Conservative Options Strategy

Due to factors unrelated to trading, my vacation was cut short. (sigh.)

7/1/08 – Market plunges, great start to vacation.

*******
7/2/08 – activities:

SOLD 3 BHI OCT 50/55 @ 4.85
GTC order, cost of spread 3.8, gross profit = 315

******
7/3 – activities:

SOLD 4 EWZ JAN 75/80 @ 3.01
Stock @ 83.76, net LOSS 325
(reduce from 8 to 4 spreads, on increased risk of position)

SOLD 5 MTW JAN 25/30 @ 2.3
Stock at 28, HUGE LOSS 839
(totally a screw-up, my fault for neglecting to scan this position until too late. If I had scanned properly, this loss would have been half of this.)

********
7/7/08 activities:

BUY 5 TEX JAN 35/40 @ 3.5
Stock at 46.97, cost = 5X350 + 7 (comm.) = 1757, expected gross profit 750

SOLD 6 TIE JAN 10/12.5 @ 1.05
Stock at 11.09, net LOSS 459.3
(reduce position on increased risk, from 12 to 6 spreads)

*******
7/8/08 activities:

Hit two GTC orders:

BUY 6 PAAS JAN 20/25 @ 3.85
Expected gross profit 690.
(increased position from 4 to 10 spreads)

SOLD 8 UNG OCT 35/40 @ 4.85
Cost was 3.67, gross profit = 944


******
Today’s activities:

Couldn’t trade yesterday, did the best I could today to take advantage of recent drop in oil prices. Bought stocks today that recently dropped, but that have low P/E ratios. Would have gotten better fills later in the day, too bad.

BUY 4 TRA JAN 30/35 @ 3.6
Stock at 47.28, cost 1440 + 5.6 comm, expected gross profit 560.

BUY 5 DVN JAN 75/80 @ 4.1
Stock at 109.65, cost 2050 + 7 comm, expected gross profit 700

BUY 5 RIG JAN 110/115 @ 4.05
Stock at 147.70, cost 2025 + 7 comm., expected gross profit 475

BUY 3 CVX JAN 80/85 @ 3.85
Stock at 95.80, cost 1155 + 4.2 comm., expected gross profit 3.45

SOLD 3 CVX SEPT 70/75 @ 4.85
Stock at 95.80, net profit = 246.6

BUY 3 TDW OCT 45/50 @ 4.05
expected gross profit 285
(Increase position from 5 to 8 spreads.)

BUY 5 XOM JAN 70/75 @ 3.9
Stock at 86.0, expected gross profit 550
( already had position 5 XOM JAN 75/80 @ 3.7.
Now position is 5 XOM JAN 70/80 @ 7.6, history = -1697)

BUY 4 PCU JAN 75/80 @ 3.7
Stock at 100.15, comm. 5.6, expected gross profit 520


Now I have several concerns, the major concern is I have too many January spreads. I would certainly prefer to have expiration dates spread over a longer period of months. It just seemed to work out this way this year. Last January was very bad and I am concerned about a repeat of that for 2009. So I’ll just watch and react as need be.

Still, overall I’m pleased with the portfolio, several positions are a little worrisome, but not out of control. Liquidation value today was about 200k, not surprising.
 
July 11: activity -


BUY 8 NE DEC 42.5/45 @ 2.0
Stock at 59.15, cost = 1600 + 11.2 comm., expected gross profit 400


***
Portfolio status: (does not include today’s new spread, previous report June 18)

Maximum value of spreads if 100% success = 195440
Present value of spreads = 150555
Amount remaining to be earned = 44885

Average max yield (44885/150555) = 29.8 % (annualized approx. 59.4%)

Max future account value = 247,255

***
P&L SUMMARY (from start of journal, previous june 27)

PROFITABLE TRANSACTIONS: 28 FOR 10806.4
LOSING TRANSACTIONS : 17 FOR 4355.1
Total Profits: 6451.3
***

Journal reference for status: S&P 1230, DOW 11010 , OIL 145 , GOLD 960, NATGAS 11.84
 
God bless for staying on track. This is a very tough strategy right now, a bullish strategy in a very bear market (ie. TEX looks like it is falling of a cliff) The good news is option prices are huge now.
 
Quote from pismo10:

God bless for staying on track. This is a very tough strategy right now, a bullish strategy in a very bear market (ie. TEX looks like it is falling of a cliff) The good news is option prices are huge now.
More...

Thanks for your comment. I've been watching TEX. Recently reduced from 8 to 4 spreads. I'm holding the 4 spread position for now because the fundamentals are sound (P/E around 6), and even technicals are pointing to a rise. Earnings come out July 24, and I haven't decided yet to hold or not. Also, these are Jan spreads so there is lots of time value, and time for many changes.

I've sold most of my losers, as you can see in my trades, and my remaining spreads are here because I'm still OK with them.

So here I am - sitting smack in the depths of a bear market - almost fully invested (90%) - most of my spreads are still DITM. Problem is (aside from wondering if the S&P will drop to 1000) I have no spreads near expiration. And It's going to be a looooong six months till Jan09 when most of my spreads expire.

You mentioned that option prices are high now. True, but spread prices are low compared to may and june.
 
