Short indications:
Lower low (in shaded area on chart)
Extended move from persistent trend-line
Weekly (Note: chart below is Daily) stochastics overbought and turning lower.

Things to watch:
Daily stochastics becoming oversold before price moves lower. (Known as Divergence)

DD | Short Trade to Trendline

As we can see from the CVX post a few days back, our short entries are just starting to play out. Notice the shaded area on the chart where we had measured our expected move, which has turned into a great looking technical entry. – After hours trading has us up nearly 2 points on this position so far, but judging by the daily we should still have further to fall. Our first area of interest to consider is going to be the 20-MA just above $76. This area also has a gap fill that would come into play from just a few weeks ago (see chart). This would be a good area to consider covering some of this position. However, unless the S&P gives us a reason to get long, I’d like to hold this short for larger move lower. Ultimately, the best case scenario would be a retest of the recent broken trend-line which would actually be a very attractive place for a long position. At this point however, I don’t expect this trade to continue that far down, but we’ll continue to monitor…

CVX Short Trade

APD’s short trade is also working nicely. While we didn’t actually short this stock, we did get long a nice vertical put spread, which is up nearly $50 per spread from our entries yesterday. We were filled on this position at $2.69 per spread, which is now trading around $3.20. – The best part is, the lower strike price in our vertical spread is now at the money. We need APD to be at or below $75 a share in September expiration, and we’re already there as we benefited from nearly a 2-point dive today. Same as on the CVX trade, we’ll continue to monitor this position but I definitely have my eye on the $73 level. The second of the two charts below is a 60-min APD chart which shows a rising wedge break-down similar to that of the S&P’s. The $73 level is nice support for APD and since the 60-min 200-MA currently resides very close to this level as well, it’s our first area of interest. For anyone who took multiple spreads on this trade, taking some of the position off at that level looks like a great technical exit to reduce some exposure and seal some profits. More to come soon.. Trade safe and stay disciplined.

APD Daily - Short Trade

APD 60 Min - Short Trade

Probably one cause the option credit spread is so preferred is that it can be looked at as being more of an ‘entry level’ option approach. It is less complicated and more basic to have an understanding of than other option spread systems much as the iron condor spread, the calendar spread – or even the butterfly spread system.

This option spread includes lots of only 2 legs – a sold leg nearer to the money – and a obtained leg further more out.

The objective of this option system is to sell a strike in which the credit spread dealer is convinced the underlying should not go to during the length of the trade. If selected right, the trader maintains the payment originally delivered into the trade (unless of course of course the credit spread option placement is closed out earlier to expiration).

This is an the perfect of a bull put credit spread …

Sell 20 Puts at the 90 Strike Level
Buy 20 Puts at the 87 Strike Level

Perhaps one reason the option credit spread is such a favorite is that it can be seen at as being more of a beginner type option method. It is easy to understand – much more so than other more complex option spread methodologies for example the iron condor, the butterfly option trade, etc.

This option spread is made up of only 2 legs – a sold option closer to the money – and a bought leg further out. The purpose of this method is to sell a option where the credit spread investor feels the stock being used will not go to while the trade is on. If chosen correctly, the credit spread investor is allowed to retain the option premium initially brought into the trade (unless  the credit spread option position is exited before expiration).

This is an example of a bull put spread on DIA…

Sell 5 Puts at the 98 Strike Level
Buy 5 Puts at the 96 Strike Level

In this example, the trader putting on this trade can profit as long as DIA stays above the 100 dollar level through expiration.

Just a general observation: as I was scanning the 3-day charts for the S&P 100 and NASDAQ 100, I noticed many stocks are consolidating and volume is dropping. I don’t know what this means other than what I said, but typically it indicates an overbought condition and a pullback may be in the near future. You know, it just feels like we are walking on egg shells, doesn’t it?

LTD – Passed on this because the price didn’t pull back like I was looking for and the Ex-Div date passed. It will remain on my watch list.

FCX – This is in my Simulated account. I missed the top for selling a call and the price is pulling back. Since I wanted to hang on to this into the Ex-Div date in October, I decided to sell a SEP 65 Call today for about 2.30, which will knock my Cost Basis down to 56.56 and a nice 14+% return if called. I know, this is different than my original plan of writing a deep ITM Call, but some readers (thanks Don) made me think twice about what I would do with this simulated trade. That’s what I love about this blog – it has made me a better trader because of your input.

