ETFC triple play

N

newguy05

ETFC (etrade)

Analysis:

Risk/nagatives:
- real risk of bankruptcy
- complex balance sheet making it difficult to find true writedown numbers linked to mortgage melt
- technical is par at best, with ma10 still below ema20,30 just levelling off slightly and cmf > -0.2 but looks like it found support at ~$3.5 and volume is dieing down from the current downtrend.

Good:
- Current price already baked in many nagative factors and then some.
- Citadel 2.5 billion infusion, the good part is citadel isnt really protected against etrade bankruptcy either, so they are taking a big risk and truely believe in etrade to turn around.
- Panic account closings are under control and died down.
- Etrade still holds ~4+ million accounts which contains a lot of moms/pops accounts, bailout will most likely occur before bankruptcy.
- As long as Jan earning report isnt complete devastation, this stock should bounce back to $5.

In the long run (mid/end of 2008) i strongly believe etrade will come back.


The triple play (using 10 contracts)

1) July 5/3 put spread: the July timeframe actually give us an advantage in this case as it will take etrade some time to bounce back.

Sell -10 ETFC JUL 2008 5 Put (.EUSSA)
Buy 10 ETFC JUL 2008 3 Put (.EUSSG)
Max Gain: $1200
Max Risk: -$700 (stock drops to $0)

2) Using the $1200 net to buy 300 underlying shares.
Max Risk: -$1200

At this point, you are have 10 contract of 5/3 put spread, and 300 shares of underlying with a max risk of $1900.

3) Start selling month over month covered calls on the underlying to reduce your cost basis (but i would wait until after jan earning to start)

I like this play because of its limited downside risk and huge upside potential. What do you guys think?
 
Interesting to see this post because I just put on a position on ETFC. I kept it simple though and bought 2010 $5 calls and shorted April $5 calls. The specter of bankruptcy is keeping me from risking too much here. This situation reminds me of a trade I did on NWA right before it declared bankruptcy. I shorted calls 3 mos out, shorted puts 1 year out and used the $ taken in to buy stock. The stock dropped from $3 to .30 and the calls expired worthless. The stock then popped to $7 on some news and the puts expired worthless and I sold the stock at a profit. However a couple of months later the stock was at zero at my puts would have been in the money.

Just food for thought.
 
I guess my point on my post was that in hindsight, I lucked out buying the stock and having it pop shortly before it went to zero because the company decided to issue new stock when they came out of reorganization. I would probably be content with the profit from the put spread and leave the stock alone. If you are afraid of missing a big run up, you can buy some LEAPS for less $ than the stock.
 
Quote from optioncoach:

I do not know the stock´s current price but be aware of early assignment if you are selling puts that are ITM.
More...

that's a good point i need to ask my broker what will happen when early assignment occurs, will they be smart enough to offer me the choice to buy the stock at 5 then immediately sell it at market value and paying only the difference. Or will it be a manual process of me having enough cash to pay $5 for all the contracts first, then manually sell them at market. If so, i am going to need time to transfer additional cash to the brokerage account.

Etfc doesnt pay dividend, so hopefully this wont occur.

chrismontez, that got me thinking if instead of buying 300 shares at step 2, i could buy 3 2010 call contracts instead and reduce some more downside risk.

I guess this goes back to the question if you bought 2010 call, and sell month to month calls, is that still considered selling covered calls?
 
It's a covered call when you are long the stock and sell calls against it. If you are long Jan $5 2010 calls and short $5 2008 calls, the position is called a calendar spread, no margin required. If the long 2010 calls are at a lower strike price than the short calls, it is debit spread and no margin is required. If say you are long Jan $5 2010 calls and sell July $3 2008 calls, that is a credit spread and margin is required ( pretty low in this case). If you are short ITM puts, it is always a good idea to check and make sure the still have time value attached to them. When they lose that, early exercise is more likely.
 
If I see 1 more E-Trade thread Im going to flip. I've had it.

WHAT VALUE DOES E-TRADE HOLD?! THEY ALMOST BROUGHT THE COMPANY UNDER, REDUCED THEIR ASSETS BY IM NOT SURE HOW MANY BILLION..

You guys act like there's nothing wrong.

Right.....said the same thing about AHM and NEW.

Comon guys.

Get real. Start playing stuff with some potential value.
 
Quote from athlonmank8:

PS. Covered calls are the same damn thing as selling puts. They're the biggest damn joke in the industry.
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If you are saying that CC's are ng because NP's are a better equivalent, in some cases I would beg to differ.

The reason that CC's might be better depends on your broker and the interest they give on your cash. OptionsXpress, for example, in their IRA's any cash securing a NP earns minimal interest. On big plays the interest lost for even one month can amount to hundreds of dollars, longer term plays it can be thousands. I'm not sure if this applies to their non-IRA accounts.

As I recall, Thinkorswim had similar problems.

Best I can tell IB, Schwab, and Fidelity don't have this problem.

Don
 
I have no opinion or outlook for ETFC. My comments are about the option/stock position.

1) I do not think much of a vertical spread that takes in less premium than the intrinsic value of the position. IOW, you sell a July 5/3 put spread that takes in $1.20 and will buy the stock for $3.80 if assigned. The current stock price is $3.55. What a deal!

2) I would not consider a 1 unit position (1 spread and 30 shares) with $190 of downside risk on a $3.55 stock to be one of limited downside risk, particularly since this isn't far from being wallpaper.

3) Selling month over month covered calls on the underlying isn't going to do much to reduce your cost basis. What are you going to get for a $5 strike, 5 cents per month? (you suggested a bounce back to $5)

4) If you insist on doing this position, sell naked puts instead of buying the stock and writing covered calls against it. Since they're synthetically equivalent, why bother with the extra slippage and commissions?
 
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