Conservative Options Trades

TSLA:
http://finance.yahoo.com/news/tesla-shares-drop-3q-falls-215536737.html

http://finance.yahoo.com/news/tesla-falls-most-2-years-211548490.html

http://www.mercurynews.com/business...unge-battery-shortage-heavy-research-spending

http://blogs.barrons.com/stockstowa...alysts-not-so-much/?mod=yahoobarrons&ru=yahoo


http://www.usatoday.com/story/money...tock-price-rebound-earnings-analysts/3451893/

http://www.cnbc.com/id/101177151?__...hoo&doc=101177151%7cWhat+went+wrong+with+Tesl

http://www.fool.com/investing/gener...ings-3-crucial-elon-musk-comments-from-t.aspx

http://finance.yahoo.com/q/ks?s=TSLA+Key+Statistics

http://finance.yahoo.com/q/bc?s=TSLA&t=1y&l=off&z=l&q=l&c=

Trade:
With TSLA at 151.16

Sell the Jan 2014 100 put and buy the Jan 2014 75 put for a net credit of $93.00
Yield above $100 = 93/2407 = 3.9% in 56 days or 25.2% annualized
or
Sell the Jan 2014 100 put for $139
Yield above $100 = 139/9861 = 1.4% in 56 days or 9.2% annualized
.....................Spread........Short Put
Price................P/L..............P/L
160.................$93.............$139
150.................$93.............$139
140.................$93.............$139
130.................$93.............$139
120.................$93.............$139
110.................$93.............$139
100.................$93.............$139
99.07................0
98.61....................................0
90................($907)...........($861)
80...............($1907).........($1861)
75...............($2407).........($2361)
70...............($2407).........($2861)
60...............($2407).........($3861)

Buy TSLA at $100
 
 
Part 1 of 3

Is the market overvalued or not??

Back on 4/27/2011 CBS interviewed Marten Schiller and Jeremy Siegal, both highly regarded economists, on the valuation issue.

http://live.wsj.com/video/the-marke...ed/9CD89413-D734-401F-BE9D-2317049CAF8D.html#!9CD89413-D734-401F-BE9D-2317049CAF8D

Shiller said he would be cautious because stock prices are getting pretty high, while Siegal said everything was fine: Party on.

http://www.youtube.com/watch?v=1iwC2QljLn4

Since that time two things have happened:

1. The market has advanced another 50%

http://finance.yahoo.com/q/bc?s=SPY&t=5y&l=on&z=l&q=l&c=

2. Shiller was awarded the Nobel prize in economics for his work in market valuation.

http://www.nytimes.com/2013/10/20/business/robert-shiller-a-skeptic-and-a-nobel-winner.html?_r=0


Both of these events have put increasing attention on the valuation issue. With the S&P 500 hitting new record intraday highs on a regular basis, investors are getting nervous and eventually what has come up will come down. When, how far and how fast we don't know.

How to deal with this recurring problem has always been an issue.

Bail out? Go short? Buy some puts? Sell Calls? What is the best route?
 
Part 2 of 3

Given that the market is overvalued how do we best proceed to hedge our long positions and/or benefit from the overvaluation??

There are 3 major strategies that I will explore and compare to deal with market overvaluation:
Short the market
Buy SPY Puts
Sell SPY Calls

1: Short the market
In this comparison we will short SPY as a proxy for the market as a whole.

Buy SPY Puts
In this comparison we will test :
......2: buying puts outright and
......3: initiating a bear put spread.

Sell SPY Calls
In this comparison we will test:
......4: Selling calls naked and
......5: Initiating a bear call spread

Trades:
With SPY at 174.93 and using closing prices on Friday we will test the following trades:
1. Short 100 shares of SPY for an initial debit of $26,240 (Reg T)
2. Buy one Jan '15 185 put for $1,834
3. Initiate one Jan '15 185/180 bear put spread for a net outlay of $301
4. Sell one Jan '15 180 Call for an outlay of $4,181 (margin cost)
5. Initiate one Jan '15 180/185 bear call spread for a net outlay of $290

Trade.........1............2.............3.............4...............5
Cost:.....26,240......1,834........301.........4,181.........290
Price................................P/L.......................................
200.......(2507)......(1834).....(301)........(1180).......(290)
190.......(1507)......(1834).....(301).........(157)........(290)
180........(507).......(1396)......199............903..........210
170.........493.........(403).......199............903..........210
160........1493.........589.........199............903..........210
150........2493........1582........199............903..........210
140........3493........2575........199............903..........210
 
3 of 3

The same table in percentages:

Percentage Table
Trade.........1.............2...............3.................4................5
Cost:.....26,240......1,834..........301.............4,181...........290
Price................................P/L................................................
200.......(9.6%)......(100%).....(100%).........(28%)..........(100%)
190.......(5.7%)......(100%).....(100%).........(3.8%).........(100%)
180........(1.9%).....(76%)..........66%............22%.............72%
170.........1.9%.......(22%)..........66%............22%.............72%
160.........5.7%........32%............66%............22%.............72%
150.........9.5%........86%............66%............22%.............72%
140........13.3%......140%............66%............22%.............72%

The highest percentage return is obtained with trade #2: A single long put.

The lowest loss and smallest initial cost is with trade #5: A bear call spread

Ignoring commissions one could get the best dollar performance by using multiples of the bear call spread.

e.g. one could buy 86 of the bear call spreads for $25,000 (roughly the original cost of the short stock) and get a yield of 86(210) = $18,000....and putting the entire $25,000 at substantial risk of complete loss.

A rational portfolio should combine elements with different outcomes.

:-)
 
 
 
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