BGZ – My cost basis is currently 36.36 and with the price at 23.91, it’s hugely underwater. However, this fund is a Bear 3x fund that will move opposite the S&P by about 3 times. So, if the S&P takes a digger and pulls back to the 950 level, then this fund should be around $30. The next area of support I see is 980 (about equal to BGZ at 27.50). So, to give myself a bit of a cushion, I will write a SEP 29 for an estimated 0.40 for a little better than 1% based on my current Cost Basis. Yeah, I will still be underwater and in danger of being called for a loss, but I will make an adjustment if the market heads south.

So I went shopping for some Covered Calls today, now that LTD is off my radar screen. On the CallWriter NASDAQ 100 list, I found Joy Global (JOYG), an old friend, and a very good candidate that’s in a pretty nice position price movement-wise. To top it off, the Ex-Div date is 9/2 and the annual yield is 1.8% – nothing that I would call Grandma about, but better than nothing. The currentl ITM SEP 39 would return 5% if it expires ITM in September. Earning season is just about over, but I checked anyway – its part of my evaluation process. Dang! Their earnings date is 9/2!

This was really the only value prospect on the lists that I found – or that I would be willing to front $5,000 for.

It’s time to start to get serious about finding good trades for September, both Covered Calls and Credit Spreads.

Oh, that reminds me… The new blog (http://theoptionguru.com/blog) is coming along very nicely. I will be migrating the content from this blog to the new one this weekend. Then I will run them in parallel for a week or so and then re-direct to the new blog permanently. I just loaded a very powerful and flexible theme last night and as a result it will probably look different each time you visit as I add/change/remove features and options. Let me know if anything looks dumb or ugly.

– Jeff

“After two years in Washington, I often long for the realism and sincerity of Hollywood.” Fred Thompson

Covered Calls

GE – an old holding that was underwater and performing poorly. I am not expecting this company to turn around anytime soon, so I let it be called away for a -5.88% loss.

BGZ – Expired OTM. This is the S&P Bear 3x fund that I am holding as a hedge against a sudden market reversal. Because it’s a 3x fund, the options have large premiums, so I will continue to chip away at my cost basis with additional call writes each month.

AKS – expired ITM for a 6.86% gain

Vertical Spreads

This is the new strategy that I am introducing to my trading plan. After months of testing (undercover) I have found that this strategy actually has less risk than Covered Calls in most cases. It does have its disadvantages and each strategy has its place in my income strategy. If you are not familiar with the strategy, you might want to visit The Option Guide for more information. More on this when I launch the new blog, but for right now let me tell you how my LIVE trades worked out this month.

SPX – (Bull Put Credit Spread) I entered this on 7/30 after the index had spent a few days above resistance of 950. My ‘bet’ was that the index would close above 960 on August 21, and it did. This provided a return of 18% on the money I had at risk. I calculate my ‘risk’ based on the amount of cash margin required while the trade is open – in this case $500/position. Without getting into too much detail at this time, I BTO AUG 955 P and STO AUG 960 P for a credit of $0.90 each. Since the spread between the two strikes is $5, the result is .9 / 5 = 18%.

FUQI – (Bull Put Credit Spread) At the end of last month, I had planned a leg in on this and I did buy the stock but ended up selling it after it rose for a 6.8% gain. Based on the current trend of this stock, I ‘bet’ on 8/3 that this would be above 22.5 at expiration (BTO AUG 21 P and STO AUG 22.5 P – credit 0.30). It also worked out for a gain of 20%.

AAPL – (Bull Put Credit Spread) This is on a tear, and my money management rules would never allow me to do a Covered Call on this with less than $150,000 in my account, but Vertical Spreads allow me to do that because I have so much less at risk. I ‘bet’ on 8/5 that the stock would be above 155 at expiration (BTO AUG 150 P and STO AUG 155 Put – credit 0.53). All ended well for a gain of 10.6%

GS – (Bull Put Credit Spread) This is the one spread that made me a little nervous. Possibly I was a bit over-confident in ‘betting’ on 8/7 that this would close above 160 (BTO AUG 155 P and STO AUG 160 P – credit 1.02). I guess it was the huge credit that attracted me, but in the end it did work out for a gain of 20.40%. The good thing here is that it forced me to do a deep analysis on adjusting spreads and running several scenarios so I would understand what to do. Turns out it’s not that difficult to either adjust for a smaller gain of a small loss. Not bad in the grand scheme of things.

