Conservative Options Trades

 
WMT:
http://online.barrons.com/article/SB50001424053111903882904577474580851310156.html?mod=BOL_hpp_dc

WMT at 67.30

Trade:
Jan '14 47.50/45 bull put spread for $25
Yield = 25/225 = 11.1% in 573 days or 7.1% annualized
Prob = 97%
Expectation = .97(25) - .015(225) - .015(112) = 24.25 - 3.375 - 1.68 = 19.2
Expected Yield = 19.2/225 = 8.5% in 573 days or 5.4% annualized

Trade:
Jan '13 55/52.50 bull put spread for $15
Yield = 15/235 = 6.4% in 209 days or 11.2% annualized
Prob = 96%
Expectation = .96(15) - .02(235) - .02(117) = 14.4 - 4.7 - 2.34 = 7.36
Expected Yield = 7.36/235 = 3.1% in 209 days or 5.5% annualized

Statistically the same trade a year apart
 
Trade:
Sept 45/40 bull put spread for $20
Yield = 20/480 = 4.2% in 92 days or 16.5% annualized
Prob = 95%
Expectation = .95(20) - .01(480) - .04(240) = 19 - 4.8 - 9.6 = 4.6
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Hi Dan

I've been puzzlling over your 5 pt. spreads with 95%
probability outcomes. I must be missing something in the calculations or i'm not doing them correctly
ie. UNH
A $20 return@100 trades yields $1900 (95 winners)
A $480 loss in 5 trades (5%prob. ) cost ($2400)
Loss woud be $500 with the 5 losing Trades?

My conclusion would be that 5 pt. spreads have a greater risk than your 2or2.5 spreads
Am i correct in this conclusion?
Thanks
john
 
<<< I've been puzzlling over your 5 pt. spreads with 95%
probability outcomes. >>>


Personally, I think statistical "probability outcomes" are somewhat meaningless.
Such outcomes should be based more on common sense than a generic math formula.
While the formula may be helpful in getting some vague general fluctuating idea, at that particular moment in time, common sense should have already given you a general idea of the likelihood of success.
If not, you probably should not be doing the trade.
Whether the numbers calculate out to 77% or 93% chance of success is less relevant than my own analysis.

For example, assume all variables are the same on a 6 week naked put or credit spread, including 2 stocks that are both 13% otm.
But one is trading no where near any kind of tech support, and the other is once again trading at it's multi tested level of tech support, per the 1 - 2 year chart.
Given a limited bankroll, which trade would you rather initiate.
I'd make the decision based on analysis and common sense, and pick the one at multi tested tech support,... not a coin toss of statistical probabily, based on where the stock happens to be trading at that moment in time.

I'd also base it on a few basic fundamental criteria pertaining to the companies financial health. While such issues may not be very relevant in the world of option trading, I look at those criteria to evaluate whether a stock has the "potential to recover", if a bad market takes it down.
I'm less inclined to panic sell, if i know I have not invested my cash in an over valued, DEBT LOADED piece of crap..... regardless of how limited the loss may be.

% probability outcome formula's, can give investors a false sense of confidence.
Nor do they speak to the likelihood of the stock recovering in a reasonable period of time, if a bad market suddenly takes it down.
Initiating a trade based on a generic statistical outcome formula, is a "lazy and risky" substitute for thoughtful analysis and common sense.

Those 95% probability outcome formulas really are meaningless.
Better to go with 96%.
<< g>>
 
 
 
 
CE:
Someone on another thread is selling naked puts on CE for AUG.

I'll look at CE as I ordinarily would and see what I get:

http://www.cnbc.com/id/47861099?__source=yahoo|headline|quote|text|&par=yahoo
I don't rule out a stock just because Cramer recommends it... some people do.
http://finance.yahoo.com/q/pr?s=CE+Profile
http://finance.yahoo.com/q/ks?s=CE+Key+Statistics
(note beta = 1.91)
http://investing.money.msn.com/investments/financial-statements?symbol=CE
(note loss in 2004)
http://finance.yahoo.com/q/bc?s=CE&t=5y&l=off&z=l&q=l&c=^GSPC
(consistant with Beta)
http://finance.yahoo.com/q/bc?t=5y&s=CE&l=off&z=l&q=l&c=&ql=1

Trade:
Dec 22.50/20 bull put spread for $25
Yield = 25/225 = 11.1% in 178 days or 22.8% annualized
Prob = 92%
Expectation = .92(25) - .035(225) - .045(112) = 23 - 7.9 - 5.04 = 10.06

Positive expectation... but the stock has too high a beta for me to actually trade, and it looks like I might have a problem getting the 25 when only 20 is offered.
At 20 my expectation would be 5.15 or half what it is if I get the 25. I need the 25 for safety reasons.
 
Actually I used to work as a bench chemist for a company much like CE... Rohm and Haas ... which was bought by Dow Chemical in 2009.

A difficult and sometimes dangerous business. I remember the day I came back from lunch and my whole lab was blown out into the stairway. One of my co-workers miscalculated the proportions on an analysis.

POOF

Luckily he wasn't killed.
 
 
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