Online Option Trading Strategies

Online Options Trading Strategies Video is a post from Option Selling.
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Iron Condors

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

$1,000 Credit Spread is a post from Option Selling.
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I don’t necessarily endorse the trading method listed in the article for all traders. But I do use these techniques myself to supplement my stock trading. Only experienced option sellers should try these techniques.

Get Naked For Income by Matt Schifin

Safety and income. It’s what investors crave these days. Everyone is nervous about the stock market and Bernanke’s bond bubble. Safe sources of income like bank CDs and Treasury bonds pay next to nothing. Muni yields are a joke, plus many are fraught with risk.

But there is another relatively safe way to generate income that most investors rarely consider. Stock options.

This new column is devoted to the investment advice and insights of outstanding self-directed investors whom I call the Warren Buffetts Next Door.

Options investor Robert Krebs, 58, is a great example. By day Krebs is an engineer who designs microchips at Western Digital (WDC) in Orange County, Calif., but when he isn’t working, he spends hours online tending to his portfolios of stocks and options. His returns have been impressive.

On the website ValueForum.com, where he is known as “dig4value,” the stocks he has picked in its quarterly contests since 2004 would have turned $10,000 into $46,600 versus $11,500 for an investment in the S&P 500. But those returns don’t speak to the opportunistic options strategy Krebs has adopted. His goal: Add 1.5% per month in income to his portfolio returns by selling calls and puts.

Like most novices dabbling in options Krebs started out buying calls, which give the contract holder the right to buy 100 shares of stock at a specific strike price for a specified period of time. But in the 1990s Krebs read an article reporting that 75% of all options expire unexercised and worthless. It’s even worse for put options, at 83%. Krebs had an investing epiphany: “If options are a zero-sum game, then sellers are the ones making the money,” he thought.

So today Krebs uses options selling (writing) strategies to generate income. He sells out-of-the-money covered calls and naked puts. One of the stocks Krebs has owned is offshore driller Transocean (RIG, 70). Let’s assume Krebs owns 1,000 shares of Transocean at $70 per share. If Krebs sells ten $3 call contracts at a strike price of $75, expiring three months out (say, February 2011), he would receive $3,000 in his account.

If the stock fails to rise above $75, Krebs gets to keep the income, which represents $3,000 over the course of three months. Krebs would continue this strategy every quarter, hoping to earn an extra $12,000 per year on his portfolio holding of Transocean. This would produce a yield of 17%.

If the stock rises above $75 and Krebs wants to keep it in his portfolio, he merely buys those call options back. He may take a loss on the calls, but he avoids selling Transocean and paying capital gains on his 1,000 shares.

The other strategy that Krebs favors is what he calls naked short puts. It sounds dangerous, but it’s actually the equivalent of a covered call from a risk-reward standpoint.

So Krebs has opted to sell January 2011 puts with a strike price of $20, with the puts trading at 50 cents per share. For ten contracts (representing 1,000 shares) that would amount to $500, deposited into his account.

If Intel falls below $20 and Krebs’ put option is exercised, his account would purchase 1,000 shares for $20,000. However, his effective price is $19.50, or $19,500. By contrast, if Intel appreciates in price, his puts expire worthless and Krebs pockets the $500.

Krebs uses naked puts as a way to build a low-cost position in a stock and gets paid to wait. Note that brokers usually require at least 25% of the equity cost in cash in your taxable margin account to engage in naked put selling. In IRAs it’s 100% cash equity.

One stock Krebs has been selling naked puts on is biotech Exact Science (EXAS, 6). The company uses a “stool-based” DNA technology for early detection of colorectal cancer. Krebs would like to own the stock, which is up 127% in the last 12 months, but he thinks it’s too pricey. So he has been selling puts underneath it at lowball strike prices of $2.50 and $4. He doesn’t own shares yet, but the income its options produce has been keeping him happy.

Matt Schifrin is Investing editor of Forbes and author of The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of and What You Can Learn From Them. Follow him on http://blogs.forbes.com/schifrin

Forbes editor Matt Schifrin shares investing insights from his new book.

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

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. Take off the 125 Calendar.