ISRG – (Bear Call Credit Spread) I took the opposite side on this one ‘betting’ on 8/13 (1 week from expiration) that the stock would not be above 240 at expiration (BTO AUG 250 C and STO AUG 240 C – credit 1.20). I mean, look at the chart! What a beautiful picture of resistance at 240. Well, it worked out for a gain of 12.0%.

You can tell where my focus was for August. You can also tell, as some have commented, that I am taking a more conservative and fundamental view of Covered Calls. Yes, they still have a place and are very good in a Bull market.

Please don’t think of me as a traitor to Covered Calls, rather think of me as attempting to maximize income while reducing risk – and I will use any strategy available in an IRA to do this.

I use the word ‘bet’ a lot in this post – the reason is that any trade you do is like placing a bet. I mean, we all know that so let’s just call a spade a spade.

Want a sneak peak at my new blog? I have temporarily placed my first official DRAFT post as a place holder. As with any newborn, when you click on this link my baby might be sleeping, cooing or crying – expect the unexpected. Test drive at: http://theoptionguru.com/blog.

– Jeff

“Good communication is as stimulating as black coffee and just as hard to sleep after.” Anne Morrow Lindbergh

FCX Update – the stock is climbing and really making me look good – closed above 62 after I bought it for 59.83 on the 18^th. We have to wait until Monday to decide if we want to write a call, wait or just sell the stock. This is the life of legging in!

Expiration this month is looking VERY good. If we don’t have a major bear move tomorrow, I will more than make up for last month’s loss.

– Jeff

“When you come to a fork in the road, take it.” Yogi Berra

SRS traded at $19.40 at the close on Friday July 17th.  Both Call options, the one bought (long) and the one sold (written), expired worthless.

We have realized our maximum loss of $3.50 (+ trading costs) or $7.80 (+ trading costs), depending on the strike prices chosen.  Our loss represents a 100% loss of the money at risk.

NOTE:  I am including this trade as a 100% loss, HOWEVER, SRS traded upto $111.22 on March 6th.  The low beteween these dates was $48.00.  IF we had placed a trailing stop order (to be explained in another post) we could have avoided this loss AND this trade would have been a WINNER of probably 75% OR BETTER.  I did not include these instructions in this trade, because I have not explained what a trailing stop is.  I would have had a trailing stop of 20% on the price of SRS (it would have been this large because of the volatility of SRS), which means that we would have exited this position when SRS was trading aroung $88.50-$89.00.

SLV traded for $13.17 at the close on Friday July 17th.  Both Puts, the one sold (written) and the one bought (long), expired worthless.

We realized the maximum gain for this trade of $0.40 (less trading costs), if we assume $0.15/share as trading costs, we have a gain of $0.25/share.  We risked $0.75/share, which makes our return on this trade 33% (0.25/0.75) for four months or approximately 100% APR.

Please note that $0.15/share trading costs assumes that only one option contract was used.  These costs go down (dramatically) if more than one option contract is used which would raise the return of this trade.

What is an Option Spread?
It involves the simultaneous purchase and sale of options in the same class, ie, calls or puts on the same underlying.

There are different types of options spreads, Those are as below..

1. Vertical spread
Buying and selling calls/puts with different strikes, but the same expiry.
eg. buy Nov 1200 call and sell Nov 1300 call or
buy Dec 1000 put and sell Dec 1100 put

2. Horizontal (calendar) spread
Buying and selling options with same strike, but different expiry months.
eg. buy Nov 1200 call and sell Dec 1200 call or
buy Oct 1000 put and sell Nov 1000 put

3. Diagonal (diagonal calender) spread
Buying and selling options with different strikes and different expiry months.

In this post I am going to discuss the Vertical spread in detail.

