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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

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

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 even is at 105.8?????

What is the correct way to compare an itm vs an otm trade?  I guess that is my real question????

So I looked at the stock to answer his question. The numbers had changed a bit.

UNP was at 95.60 when I looked at it. The Jan 2012 60 strike call was trading at $36. That makes the breakeven $96. The delta on the 60 call was .89. That means the option will gain 89cents for every $1 gain in the stock price. So if UNP is at $100 at expiration, the stock will have gained 4.4% while the option will have gained 11.11%. The return will be better if the stock does well.

Buying a call so far in the money is also called “stock replacement”. You are putting up less money to buy the call and get about the same gain/loss in the option that you get in the stock. Using far in the money options is a great idea when doing covered calls. Since the cost of the long call is cheaper than stock, your returns on the covered call are much greater.

For the At the Money 100 Call, it is trading at $7, so the breakeven is $107. But if UNP goes past $107, the gains will be of a greater percentage.

Say UNP is at 110 at expiration. For the In The Money Call we would make $14 or 38%. With the At the Money Call we would make $3 or 42.8% While the stock moved up 15%

 Which one should you choose? The In the Money is the most conservative since it is at about breakeven right now and can gain more than the stock if the stock advances. The At the Money Call is fine if you think the stock will move. In our example I only took the stock to $110. It the stock is at $120 at expiration, the At the Money Call % return would have dwarfed the other two options.

That being said, would you want to wait for almost a year to make 20-30% on these calls? If UNP is going to go up, why not sell Puts month after month and make 8-10% a month? That way, even if UNP stays close to $95, or moves up, or even moves down a little, you can still make money. And if UNP moves down a lot, you just look for another stock. You are not tied into the trade long term like with these calls.

Out of the Money Call vs At The Money Call 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 answer is, it depends. But I do have my preferences.

Liquidity

Both ETFs and Indexes are very liquid.  As I write this the At The Money Call in  SPX has an open interest of 45,000 contracts. The SPY At The Money Call has an open interest of 85,000 contracts. So both are very liquid. Major hedge funds though trade the indexes because they trade directly with the market makers.

Advantage: Even

Commissions

Commissions play a role because the SPX is ten times larger than the SPY. So if you want to trade $1,000 credit spread, you can do it with a 1 contract spread in SPX or a 10 contract spread in SPY. If you are paying per contract, the commission to trade SPY is ten times larger. if you are trading a flat fee per trade, regardless of the number of contracts, then it does not matter which one you choose.

Advantage: Indexes

Assignment

Indexes are European style options which means you cannot get assigned early. There is no early assignment with European options. ETFs are American style options and can be assigned anytime which can screw up your trade.

Advantage: Indexes

Bid/Ask Spreads

The Bid/Ask Spreads in ETFs are much smaller than in Indexes. Often times the spreads are only 1 penny. Keep in mind though that a 1 penny spread in an ETF is the same as a 10 cent spread in an Index. And if you have a 5 penny spread in an Index that is better than you can get in an ETF.

As a trader you should never be paying the Bid or the Ask. You should be paying somewhere in the middle. So if the spread is 23/24 you should be paying 23.50 or better.

A wide bid/ask spread can hurt you if the market is going crazy and you need to get out of a position immediately. It also takes a little more finessing to get a good price on a trade. Beginners should stick with ETFs for this reason.

Advantage: ETFs

Taxes

Indexes have preferential tax status. 60% of the income is counted as long term, and 40% is short term no matter how long you were in the trade. For ETFs, the tax implications are the same as stock. Since our option selling trades are concluded in about a month on average, the 60/40 tax structure can save us a lot of money.

Advantage: Indexes

Settlement

Most Indexes are settled on the market open on expiration Friday. ETFs settle at the close on expiration Friday. The Index settlement can cause confusion and crazy settlement prices. That is why it is best not to go into expiration. Take your trades off before and save the heartache.

Indexes are cash secured positions. ETFs are just like stock so if you go into expiration short an option you will be required to buy or sell shares of the ETF. An assignment can easily be remedied but it can cause margin calls and other problems.

Advantage: ETFs

Amount of Capital:

With ETFs you can trade spreads with as little as $100. With an Index like the SPX $500 is the minimum. I have heard several traders say that anyone with less than $5,000 should be trading the ETFs, and those with $5k or more should stick to Indexes.

For newer traders with less capital, stick with the ETFs. But I recommend traders start with $10,000. And if you are trading that much or more, the Indexes offer the better bet. As you get better as a trader and your account size grows you may open a portfolio margin account which is margined differently from a regular account. That will really allow you to trade more contracts and the Indexes will allow you to do so without upsetting the market prices with large orders.

Advantage: Indexes

Final Score: Indexes 4 points, ETFs 2 points.