Step 2. Now that we are in a better position it is time to determine how to adjust. Easiest way: just add another calendar at a higher strike. We have two options: adding the 131 or the 132.

Here’s the chart when we add 131 call calendars to the 128s we already have:

Double Calendar 128/131 Call GLD Spread

In the middle of the graph we can still make about $450.

Here is the graph of the 128/132 Calendar:

128/132 Double Calendar

The amount we can make on the 132 is lower: closer to $100 but the upside break even is farther away. The 133 Calendar is too far away and the profit at the middle of the graph becomes negative so that is not an option.

Which to choose? Depends on what you think GLD will do in the next week. I normally like to be out of Calendars the Monday or Tuesday before expiration (next week).

If you think GLD will stay put or move down a little, the 131 makes sense. Otherwise the 132 is the best way to save this trade. If we do the 132, and GLD keeps moving up and gets to the break even we will be down about $670 which is around 17%. Right now we are down $450

But hold on! There is another option.

What if we take off the 128 as well and reposition the trade?

Here’s a graph of a 130 – 133 Double Call Calendar. I sold the 125 and the 128.

Double Call Calendar 130-133

I think I like this one best of all: Break evens are 129.39 and 133.77 with the ability to make $400  in the middle of the graph.

Recap: GLD is outside the break even on our 125/128 Oct/Nov Call Calendars. I don’t think GLD will come back into our trade. I think it will stay outside the break evens and so I need to adjust.I am adjusting by selling both the 125 and the 128 Call Calendars for a credit. I entered the trade with a debit. And then I am repositioning the trade by buying the 130 and 133 Oct/Nov Call Calendars. I now have new break evens and the ability to make a decent return.

Calendar Spread Update 10/5/2010 is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

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 add another Calendar Spread at the money. This will double your capital in the trade but will give GLD more room to run around.

This trade was put on today before the FED announcement and since then GLD has moved up about $1.

Weekly Calendar in GLD 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 has gone under a complete redesign to better communicate with readers and members as well as keep me better connected to you via, facebook, twitter, rss, youtube, etc.

And I also incorporated the Option Genius logo – the cartoon Einstein looking character. I think this brings out the playful side of the site. You can’t be serious all the time, right? After all, it’s just money.

If you are already on Facebook, you can click on the Like button to become a fan of the OptionGenius Facebook page. I haven’t launched it officially yet. Still getting some programming tricks for it. But the more friends and fans the better.

You can also click on the orange rss button to follow this blog and get notified whenever there is a new post.

All posts can easily be shared via Twitter or facebook by clicking on the Tweet or Share buttons next to each post.

OptionGenius now has it’s own YouTube channel as well but there is only one video right now. Many more soon to come.

So what do you think? I’d love your comments so please leave one.

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

Visualizing Obama’s budget cuts is a post from Option Selling.
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Life Goes On is a post from Option Selling.
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Got an email today from a member that was having a problem getting our emails. So when I investigated, it turns out that he has taken advantage of the $1 30 day trial FOUR TIMES. What a wonderful fellow (sarcasm). He went through the effort of using different email addresses and different names to create new accounts every time his 30 days was up so he would not have to pay the monthly fee.

And this is supposed to be someone who can afford to be investing? If you have thousands of dollars in the market, why would you go through all this trouble to screw me out of a few dollars a month?

You are stealing you loser. Why would you stoop so low to save a couple dollars a day?

And it’s not like he did not get any value of it. He was a member for four months and complained when he missed one email. He was obviously using the service. Hell, one good month pays for a whole year of the membership even if you only have $10,000 to invest, which is the minimum I suggest you start with.

Needless to say his account has been terminated and steps have been taken so he cannot sign up again.

Now I am going to have to waste precious time to see if this is a larger problem and many people are doing this or if this guy was the only one with no scruples, values, or decency.

On days like this, I wonder if it is worth it. It’s not like I am making millions of dollars with this site. It’s just something to keep me busy since the trades don’t take up that much time. 

Oh well, I guess it’s part of life. The sad thing is, that if others are doing this as well, I will have to do away with the $1 trial and then it will hurt the people who actually are honest enough to follow the rules.

Thanks for letting me vent. I feel a little better. I think I am going to go punch something now.

Why Are People So Cheap? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com