These vertical spreads can be classified into two basic types: bull spreads and bear spreads

In a bull spread the investor buys the lower strike and sells the higher strike. Where as in a bear spread the investor sells the lower strike and buys the higher strike.

Basically the vertical spreads are used to profit from a directional movement in the underlying. However One must use these strategies when they are moderately bullish/bearish on the underlying.

Bull spreads can again be classified into Bull Call spread and Bull Put spread

Bull Call A strategy to be used when an investor is moderately bullish on the underlying, and it is constructed by buying a CALL option with lower strike, and selling a CALL option with higher strike.

Bull Put This is also a strategy to be used when an investor is moderately bullish on the underlying, and is constructed by buying a PUT option lower strike, and selling a PUT option with higher strike.

Below is the summary of the bull spreads..

That’s it for now about Vertical spreads; I shall discuss Horizontal & Diagonal spreads in my next post.

Happy Trading!

Sell SLVSM            July 2009    $13 Put             $1.20

Buy SLVSL            July 2009     $12 Put             $0.80

Net Premium               $0.40 (-Trading Costs)

Maximum Loss            $0.60 ($1 difference in strikes – $0.40 premium received) (+Trading Costs)

Maximum Gain            $0.40 (-Trading Costs)

SLV is trading for        $13.61 at the close on Friday 03/20/09

In order to enter this position the investor will have some beliefs.

          1)  She believes that the underlying security will stay the same or go up.  Depending on the strikes chosen, the underlying security can go down a little and this position will still make money.  That is why this position has the word Bull in the name, it has a bullish bias.

          2)  The investor understands that IF the underlying stock moves counter to the postion, in this case, down, the position can lose 100% of the money invested.  The good thing about a vertical spread, however, is that the options WILL retain some value, up until, expiration.  This means that a 100% loss can be avoided. 

Lets look at an example:

In a previous Trade Idea I suggested a Vertical Spread.  I said to buy a July 2009 $35 Call while selling a July 2009 $55 Call on SRS  (Proshares Ultrashort Real Estate Fund).  Here is the Risk/Reward graph for this position.

The Maximum Loss is $7.80 (+ Trading Costs), and this will occur if SRS is below $35 at the expiration, July 18, 2009.

The Maximum Gain is $12.20 ($20-$7.80) (- Trading Costs), and this will occur if SRS is above $55 at the expiration, July 18, 2009.

If SRS is between $35 and $55 at expiration, July 18, 2009, then the gain/loss will be -$7.80 (the cost of the spread) – $35 (the price that you can buy (call) SRS) + the price of SRS.  Therefore the breakeven point for this position is $42.80 (-$7.80 – $35 + $42.80 = $0) (not including trading costs).

This trade was entered when SRS was trading for $59.44.  This means that if SRS stays the same or goes up OR goes down $4.44 (7.5%) this position will still make the maximum gain.  SRS has to drop to $42.80, a loss of $16.64 (or 28%), for this position to start to lose money.  The 52 week low for this ETF is $48.00.

This position cost us $7.80/share and has an upside potential profit of $12.20/share.  That would be a 256% gain in approximately 6 months.  Which is an approximate 500% APR (Annual Percentage Rate).

One other note on this example:  This position is called a Bull Call Spread, that means that I was “bullish” on SRS.  However, SRS is an “Ultrashort” ETF, which means that it moves up when some index, in this case the real estate fund, goes down.  In essence, this position was a “bearish” position.  I hope I have not confused the situation.

Spreads have many names, but do not let that scare you.  As I said before, half of understanding anything is learning the “language”.  I will attempt to explain them in plain English.

The first Spread that I will explain is the Vertical Spread.

The Vertical Spread consist of buying a Call (or Put) and selling a Call (or Put) with the SAME expiration month, but with DIFFERENT strike prices.  That’s it.  Not very difficult.  This position will have a LIMITED loss potential, as well as, a LIMITED gain potential.  In other words, when you enter the trade you will KNOW the maximum gain and the maximum loss that can occur. 

Sometimes, you will hear of a Credit Spread or a Debit Spread.  A Credit Spread means that you will receive a positive inflow into your account (a credit) when you open the trade.  A Debit Spread means that you will pay (a debit) when you open the trade.

