Vacation-Proof Your virtual Portfolio
by Phil - May 23rd, 2009 3:30 pm
A couple of years ago, Option Sage (Gareth) and I put up a very popular article titled "Vacation-Proof Your virtual Portfolio."
In it we discussed several strategies for hedging existing positions, moving them into neutral positions ahead of a time when you would be going away and not able to keep your eye on the markets. As we cashed out last week, it hasn’t been much of an issue coming into this long weekend but some of you still have long postiions that need protecting and Sage has been kind enough to provide us with access to a free on-line seminar on the subject through his educational platform at www.MarketTamer.com.
I don’t recommend many services but Sage was an original member who went on to write many of our educational posts over the years and went on to develop an on-line trading education system that is very, very good for learning stock and options trading. PSW members get a special offer of $99/month, which is 1/3 the going rate AND he will give you that $99 back if you are not satisfied after the first month! So check out the link above, there are 3 free lessons there and read through the article. If you plan on going away with positions open this summer in this crazy market – I think it will be time well spent…
Those of you who know Sage have probably already linked over but for those of you who didn’t get a chance to meet him when he was on-line with us all the time, here’s a copy of Market Tamer’s recent press release, which tells you a bit about Gareth and the company he’s been building:
Taming The Market
A shockingly simple yet amazingly powerful concept has been ignored by major hedge funds, mutual funds, and retail traders alike. On their quest to outperform the market, Wall Street’s best often get sucked into a single style of investing or trading: long only, long/short, distressed, diversified and the list goes on. They use a single approach to exploit a changing market. And often a single approach works – for a while. Bill Miller of Legg Mason was regarded as one of the stars on Wall Street until his virtual portfolio suffered substantial losses during the crisis of 2008. Victor Niederhoffer was once acclaimed as the number one hedge fund investor in the world until his fund blew…
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Digg$100K Hedged virtual Portfolio Update
by Phil - May 6th, 2009 4:48 am
Well, there was no reason to adjust the virtual portfolio this weekend but now I’m a little concerned (as I went short-term bearish yesterday morning) and it’s a good time to review our positions.
Monday gave us a lot if cushion but that doesn’t mean we have to squander it. Our last review was on the 25th and we had made adjustments on the 21st in member chat, triggering the plays we had decided to wait for the previous weekend. Notice we haven’t really had a down day since so there has been no reason to adjust what has essentially been a bullish set. Yesterday, in comments, I called for covering our UNG play but that’s the only move we’ve had to make in 2 weeks. Sadly, vacation time is over so let’s look over our positions and see where action will be required:
Our original positions were:
- 500 UYG at $3.48, selling 5 May $3 calls for .72 and 5 May $3 puts for .28, net $2.48/2.74
- UYG now $3.91, May put and call combo now $1.05 = net $2.86 ($190 profit on $1,240 = 15.3%)
- We are fine being called away on this position
- UYG now $3.91, May put and call combo now $1.05 = net $2.86 ($190 profit on $1,240 = 15.3%)
- Selling 2 FAS $7.50 puts for .45 naked
- FAS closed at $9.40 so 100% profit of $90
- 500 C at $3.04, selling May $3 puts and calls for $1.11, net $1.93/2.47
- C now $3.31, We took out the callers for .30 on 4/21 and the May $3 puts are .20 = net $3.11 ($590 profit on $965 = 61.1%)
- We should close this position, it is above our profit expectations
- C now $3.31, We took out the callers for .30 on 4/21 and the May $3 puts are .20 = net $3.11 ($590 profit on $965 = 61.1%)
- Selling 2 IYF May $36 puts for $2 naked
- IYF closed at $41.80, May $36 puts $.35 ($330 profit on $400 =82%)
- Because of the stress tests, I would rather close these out
- IYF closed at $41.80, May $36 puts $.35 ($330 profit on $400 =82%)
- 4/21 Sold 2 IYF May $34 puts for $2.10 naked
- IYF closed at $41.80, May $34 puts $.20 ($380 profit on $420 =90%)
- Because of the stress tests, I would rather close these out
- IYF closed at $41.80, May $34 puts $.20 ($380 profit on $420 =90%)
- Selling 2 JPM May $29 puts for $1.95 naked
- JPM closed at $34.77, May $29 puts $.23 ($344 profit on $390 = 88%)
- Because of the stress tests, I would rather close these out
- JPM closed at $34.77, May $29 puts $.23 ($344 profit on $390 = 88%)
- 4/21 Sold 2 JPM $28 puts for
…
$100K Hedged virtual Portfolio Update
by Phil - April 25th, 2009 9:18 am
This week we made several $100KP Adjustments, which triggered during Tuesday’s chat.