July 15 Activity:

BUY 3 SLB JAN 70/80 @ 7.6
Stock at 97.28, cost = 760*3 + 4.2 comm = 2284.2
Expected gross profit 720

BUY 5 APA JAN 80/85 @ 4.05
Stock at 119.4, cost = 2025 + 7 comm
Expected gross profit 475


********
Busy day today. Oil drops down to 137/barrel and most of my favorite energy stocks go on sale. I bought a lot of spreads today for different accounts that I trade.

For this account, liquidation value is still over 200K. I have two positions that are OTM and worrisome:

6 TIE 10/12.5 - stock at 11.4
4 TEX 45/50 - stock at 43.4

I have another six positions that are still ITM but not as deep as I would like. Otherwise, the portfolio is looking good.

*****

Spread Distribution (# of spreads per expiration month):

Sept 15
Oct 97
Nov 35
Dec 64
Jan 223
Feb 5
---
total number of spreads 439

My distribution is not as bad as I had imagined. I have half my spreads expiring before Jan09, with over 100 spreads expiring in Sept and Oct. So I should be generating more profits starting in about a month. From past experience I expect most of 2008’s spreads to be done by mid-november, then I can close out Jan09 spreads as I wish in Dec. (With an eye out for 2008 tax consequences.)
 
I'm not as afraid as those holding long positions on these stocks.
I'm invested at levels 20% below the longs, that is the whole point of the DITM strategy.

I'm investing in oil and energy stocks at prices as if oil were priced at $80 to $90 per barrel. I have a lot of confidence in the belief that oil is a commodity with diminishing supply in a world market with increasing demand.

I could be wrong of course, but my recent spread purchases are all on energy or comodity related stock with P/E rations below 12. and they are all below their highs when I enter.
 
July 16 activity:

SOLD: 3 GRMN OCT 35/40 @ 3.55
Stock at 46.64, net LOSS 83.40
(exited position on strength today, to exit without much loss. I felt today’s market gain was without legs (I hope I’m wrong!), and don’t feel strong about GRMN’s near term growth. So, I was happy to close this, one of the six most risky positions I mentioned in my post yesterday.)

SOLD: 2 TEX JAN 45/50 @ 2.2
Stock at 46.7, net LOSS 305.6
( took a pretty good hit. Reduced position from 4 to 2 spreads on a very strong day. TEX future looks good so I kept 2 spreads to offset the losses on these two, if things workout. Was not confident to keep all 4 spreads with them ATM. I also still have 5 TEX JAN 35/40 spreads.)

I was still a buyer of DITM spreads today for other accounts, with continued weakness in energy and commodities.
 
July 17 Activity:

BUY 6 CVX 70/75 @ 3.9
Stock at 86.5, expected gross profit 660


Well today was the dreaded day and it has come and gone. Not to say it won’t return tomorrow. All my spreads have been put strongly to the test the last few days. Can’t deny there has been some bruising. Energy, commodities, gold, everything I hold positions on have been on a – what? Landslide, crash, dip, correction, panic ?

On Tuesday I think my liquidation value was around 200k, Wednesday about 195K, and today about 189K. In previous dips I would have spent the day frantically selling all my most risky positions (with significant losses) and replacing them with deeper ITM spreads. This time I’m hanging on a little tighter to the spreads, more reluctant to get rid of risky positions and take losses.

One reason is that more of my spreads are still a long time from expiration and can afford to wait out a temporary market dip (if that is what this is). Other reasons are:
1 convictions that the market is not done with the bear market – so another surge in investing in commodities and energy will occur before my spreads expire,
2 fundamental confidence in the stocks I am in,
3 previously I have watched many of the spreads I sold for losses quickly rebound and end up being golden.

Today I’m preparing a spreadsheet that I’ll post tomorrow showing all my spreads, compared to present values of the stocks, and a quick risk (high or low) assessment of each spread position. From time to time through (what I consider) a crisis period, I will update the spreadsheet with more daily prices, in order to see how my decisions worked out on a stock by stock basis. I have never kept these records before and hope to find them useful in my future trading.

So far I’m concerned but far from frantic. Tomorrow is sometimes squirrelly as options expire. Should be interesting.

BTW - All the buying I've been doing is not because I thought a bottom was in place on the stocks I got into, but more that I know I can't find a bottom, but I damn sure know I paid less than I would have if I had bought before. That has to be good enough cause it don't get better.
 
Attached is the excel file showing my spread positions.
I can also look at the positions relative to current stock prices, so I can judge the relative safety of my position.

By way of explanation, here is the first two spread positions for AEM:

4 AEM NOV 45/55
5 AEM JAN 40/45

Thursdays price was 69.46 and today’s closing price was 69.83. Since the 55 call is the highest, the positions are good unless the stock drops below 55 at expiration. I consider this a low risk position at the present stock price.

All the other positions on the spread sheet can be judged in a similar manner.


stock, expiration, strike, call/put, # spreads, price7/17, risk level, price7/18.


AEM Nov-08 45 C 4
AEM Nov-08 55 C -4 69.46, lo, 69.93
AEM Jan-09 40 C 5
AEM Jan-09 45 C -5 lo
 
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