Conservative Options Trades

I don't remember IB having probability but they might... I don't use them very frequently so I don't know.

There are a number of free software packages that include probability... I think OptionsOracle gives you probability. At one time or another I have compared the different probabilities from different sources and they all come out to be about the same.

Expectation:
http://en.wikipedia.org/wiki/Expected_value

I use a three point expectation estimate:

point one: complete success
point two: complete failure
point three: halfway between the other two (on the outcome axis)

(I hope this doesn't engender an endless discussion from the local boardies)
 
 
PFE:
Pfizer is the world's largest pharmaceutical company with yearly revenues around 68 billion dollars.
http://finance.yahoo.com/q/ks?s=PFE+Key+Statistics
http://topforeignstocks.com/2011/08/13/the-worlds-50-largest-pharmaceutical-companies-by-sales/

Over the past 5 years the market has not treated PFE stock all that well, not nearly as well as it has fellow Pharma BAX for example.

http://finance.yahoo.com/q/bc?t=5y&s=PFE&l=off&z=l&q=l&c=BAX&c=^DJI

Still PFE is a stable, relatively recession resistant company.
http://moneycentral.msn.com/investo...ment=10YearSummary&symbol=US:PFE&stmtView=Qtr

PFE yeterday received a landmark approval from the FDA for a genetic based lung cancer drug:
http://finance.yahoo.com/news/FDA-approves-genetargeting-apf-1715349750.html?x=0
http://en.wikipedia.org/wiki/Lung_cancer
http://www.onclive.com/conference-c...ing-Delivers-Personalized-Lung-Cancer-Therapy

I may add PFE to my portfolio of conservative option trades:
http://finance.yahoo.com/q/bc?t=5y&s=PFE&l=off&z=l&q=l&c=
Sell the Jan '12 12.50 put and buy the Jan '12 10.00 put for a net credit of $12
Yield = 12/238 = 5.0% in 147 days or 12.5% annualized.
Prob = 94.7%
Expectation = .947(12) - .005(238) - .05(119) =11.4 - 1.2 - 5.95 = 4.25

A positive expectation.
 
BAC:
A Buffett inspired trade:
http://dealbook.nytimes.com/2011/08/25/buffett-to-invest-5-billion-in-bank-of-america/
http://seekingalpha.com/article/289908-warren-buffett-s-bank-of-america-deal

http://finance.yahoo.com/q/bc?s=BAC&t=6m&l=off&z=l&q=l&c=
My usual ultraconservative trade would be a bull put spread:
Trade1:
Sell the Jan '12 $4 put and buy the Jan '12 2.5 put for a net credit of $16
Yield = 16/134 = 11.9% in 146 days or 29.8% annualized
A more adventurous trade would be a higher up bull call spread:
Trade2:
Buy the Jan '12 4 call and sell the Jan '12 7.5 call for a net debit of $256
Yield = 94/256 = 37% in 146 days or 92% annualized
..................................... P/L Table
................Trade1................... Trade2...........Prob>
2..............(134).......................(256).............98%
3...............(78)........................(256).............91%
4................16..........................(256)............80%
5................16..........................(153)............67%
6................16...........................(51).............55%
7................16........................... 50...............45%
8................16............................94...............35%
9................16............................94...............28%
10..............16............................94...............23%
11..............16............................94...............18%
 
SO:
A 'safe' utility in which to park cash. The stock yields 4.6% in dividends. A covered call will yield about another 2% annualized.
"Southern Co. (SO) is an Atlanta-based regulated electric utility firm, and is one of the largest utilities in the US, serving customers in municipalities in Alabama, Florida, Georgia, Mississippi, and the Carolinas. SO also is also moving into nuclear energy, via its subsidiary Southern Nuclear, with three nuclear generating plants in Alabama and Georgia;In addition, SO owns SouthernLINC Wireless, a communications network with a 127,000 square-mile coverage area in the Southeast; and Southern Telecom, a fiber optic wholesaler in the Southeast."
http://seekingalpha.com/article/289...hese-3-defensive-dividend-stocks?source=yahoo
SO correlated less than .5 with SPY:
http://seekingalpha.com/article/288709-the-best-electric-utilities-for-diversification?source=yahoo
http://finance.yahoo.com/q/bc?t=5y&s=SO&l=on&z=l&q=l&c=&c=^DJI

http://finance.yahoo.com/q/bc?s=SO&t=5y&l=on&z=l&q=l&c=
http://finance.yahoo.com/q/ks?s=SO+Key+Statistics
http://moneycentral.msn.com/investo...ement=10YearSummary&symbol=US:SO&stmtView=Qtr
http://finance.yahoo.com/q/is?s=SO
Trade:
Sell the Jan '13 30 put and buy the Jan 13 25 put for a net credit of $50
Yield = 50/450 = 11% in 506 days or 8% annualized
Prob = 91.8%
Expectation = .918(50) - .014(450) - .068(225) =45.9 - 6.3 - 15.3 = 24.3
(bid ask is .45/.59)
 
To balance bullish stock spreads:
TLT:
Sell the Jan '12 90 put and buy the Jan '12 85 put for a net credit of $48
Yield = 48/452 =10.6% in 142 days or 27% annualized
Prob = 88%
Expectation = .88(48) - .06(452) - .06(226) = 42.2 - 27.1 - 13.5 = 1.6
 
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