However, only the entries on the new trades will be adjusted as the intention of the virtual portfolio is to do weekly adjustments only on trades once we hit our entries. We don’t trust the markets enough this week to add any sectors so we’re still just messing around with the financials at the moment but we did add our DBC and UNG plays with mixed results.
On Tuesday I did suggest a couple of changes to the existing positions:
- Taking out the C $3 calls for .30 (now .44 – up 46%)
- Selling 2 IYF $34 puts for 2.10 (now .80 – up 62%) and rolling the $36 puts down to more $34 puts.
- Not big deal if you missed it as the $36 puts are still on track to expire worthless.
- Selling 2 more JPM $28 puts for $2 (now .73 – up 63%)
- Stopping out the FAZ puts at $1.60 as that was a 50% gain – they are now back to $2.83 (up 77%) and THAT is why we take profits off the table!
It is a very choppy market and we can make fantastic gains like this making mid-week adjustments. If you are following this virtual portfolio – make sure you are signed up for Alerts (this one came Tuesday at 10:37) and our upgraded system will be able to put titles on the Alerts so future mailings should get your attention quickly when they are about the Sample Portflio.
Whether you made the adjustments or not, there are no changes to be made this weekend as we’re drifting into next week pretty much where we were at the end of last week and the puts and calls we sold are losing their premiums right on schedule. Our new trades are going well so far off the Tuesday entries and it really paid to wait:
- Selling 10 FAS May $6 puts at $1.20
- Now .57 (up 52%), need a stop at .65
- 200 GE at $11.28, selling June $10 puts and calls for $2.95, net $8.33/9.17
- GE is now $12.11 and the June $10s are $3.06 so very good so far.
- Selling 10 URE June $3 puts for .70 naked
- Now .43 (up 38%)
- 300 PGF at $10.23, selling May $10 puts and calls for $1.25, net $8.98/9.49
- PGF is now $11.22 and the
…
How To Buy A Stock For A 15-20% Discount
by Phil - April 22nd, 2009 5:58 pm
If this market hasn’t convinced you that buy and hold is a gamble - I don’t know what will.
Holding any stock for more than a day has been a sure recipe for heartache (sometimes just an hour will do it) but we have been having a good time at PSW, during our member sessions, bottom fishing and concentrating on plays that give us much better prices than the ones paid by the average retail investor using very basic option strategies. This strategy, which we call a "buy/write", as we buy the stock and write options against it, is one of our most effective tools for dealing with a choppy market.
There are, of course, many, many stocks trading near multi-year lows and it’s still important to select ones that have strong underlying fundamentals that we actually don’t mind holding long-term but, as long as you are willing to own 200 shares of a stock – this system can reliably give you a 10-20% discount off the current market price. It’s simple, easy to follow and is ideal for trading in a volatile market.
Of course when we buy any stock or long-term option position, we should be scaling in. In other words – we don’t assume our timing is perfect and we enter a position in stages. In our Strategy Section I discuss the 20% entries and the various rules for that so I won’t get into it here but, effectively, selling puts and calls against a stock entry is a way of automatically following the scaling system without having to monitor your position that closely. I will give a few examples here and, if you sign up for our newsletter service, PSW REPORTS, using this link, we will be waiving the fee during a trial period and there will be follow-up trades each week through June options expiration (19th).