There are essentially four different Vertical Spreads that one can enter, they are:

          1)  The Bull Call Spread

          2)  The Bear Call Spread

          3)  The Bear Put Spread

          4)  The Bull Put Spread

next up - a discussion of the Bull Call Spread

期权组合的盈亏与股价、时间的关系

期权组合的盈亏与股价、隐含波动率的关系

Sell SRSGK            July 2009    55 Call             $22.00

Buy SRSGI            July 2009    45 Call             $25.50

Net Cost                      $3.50(+Trading Costs)

Maximum Loss            $3.50(+Trading Costs)

Maximum Gain            $6.50(-Trading Costs)  (=$10.00-$3.50)

SRS is trading for        $59.44 at the close on Friday 01/16/09

Or

Sell SRSGK            July 2009    55 Call             $22.00

Buy SAKGG            July 2009    35 Call             $29.80

Net Cost                      $7.80(+Trading Costs)

Maximum Loss            $7.80(+Trading Costs)

Maximum Gain            $12.20(-Trading Costs)  (=$20.00-$7.80)

SRS is trading for        $59.44 at the close on Friday 01/16/09

SRS is the Proshares Ultra Short Real Estate ETF.  This fund moves double opposite the Real Estate ETF.  If the Real Estate ETF move Down 10% The Ultra Short Real Estate ETF will move (approximately) UP 20%.

Amgen Inc. (NasdaqNM: AMGN)

• 最新股价： $59.12
• 股价变化： $1.41
• 变化（%）： 2.44%
• 昨天收盘： $57.71
• 今天开盘： $58.08
• 今天交易量： 6,079,656
• 平均交易量： 10,490,000
• 市值： $62,638,876,250
• 每股盈利： $3.76
• 市盈率PE： 15.71
• 在外股数： 1,059,520,930
• beta 比率： 0.47
• 今天最高： $59.14
• 今天最低： $57.71
• 52周最高： $66.51
• 52周最低： $27.00

垂直套利（Vertical）

• 组成
  • 卖出1/17/2009到期的$50Put
  • 买进1/17/2009到期的$47.5Put
• 价格： $0.23 Credit
• 风险： $2.27
• 成本： $2.27
• 利润： $0.23
• Delta： 5.19
• Gamma： -0.72
• Vega： -1.11
• Theta（每天）： 0.88

股价只有10.90 %的概率会低于下方盈亏平衡点–$49.77，这个套利有88.45%的概率可以取得9.80%的月回报率，其中每天可以赚取0.39 %的租金收入。AMGN在2008年12月11日出现一个Bearish Engulfing的图形，在2008年12月10日出现一个DOJI的图形，在2008年12月9日出现一个DOJI的图形。

以ASML举例

• 股票：ASML Holding N.V. (NASDAQ:ASML)
• 股价：17.55美元
• 买进call期权的例子（5个合约） 
  • 期权：买进call期权，买进09年1月17.50元call。
  • 价格：2.35美元 debit
  • 风险：2.35美元
  • 成本：2.35美元（5个合约总成本1175美元）
• 买进call垂直套利的例子（7个合约）
  • 期权：买进call垂直套利，买进09年1月17.5元call，卖出09年1月22.5元call。
  • 价格：1.70美元
  • 风险：1.70美元
  • 成本：1.70美元（7个合约的总成本1190美元）

买进5个合约的call期权，成本1175美元，为了确保总成本相当，买进7个合约的call垂直套利比较。如果股价能在2周内涨到目标20.90美元（ASML出现双低，理论上的目标价是20.90美元），买进call期权可以赚959.29美元，比买进call垂直套利的利润807.58美元要多。那是不是就说明买进call期权要比买进call垂直套利好呢？

实际操作上能准确预测股价在2周内这么短的时间能达到目标价格其实不容易。如果是2个月内呢？比较容易一点。这2个例子在2个月后的回报如何呢？买进call期权可以赚627.34美元，而买进call垂直套利可以赚931.53美元。

所以，除非很确定股价能在1－2周内达到目标价，就可以买进call期权（看涨）或买进put期权（看跌）。买进垂直套利给我们自己更多的时间、更多的盈利机会。

• 股票：PowerShares QQQ (QQQQ)
• 股价：$28.69
• 期权：垂直套利，卖出11月32元calls，买进11月33元calls。
• 价格：$0.25 Credit
• 风险：$0.75
• 成本：$0.75

