68) I make the whole 16.2% minus whatever commissions I paid to get into the trade. If NLY is below 16 and above 15 I will be assigned the stock if I don’t exit the trade. Again, I don’t mind owning this stock. if NLy is below 15, I lose the entire amount that I can risk, which is $86 per spread, plus the commisisons I paid unless I exit the trade.

Here’s the cool part. This is a chart of the stock. The red line is the breakeven on the trade. NLY has to be below that line for my to lose money. Guess what? It has not been that low in MONTHS!

But wait! It gets better. I plan on adding a call spread as well. Selling the 19 stirke and buying the 20. Notice that the stock has not been above 19 in months either. So even though the probability of profit is listed as 74%, I feel it is a lot more than that.

No Stress Options Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

It’s an iron condor on Apple. It has a 77.43% Probability of profit with 22 days left to expiration.

Sell to Open June 355 Calls, But to Open June 360 Calls

Sell to Open June 310 Puts, Buy to Open June 305 Puts

For a credit of .63

For each contract you do, you get a credit of $63 which is the max gain on the trade. The max loss is $437. So the potential ROI is 14.41%.

My plan for this trade is to keep it super simple. Let it ride until expiration. Look at exiting when up 10% or more. If I get down 15% or so I am going to exit. This is a small position and one I put on because my wife made me. I am teaching her how to trade options and she is coming up with her own trades. This is one she really feels good about and forced me to put it on with real money. Up until now she has been papertrading, and so I decided to share it with all of you as well.

Apple (AAPL) Iron Condor is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

It’s a classic butterfly spread on MCD – McDonald’s.

The trade was Buy 2 April 70 puts, Sell 4 April 75 Puts, Buy 2 April 80 Puts for a debit of 3.11 per spread or a total cost of $622.

It’s a cheap trade that will make money if MCD stays between 73.12 and 76.92.

Here’s the graph:

The trade has a 48% probaility of profit at expiration. But I dont want to stay until expiration. I want to make 10-20% and get out within 2 weeks. This will happen if MCD stays where it is, or if the volatility in MCD options goes down.

With the end of the quarter coming up next week I am expecting the markets to go strong and higher into April. That will result in a drop in volatility and hopefully a quick profit.

If this trades needs an adjustment, I will add a second butterfly of the same size at either 70 or 80 when it hits the breakeven point on either side.

MCD Butterfly is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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 me his credit spread horror story yesterday which he gave me permission to share with you.

Keep in mind that this member has been trading for 17 years so he is not new to the game.

“I now try to follow a strategy I read last year in the book of Proverbs from the Bible, of all places:  it says:
” … whoever gathers money little by little makes it grow.” 
(Proverbs 13:11).
 
I was shooting for 1 or 2% per Week with Weekly options.  It does not souund like a lot and takes a long time – but after 1 year, it is 50 – 100% for the year, which is great.   It is like your 5% per month strategy.  Making a little money on lower risk option credit spreads over and over again adds up over time.

Yes whatever you do – NEVER CHANGE your Strategy if it has proven to work.   – and NEVER get greedy.  When you make your 5% or so – get out.  Do not try to get more.  Every time I do that, I end up loosing the 5% and then loosing even more.  I just lost $3,500 on a NETFLICKS Credit spread 2 Friday’s ago (a weekly position), in the last 45 Min, when NETFLICKS spiked up 8 points in  that final 45 min after being flat the entire day.  I went from a $200 gain to a $3,500 loss – all in that 45 min – going into the close (Expiration Friday). I was so devastated.  it will take me months to recoup that  – as soon as I get up the nerve to start trading again.

Urgh, I was so, so destroyed by that one trade.  Prior to that trade, I hade made 29 out of 30 trades over the past 3 months – all making about $150 each (ie, “little by little”).  Then BANG – all gone in 45 min.”

So as I mentioned, credit spreads can hurt if they go against you. Add the high gamma of weekly options and you can be broke in a few hours. I know that weeklies have become very popular. But they are very risky.

Before you play the weeklies, I would suggest you get good at the regular monthly option trades and know exactly how and when you will adjust or exit. Once you have some consistent winners, then try the weeklies.

