Conservative Options Trades

jimmyjazz said:
Why only a $40 credit? optionsXpress is reporting NBBO of $0.35/$0.85. In my experience, they usually fill pretty close to the middle ($60). This obviously raises the expected profit.
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At a $60 credit, I see the math as

(-240)*.0908 + 60*.8122 + (-90)*.097 = -21.79 + 48.73 - 8.73 = 18.21


which is an expected profit, as opposed to an expected loss at a $40 credit. I'd calculate the return as 18.21/240 = 7.59% (or roughly 13% annualized).


(Apologies if you've already covered your rationale for defining the size of the credit. It's a long thread. :) )
 
 
JJ: Yes more is better. If and when I submit an order I will try to get more... but the $40 gives me a (more or less) breakeven expectation (based on the probability distribution of past prices) and is thus looked on as minimum. That's why I call them 'conservative' option trades.

In these trades I am always looking at the rationale of the opposition and why he is pricing as he is. If I see a trade does it mean I see something he doesn't? Hmmmm.

Also I am wary of the market being over-extended and thus am less optimistic on bullish trades right now.
 
RL:

http://finance.yahoo.com/news/bear-day-ralph-lauren-rl-050020646.html

http://www.bloombergview.com/articles/2014-05-16/ralph-lauren-s-fading-fantasy?cmpid=yhoo

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

http://finance.yahoo.com/news/ralph-lauren-sees-2015-revenues-121905060.html

http://finance.yahoo.com/q/bc?s=RL&t=2y&l=on&z=l&q=l&c=

I do not think RL will see 180 again for a while.

Trade:
With RL at 152.45
Jan '15 180/185 bear call spread for a net credit of $45
Yield = 45/455 = 9.9% in 217 days or 16.6% annualized
Prob = 90%
Expectation = .9(45) - .067(455) - .033(228) = 40.5 - 30.5 - 7.5 = +2.5
Bid/ask on the spread is .40/.75 ... so if I can get better than .45 it will be a better trade.
:-)

Price.................Profit / Loss...........ROM %
125.00................ 45.00................ 9.00%
152.45................ 45.00................ 9.00%
175.00................ 45.00................ 9.00%
180.00................ 45.00................ 9.00%
180.45.................. 0.00................ 0.00%
184.01............. (356.30)............ -71.26%
185.00............. (455.00)............ -91.00%
200.00............. (455.00)............ -91.00%
225.00............. (455.00)............ -91.00%
 
HSBC:

How about a London bank?

http://finance.yahoo.com/q/pr?s=HSBC+Profile

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

http://investing.money.msn.com/investments/financial-statements?symbol=HSBC

http://www.fool.co.uk/investing/201...fit-with-little-risk/?source=uptyholnk3030001

http://finance.yahoo.com/news/hsbc-first-quarter-profits-fall-095105347.html

http://www.fool.co.uk/investing/201...-profit-is-good-news/?source=uptyholnk3030001

http://finance.yahoo.com/q/bc?s=HSBC&t=my&l=on&z=l&q=l&c=

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

http://finance.yahoo.com/q/bc?t=5y&s=HSBC&l=off&z=l&q=l&c=&ql=1

Trade:
With HSBC at 52.21
Jan '16 40/35 bull put spread for a net credit of $68
Yield = 68/432 = 15.7% in 578 days or 9.9% annualized.
Prob = 90%
Expectation = .9(68) - .03(432) -.07(216) = 61.2 - 13 - 15 = 33.2
Expected yield = 33.2/432 = 7.7% in 578 days or 4.8% annualized

(HSBC yields 3.8% in dividends... but without the $12.21 buffer that this trade offers. The disadvantage of this trade over holding the stock is what you may lose if you need to bail out early. This trade is a substitute for a long term investment in HSBC for income purposes )
 
gis-paris-liberation-082944jpg-d82cdd9335d1db3d_large.jpg


Yesterday was flag day.

:-)

It made me think of the first time I was in Paris and the first time I ever realized what an important role my father and his contemporaries played in saving the word from Nazi Germany.

The above photo is captioned '28th Infantry Division march along the Champs Elysees, the Arc de Triomphe in the background, on Aug. 29, 1944'.

On that date I was 1 year old.

When I went to Paris for the first time in the early sixties I first saw this picture hanging in a hotel bar on the Champs Elysees, and was very surprised at how much the French loved Americans. Anyone there who remembered and spoke of those times couldn't refrain from kissing me.

:-)

http://www.youtube.com/watch?v=wpZ3jPMM5Ac
 
COV:

http://dealbook.nytimes.com/2014/06...hp=true&_type=blogs&partner=yahoofinance&_r=0

http://www.thestreet.com/story/1274...e-year-high-today.html?puc=yahoo&cm_ven=YAHOO

http://dealbook.nytimes.com/2014/06/16/a-merger-in-a-race-with-congress/?partner=yahoofinance

http://blogs.wsj.com/moneybeat/2014...club-on-medtronic-covidien-deal/?mod=yahoo_hs

http://stockcharts.com/h-sc/ui?s=MDT

http://stockcharts.com/h-sc/ui?s=cov

Trade:
Jan '16 75/70 bull put spread for a net credit of $80
Yield = 80/420 = 19.05% in 260 days or 27% annualized

This is a trade where expectations based on the distribution of previous plays no role whatsoever. The real question is what is the probability that the deal will actually take place.

Based on information in the financial press I estimate the probability at 85%

Expectation = .85(80) - .15(420) = 68 - 63 = 5

Positive but no great shakes.
 
 
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