这是一个看跌的垂直套利，卖出11月32元的calls——预测QQQQ的股价在11月期权到期日前不会涨破32元。QQQQ在11月期权到期日会突破32的概率只有25.34％，就是说这个垂直套利有74.66％的概率可以盈利。而且从技术分析的角度看QQQQ在32元有很多交易量，意味这最近很多投资者的成本在32元的水平。就算QQQQ股价能从现在的28.69元反弹，在32元也会遇到很大的阻力。

由于卖出calls期权的风险在理论上是无限的，实际上成本也很高，所以买进11月33元calls期权作为保险。整个组合的成本是75元／合约，同时，75元也是最大的风险。这个垂直套利不会亏损超过75元／合约。一个合约收取25元（Credit）的期权金是这个垂直套利的最大利润， 回报率是33.33％，从今天到11月期权到期日还有26日，平均月回报率是38.46％。

整个垂直套利的Vega是－0.36，意味这如果隐含波率动率每下跌1％，这个垂直套利的就赚$0.36。QQQQ的隐含波动率最高是98％，一周时间跌到59％，等于14.04元的利润。相对75元的成本就是18.72％的回报率。

在期权交易中不要忽略波动率的影响，Vega是我们衡量波动率对我们盈利的影响。

两个原因，隐含波动率太高了，现在有点高处不胜寒，如果波动 率下跌期权的价格也会下跌，除非我们相信波动率能创新高；第二，高波动率也意味着期权的时间价值更多，期权买家亏损的时间价值也更多，除非我们对股价把握 很准确——包括目标价、时机等。如果简单预测涨跌是不能从中获利的，因为亏损的时间价值太多。

不想亏时间价值就要卖期权，赚期权金与对冲 过高的波动率。但卖出无保护的期权风险太高，成本也太高，我们可以给卖出的期权加一个保险，成为Credit的垂直套利。其实Credit的垂直套利也可 以很进取，只要把卖出的期权的执行价设置成平价期权（ATM）甚至价内期权（ITM）就可以。

我们举一个Home Depot的例子

• 时间：2008年10月9日
• 股票：The Home Depot, Inc (NYSE:HD)
• 股价：$21.17
• 期权：垂直套利，卖出11月20元put，买进11月17.5元put。
• 价格：$0.88 credit
• 风险：$1.62
• 成本：$1.62

这 个垂直套利卖出平价期权20元put，买进17.5元的put做保险。只要股价在11月期权到期日能守住20元，这个垂直套利就可以有54.32%的回报 率（$0.88 / $1.62），平均月回报率37.52%（现在离到期日还有43天）。根据期权定价公式，这个垂直套利有三分之二的概率可以赢。Theta是$0.44， 每天赚$0.44的时间价值；Vega是-0.64，表示利润与隐含波动率负相关，除非波动率继续创新高，否则这个垂直套利就可以从中盈利。

• 股票：BlackRock, Inc. (NYSE:BLK)
• 股价：$203.00
• 策略1，买put
  • 期权：买进09年1月195元put
  • 价格：$20.10 debit
  • 风险：$20.10
  • 成本：$20.10
• 策略二，put垂直套利
  • 期权：垂直套利，买进09年1月195元put，卖出09年1月190元put
  • 价格：$2.10
  • 风险：$2.10
  • 成本：$2.10

如果股价1周内下跌10%，策略一可以盈利$821.09，回报率是40.85%；策略二可盈利$70.41，回报率33.53%。如果股价跌得比较慢，2个月后才跌到10%的水平，策略一可以盈利$274.66，回报率13.66%；策略二可盈利$84.4，回报率40.19%。

由此可见，同样的跌幅，短期操作买put的回报率高一些，而中期操作（两个月）就是put垂直套利的回报率比较好。所以，看跌一只股票时，如果觉得股价会立刻下跌，准备短线操作（几天到几周），就应该选择买put的策略；如果没有信心股价会立刻下跌，或计划中线操作（1-3个月），就因该选择put垂直套利。