Weeklies are not the holy grail they have been made out to be.  Use them with caution.

Weekly Options Credit Spread Horror Story is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Here’s a screenshot of a daily chart on LVS as of midday today. As you can see from the chart, LVS has been trading in a range the last couple months, but with the news today is moving towards the upper resistance level.

Click on the Image to Enlarge

So What Will LVS Do?

Will it hit resitance and drop back into the range, or will it break through and go higher?

If you pick correctly you get the amazing prize of knowing you picked correctly.

So please post your answer and your thinking as a comment, and maybe we can all learn together about how stocks move and why.

BTW: do you see the little red button with the -2LMT X in the picture? That’s an order I have enetered that has not gotten filled yet. It is a 45/40 Feb Put spread for a credit of .53 – a ten% ROI in about 2 weeks.  That’s a hint as to what I think LVS is going to do.

What Is LVS Going To Do? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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 “call fly” costs 20 cents. If Sprint closes at $5 on January expiration, the 20-cent ante is worth $1. If Sprint tumbles, traders lose the entire 20 cents, but who cares about chump change like that?

To be sure, the past few days have been intoxicating for many traders who seem stunned at how much money they’ve made since the second phase of qualitative easing (QE2) bull market began.

The demand for limited-risk, very high-return options trades suddenly seems insatiable as the traders interpret the Federal Reserve announcement last week of QE2 as a raging buy signal for stocks. Why? Because the Fed’s decision to buy Treasuries and further depress interest rates lowers the value of bonds, and effectively shoves investors into riskier assets such as stocks that offer capital appreciation and dividends higher than bonds.

Various options-trading-desk chatter invariably revolves around how investors can lock in gains and take advantage of incredibly inexpensive put options as fear has exited the market. But the backroom talk that is usually not meant for public dissemination revolves around how to make outsized returns during the six-month period of QE2. After QE2 ends, who knows what will happen? Until then, there is little perceived risk in buying stocks. Of course, such logic always ends in a veil of tears, but. . .

The “bulled up” logic of QE2 permeates many low-priced stocks, including Citigroup (C) and Augusta Resource (AZC), a copper miner. All traders know the “flight to crap” is a sign of frothy markets, but bubbles be damned, as the only ones who cry about burst bubbles are those who don’t know when to sell and take profits.

GO WITH THE FED

Credit Suisse Suggests a Butterfly Trade is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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 of two important December investor meetings, that the implied volatility of options that expire in three to six months are near pre-earnings levels, which makes the options a good sell.

By selling GE’s March $15 puts and March $18 calls, as Goldman Sachs’ influential derivatives strategists, John Marshall and Maria Grant, recently highlighted to clients, long-suffering GE investors can pocket a $1.17 credit, an amount equal to 7.2% of GE’s stock price, and almost four times greater than the annual dividend on the $16.16 stock.

If GE’s stock remains between $15 and $18, investors keep the $1.17, a payout that can be considered a conditional dividend.

Should the stock decline below $15, investors must buy more GE stock, but they’re getting it at a cheaper price. Should the stock rise above $18, investors must sell their stock at the higher price.

“We recommend selling options to enhance yield and benefit from this elevated implied volatility,” they advised clients.

Investors who do not own GE but would be willing to buy the stock at lower prices — and GE remains a play on the global economy — could sell the puts for 76 cents, collecting 5% of the $16.16.

The trade exposes investors to some event risk that could require investors to get action if the stock responds to pending management updates.

GE’s management team is scheduled to meet with investors on Dec. 7 at the GE Capital Investor Day and on Dec. 14 at the GE Annual Outlook Investor meeting. These meetings should clarify fourth-quarter financial trends, which could cause the stalled stock to break higher or lower. Still, it’s hard to imagine management saying anything that sends the stock sharply lower, or higher, which is why Goldman’s GE trade seems so compelling.

Option Selling Trade From Goldman Sachs is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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 in the trade and move my breakevens higher.

GLD Calendar Spread Update 9/29/10 is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com