Let’s say, for our first example, we want to buy BAC at $8.26. If our goal is to buy 200 shares we buy instead 100 shares and also sell the June $8 puts for $1.65. Additionally, we sell the June $8 calls for $1.77. The two sold contracts reduce our net basis to just $4.84 and we have taken on two obligations. The call we sold, obligates us to sell our stock for $8 on June 19th IF the price of BAC closes above $8 on June 19th – we have sold someone an OPTION TO BUY our stock for $8…
Members Only – Setting Up A Hedged virtual Portfolio Part 1 – Financials
by Phil - April 10th, 2009 3:14 pm
There were a couple of member questions that came in today and both I thought would be good to address:
1020 asked: "What’s the best way to get started using your site?" That one is easy to answer and hard to do. We have a "New Member’s Guide" which pretty much lays things out with these standard assignments:
- If you are new to options, read Sage’s Book
- Read 1 full month of my posts and all comments, you will get a good feel for the site, the kind of trades we do and also get to know a bit about the people in chat. Knowing people’s various expertises and understanding their market philosophy and position makes the next live comment they make much more informative…
- Read Option Sage’s articles under his tab, many were co-authored by me that highlight various option stratgies with real-world examples.
- Watch The Man Who Planted Trees, a short video about investing that characterizes a solid investing philosophy.
AFTER you do those things, then we are ready to talk about setting up a virtual portfolio, which brings us to Pstas’s question of what would be a good model virtual portfolio for $100,000.
In this traing environment I would first and foremost concentrate on the Buy List (under our virtual Portfolio Tab) and trades like the DNDN (which is riskier) and ZION (which I hope is not risky) that I highlighted just yesterday. Typically, you can categorize the buy/write plays as fairly low risk. The idea is we’re buying stocks at discounts to the current trading price and scaling into the positions over time.
Setting realistic expectations is key too, the biggest mistake you can make with $100,000 is to jump right in and spend it. I’m going to put down a minimum for each play and an allocation
So let’s look at a quick set of trades we can set up:
UYG is my first choice. Why? Because it’s not as volatile as XLF, which just jumped out of our $5-$7.50 range and we don’t feel confident enough to chase it at the moment. UYG is a crap investment by itself but, for the same reason, is great to sell calls and puts against.
500 UYG at $3.48, selling 5 May $3 calls for .72 and 5 May $3 puts for .28, net $2.48/2.74
This play puts you in for $1,240 and you make…
Spinning Straw Trades Into Gold
by Phil - March 22nd, 2009 9:08 am
Here’s a fun chart that illustrates why I like gold. Don’t take it too seriously but do take seriously that this is exactly what happened to the US when we got embroiled in the Vietnam war and Nixon took over and the country plunged into debt and we cut taxes to the rich and dropped the gold standard. The ratio of the Dow to gold dropped from 47:1 to 2:1 but the middle of Reagan’s first term. During the Clinton years, as we moved towards a budget surplus, the ratio of Dow to gold jumped from 7:1 in 1993 to 40:1 in 2002 but, since then, has dropped back to 15:1. The bottom line is: If you are worried about the markets – buy some gold. If you are worried about the dollar – buy some gold. If you are worried about terrorism – buy some gold.
I still think we should get a correction in gold back to $875 (no longer $850 as the trendline has been yanked up) but we’re not hedging gold because we are worried it will hit $1,000, we are hedging because we are worried it will hit $2,000. That means that the difference between buying gold at $850 or $950 is not a big enough deal to stay completely out of it now. We would LIKE to be in the 2011 $70 calls for $20. Sadly, they are $32.25 at the moment. Here is how you can use a rolling plan to enter something high and still be happy when it’s low.
We pick a target amount of gold. Say 10% of our virtual portfolio and say that’s $10,000.- We scale in so we buy $2,500 at a time (roughly)
- We FIRST look at what rolls cost. The roll from the $120s to the $115s is $1. Well that’s silly, we’d pay that now. The roll from the $75s to the $70s is $3 so let’s say we’ll be happy to spend $1.50 a roll. THEREFORE we buy in at the first strike we CAN’T roll down for $1.50, which is the 2011 $100s at $19.
