Conservative Options Trades

F:
http://seekingalpha.com/article/291098-ford-a-buy-on-auto-demand-alone?source=yahoo
http://finance.yahoo.com/news/Ford-Motor-Companys-August-prnews-148874982.html?x=0&.v=1
http://finance.yahoo.com/q/ks?s=F+Key+Statistics
http://finance.yahoo.com/q/bc?s=F&t=2y&l=on&z=l&q=l&c=

Trade:
Sell the Jan '2013 7.50 put and buy the Jan '2013 5.00 put for a net credit of $45.
Yield = 45/205 = 21.9% in 505 days or 15.9% annualized.
Prob = 68%
Expectation = .68(45) - .1(205) - .22(103) = 30.6 - 20.5 - 22.7 = -12.1

From a purely statistical point of view a bad bet. If I am convinced that F is going to do better in the future and the past distribution of prices will be superceeded by a rise in average price then the trade would be justified... but then if I believe that I should just go long F and wait... or maybe buy leap calls.
 
Great job Dan! Your approach is unique. Was it something you developed on your own? Any references that inspired you. I would understand if you were to decide not to answer-- It is your right, and I will not take it in a negative way at all.

You are right that there can be some strange people (even if the majority are good people). I started a journal, got harassed so I just left it. There are guys still following me ever since, and I do not even answer them, but they still continue including with their insults.

I wish you well!
 
Yes it is a shame that this resource is so badly spoiled by a few angry, assultive people. I wonder how they have so much time to kill.

I would not be able to use this board at all if it did not have such a good ignore function. I currently have about 8 people on my ignore list and it makes the board seem quite civil to me.

As for my approach I mostly sell credit spreads. I think of it as selling insurance and then laying off most of the risk by buying re-insurance. The only trick is getting an adequate profit out of the spread relative to the probabilities so that each trade has a statistical expectancy that is greater than zero.

http://www.investopedia.com/terms/r/reinsurance.asp#axzz1Wq9mrxrA
http://www.insurancefreefaq.com/insurance/25163-insurancefreefaq.html
 
Dan, Thanks for answering. One of the things I noticed about your unique understanding of spreads is the notion that an annualized return might actually be obtained with spread with higher expiry time, as opposite to the "conventional" view of repeated selling of shorter term spreads. When I noticed that insight, I knew you were an original thinker, and an experienced and thoughtful person.

I assume that selling across multiple instruments is another way for you to reduce risk. I was also wondering if you have used your approach across less correlated instruments, so that you reduce the risk even further (such as in commodities/currencies/etc).

The last poingt I was wondering about is the cost of commission and bid-ask spreads impact on the returns of a spread business.

Thanks again for reading and answering, and my best wishes to you!
 
CPB:
Many years ago I was working in Philadelphia for a large Pharma company and became disgusted with the exhausting corporate culture. To escape that culture I took a job with the disaster that is the County of Camden in NJ... just across the bridge. There is no doubt that the year I spent as a Camden County employee was different. e.g. in 2004 Camden was named the nation's most dangerous city...superceeding Detroit.

http://www.msnbc.msn.com/id/6555449...courts/t/camden-nj-named-most-dangerous-city/

One of the things I became aware of while in Camden was how important to the poor people who live there was the Cambell Soup company. Cambell's was almost the only source of jobs... and still is.

http://www.indeed.com/q-Campbell-Soup-Company-l-Camden,-NJ-jobs.html

On Friday CPB reported quarterly profits that exceeded predictions:

http://finance.yahoo.com/news/Campbell-Soup-adjusted-profit-apf-2138385657.html?x=0&.v=10

Cambells has been trying to overcome years of declining consumption of canned soup and increasing competition. Its chart is none too encouraging:
http://finance.yahoo.com/q/bc?s=CPB&t=2y&l=on&z=l&q=l&c=

I have looked and looked for a profitable trade but despite it's iconic place in the american psyche

http://en.wikipedia.org/wiki/Campbell's_Soup_Cans

The best I can do in a trade is:

Sell the Jan '12 30 put and buy the Jan '12 25 put for a net credit of $80.
Prob = 62%
Expectation = .62(80) - .05(420) -.33(210) = 49.6 -21 - 69.3 = -41

With a negative expectation this has to be considered a poor investment.
 
