I have reviewed the situation with GIS and have come to the same conslusion.... I will put on the Jan 2011 50/45::80/85 IC . It's a good trade. This is what I conlcuded before and it is that trade that produced such a big brawl.
It was probably my fault because I did not really explain how I got there. It's a little complex:
1. Look at the GIS 2 year chart:
http://finance.yahoo.com/q/bc?s=GIS&t=2y&l=on&z=m&q=l&c=
At the depth of the March drawdown GIS went as low as $50.00. If we get a 'W' recovery we may have to withstand that decline again. So I want to place a trade that will be successful even if GIS goes down to $50.00
2. What kind of trade would that be?
Well I could sell a 50 strike put. Lets see if that's feasable:
Of course the Nov 50 put is no bid. There is no Dec 50 put, the Jan is bid at .05, the April is bid at .25 and the Jan 2011 is bid at 1.30.
If I have a cash account I will require cash margin to completely cover the strike. Thus the yield on the April short put is 25/4075 = .6% in 168 days or 1.3% annualized. Not worth the trade. The yield on the Jan 2011 is 130/4870 = 2.6% in 448 days or 2.0% annualized. Worse.
If I turn the short put into a bull put spread by buying the 45 strike the numbers get better: November, December and January are still a wash, but April Yields 2.45% or 5.1% annualized and Jan 2011 yields 9.48% in 448 days or 7.6% annualized. That's beginning to look worthwhile. If I check my probabilities table the random variable probabiliy of GIS being above 50 on expiration in Jan 2011 is 91%, and the random varable calculation does not take into account the effect of a long term support level there.
So, for me at this point this is an anemic but acceptable trade.
3. When faced with an anemic but acceptable trade I immediately check to see if I can enrich it. For example I could turn the whole thing into an Iron Condor buy adding a bear call spread, as long as I don't compromise the probabilities too much.
The bid on the jan 2011 80 call is 1.30 and the random variable probabiity of GIS staying below 80 until then is 78%... not quite 91 but again it does not account for the high resistance at 70 and frankly I don't think GIS has any chance of getting near 80. If I do the 50/45::80/85 IC my yield is 19.05% or 15.3% annualized, which is a little low, but not too bad for my conservative option portfolio.
5. So on Monday I will put on that trade for GIS... and I will watch that 80 strike.