- If we plan on spending $1.50 per $5 roll down as gold falls, it will cost us $9 ($1.50 x 6 rolls) to get down to the 2011 $70s. That would put us in for $28 total dollar and now the question is –
…
Profiting From Short Strangles – Part 2 – Possible Adjustments
by Peter D - February 16th, 2009 6:43 am
Possible adjustments for short strangles, including passive adjustments at expiration and active adjustments prior to expiration, are examined in this section. Let’s also re-iterate the practical “Strangle a Spy” example from Part 1 to provide additional clarity to the concepts:
- For prices at the close of 1/9/2009, Sell SPY Feb 70 PUT (20% downside cushion with SPY at $89) and Sell SPY Feb 105 CALL (17% upside cushion) for $0.81 credit.
- The margin requirement was $8.9 ATM (At-The-Money), $24.2 for SPY at $105, or $18.4 if SPY drops to $70.
1- Passive Adjustments at Expiration
a) No adjustment: If SPY closes between the two short strikes, e.g. $70 and $105 on 2/20/2009, both the short PUT and short CALL expired worthless, the maximum profit is realized, and no adjustment is needed.
b) Rolling “horizontally”: If SPY closes below the PUT strike, the short PUT can be rolled horizontally to the same strike next month for a credit. We are betting that the market will eventually recover to above the short PUT strike so that we keep the premium of all short PUT sold. We can keep rolling horizontally very month as premium sellers. However, the margin requirement does increase when the stock goes lower due to the increased PUT value. Prudent money management to absorb the margin requirement is a must when using Short Strangle strategy.
Let’s look at December 2008 expiration example to see how much credit we would get when rolling horizontally. Since the stock price would be below the short PUT strike, we would look at ITM rolling to simulate the possible credit.
SPY closed at $88.19 on 12/19/2008, rolling:
- Dec 89 PUT to Jan’09 89 gives $3.60 credit (short PUT is 1% ITM)
- Dec 91 PUT to Jan’09 91 gives $2.58 credit (3% ITM)
- Dec 94 PUT to Jan’09 94 gives $1.50 credit (7% ITM)
- Dec 97 PUT to Jan’09 97 gives $0.78 credit (10% ITM)
The amount of credit is also dependent upon the volatility reading at the time. Note that all these rolling of the PUT and selling of additional short CALL would give more credit than the $0.81 credit from…
virtual Portfolio Margin – Useful and Dangerous Leverage
by OptionSage - February 7th, 2009 9:16 am
Give me a lever long enough and a place to stand and I will move the entire Earth
- Archimedes
Margin Basics
Whether you examine the property virtual portfolio of a real estate tycoon or the virtual portfolio of a successful private equity company, you will find a common thread that magnifies returns for each… leverage! It is no different in the stock market. In fact, each of us who trades options takes advantage of the leverage they afford us every day.
2. You CANNOT use margin to purchase options but there are MARGIN REQUIREMENTS for certain spread positions that we like to take.
Example
Stock Buying Power: $200,000
Option Buying Power: $100,000
The benefit of margin is obvious but it doesn’t come without drawbacks. Had…
The Dawn Breaks…
by OptionSage - January 19th, 2009 11:47 pm
The hammer dropped Thursday. The market held firm Friday. And this next week will be seen in retrospect as the week the market bottomed out and started to rise again – at least for quarter 1 2009.
Detractors might argue that Circuit City is laying off thousands and Bank of America might be closing locations and commercial real estate is dead and shopping malls are vacant and….
And it may all be true. But the beauty of integrating fundamental and economic analysis with technical and sentimental analysis is that the big picture appears. The fundamentals of many stocks are certainly impaired. Even Kudlow will find it hard to argue in favor of a bullish economy. But the sentiment is changing. Watch the VIX over the next few months. I anticipate it will be lower by March than where it is now even if not within the next few days. And the technical charts tell stories once you know how to read them. The news is reflected in the charts and the story the charts tell is bullish. The markets should go higher in the next few months.
Can I be certain? With 100% probability, no! But actions speak louder than words. And as the dawn breaks on the coming week I plan on backing the rhetoric with purchases and those purchases shall be on the SSO to amplify the expected gains. And what of Gold…Gold goes higher too. Time to get on board the train to $1,000/oz.
To confidently predict direction is not enough. I need to know I can figure out how to protect myself if I am wrong. That’s how I made money in 2008 when most lost their shirts. All you need is a system that works. And the system I use I also teach. If you’re interested you too can thrive and prosper.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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