Tradingjournals:
I do try to make a portfolio of non-correlated holdings. Unfortunately I am often frustrated by the fees at OptionsXpress and have passed on many a trade because the commission takes up too high a percentage of my profits.

The comissions at IB are seemingly less but have a way of sneaking up on you if you try to trade volume.

Another problem, of course, is that many of my trades are with less liquid species which have a wide bid/ask spread and I sometimes have to stake out a trade for quite a while to get an execution at my required price point.
 
Cintinuing the theme on WMT,TGT etc:
TGT:
http://finance.yahoo.com/q/bc?t=5y&s=TGT&l=on&z=l&q=l&c=
trade:
Sell the Jan '12 35 put and buy the Jan '12 30 put for a net credit of $25
Yield = 25/475 = 5.3% in 138 days or 13.9% annualized.
Prob = 96%
Expectation = .96(25) - .01(475) - .03(237) = 23.75 - 4.75 - 7.11 = 11.89
I much prefer WMT for the following reason:
http://finance.yahoo.com/q/bc?t=5y&s=TGT&l=on&z=l&q=l&c=WMT

WAG:
http://finance.yahoo.com/q/bc?t=5y&s=WAG&l=on&z=l&q=l&c=
Sell the Jan '12 25 put and buy the Jan '12 20 put for a net credit of $28
Yield = 28/472 = 5.9% in 138 days or 15.6% annualized.
Prob = 93%
Expectation = .93(28) - .01(472) - .06(236) = 26.04 - 4.72 - 14.16 = 7.16
Looking at WMT vs WAG:
http://finance.yahoo.com/q/bc?t=5y&s=WAG&l=on&z=l&q=l&c=WMT
and WAG vs TGT:
http://finance.yahoo.com/q/bc?t=5y&s=WAG&l=on&z=l&q=l&c=TGT

WMT and TGT are highly correlated while WMT is not correlated to the other two.
 
HON:
http://finance.yahoo.com/news/Honeywell-wins-450-million-apf-578890909.html?x=0&.v=1
http://investing.money.msn.com/investments/financial-statements?symbol=US:HON
http://finance.yahoo.com/q/pr?s=HON+Profile
http://finance.yahoo.com/q/ks?s=HON+Key+Statistics
http://finance.yahoo.com/q/bc?s=HON&t=5y&l=off&z=l&q=l&c=
Trade:
With HON at 47 or above:
Sell the Jan '12 30 put and buy the Jan '12 25 put for a net credit of $22.
Yield = 22/478 = 4.6% in 134 days or 12.5% annualized.
Prob = 95%
Expectation = .95(22) - .01(478) - .04(239) = 20.9 - 4.78 - 9.56 = 6.56
 
DRI:
http://finance.yahoo.com/news/Ahead-of-the-Bell-Darden-apf-1504799627.html?x=0
http://investing.money.msn.com/investments/financial-statements?symbol=US:DRI
http://finance.yahoo.com/q/bc?s=DRI&t=5y&l=off&z=l&q=l&c=
http://finance.yahoo.com/q/bc?s=DRI&t=5d&l=off&z=l&q=l&c=
http://finance.yahoo.com/q/bc?s=DRI&t=1d&l=off&z=l&q=l&c=
Trade:
On speculation that recent selloff is over and with DRI at 45 or above
Sell the Jan '12 30 put and buy the Jan '12 25 put for a net credit of $30.
Yield = 30/470 = 6.38% in 134 days or 17.4% annualized.
Prob = 94%
Expectation = .94(30) - .01(470) - .05(235) = 28.2 - 4.7 - 11.75 = 11.75
 
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