My personal opinion: I stick with Indexes because of the commissions, the tax structure, and the ability to trade more money with a smaller number of contracts. I would rather trade 100 contracts than 1,000 and make $100 per spread than $10.

Smaller traders get eaten alive by the commissions when trading ETFs.  Once you learn how to enter a trade, the bid/ask spread becomes a non issue. Getting out of a position in a fast moving market can be more difficult but it varies from Index to Index. And if you don’t go into expiration with your trades, the settlement will not affect you either.

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

Not only does the article tell the story of how the trader did it, but also gives you the trade he is in right NOW.

One thing I want to point out is that this trade had very little risk for this trader. Why? Because it seems that the trader was bullish on the stock and thus would have bought the shares had they gone down. So basically he would have gotten a discount on them as well as have the ability to buy them below what their “value” was.

Some (options) guys (or girls) have all the luck.

Nick Ut / AP

Well, at least one of them has had a tremendous amount of good fortune lately by playing long and short positions against each other on drug store chain Walgreen and pocketing nearly half a million dollars in profit.

This particular trader’s good fortune began back on Sept. 20 when he or she sold 35,000 put options at the October $27 strike price for an average premium of 17 cents apiece on a day when the stock closed at $29.24, according to information from Interactive Brokers.

The move to sell the puts looked extremely smart Tuesday, when Walgreen posted earnings of 49 cents a share that beat the consensus by a nickel. Shares gained 11.4 percent on the day to close at $33.81, a 15.6 percent jump in eight days.

The stock move hammered the puts, allowing the investor to buy back the options at a 4-cent premium per contract. The net gain, then, was 17 cents per contract, bringing the profit on the 35,000 contracts to $455,000.

Not stopping there, the investor then jumped on the bullish Walgreen bandwagon by rolling the puts to the $31 October contract for a premium of 14 cents per. That means the stock will only have to hold that level through the expiration to keep the full premium.

The cagey positioning was part of an active day for Walgreen in which more than 124,000 contracts were exchanged by mid-day, Interactive Brokers said.

Happy trading, for sure.

Option Seller Makes $455,000 in 9 Days 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 concept they were teaching was day trading and so it did not interest me very much, but a couple things the speaker said were very interesting. The guy’s name was Tom Busby.

He said that once a stock breaks a hundred $ level for the first time it zooms up 10%.  For example, once a stock breaks through $100 it is going to $110. When it breaks through $200 it is going to $220, etc.

I had heard this before somewhere so I started looking it up. It turns out that Jesse Livermore mentioned this in one of his books. Livermore was probably the best trader of all time.

So now with two reference points I decided this was something worthy of looking into. So I started doing some research.  It turns out, that this theory/rule is true.

I checked with over 40 companies that broke through either $100, $200, or $300 and  84% of then did eventually hit $110, $220, or $330. The average time it took was 4 months. Some did it much faster and the slowest took 8 months, but it got there.

One thing I noticed is that this does not work all the time. It works only in bull markets. And this was also a limited sample.

If this theory holds, then Google (GOOG) is poised to hit $660, and Apple (AAPL) is going to hit $220. As I write this, Apple (AAPL) is already above $209 so $220 is not much of a stretch.

How should you play this?

1. You can buy the stock and wait.

2. You can buy a call option on Google (GOOG) at 660 with at least 4 months of time left to expiration.

3. You can sell puts month after month until Google (GOOG) starts to decline.

All 3 methods have their pluses and minuses. I am already long the stock, and have sold the Jan 560/570 put spread. As long as the bull market stays intact, I can sell more puts.  When Google (GOOG) breaks below the 50 day moving average, I plan on selling my stock and looking for another company to play.

Google (GOOG) Going to $600 is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

In a preliminary proxy statement filed this morning with the SEC, Berkshire gives notice that a special meeting of shareholders will be held at 9:30a on Wednesday, January 20, 2010, at Omaha’s Holland Performing Arts Center.     

Shareholders are being asked to approve a 50-for-1 split of Berkshire’s Class B shares, without splitting the higher-priced Class A shares.

That split would bring Class B shares down from about $3300 each (at today’s price) to roughly $66 each.

In an interview with CNBCjust after the Burlington deal was announced about a month ago, Buffett told us:

“I’m not big on stock splits. But by having this split, it enables anybody that has as little as one share of BNSF to opt for the tax-free exchange… So those small shareholders can have exactly the same availability that otherwise would only have been available to a big shareholder.”

So what?

Well in my opinion this is good news for option sellers. Why? Because Berkshire is a good stable stock. Not volatile and now well priced to sell options on. I am going to be keeping an eye on this one. Who knows? It might become on of my favorite stocks to do income strategies on. Time will tell.

Buffet Splitting His Class B Shares is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com