04-21-2011 Trading

This last week has been rather interesting, even with earnings all over the place, thanks to GOOG falling way short and INTC crushing, we have had light volume, maybe it was because of Good Friday, or we are waiting on some more earning next week...

On Wednesday, I was able to sell some more of the 1150/1125 spreads (yes that is 16.44% OTM) for $25 per spread... leading to a 3.48% return leveraged over the next 38 days (this is within my profit zone, I look for anything between 3% and 5%) . At the open of Friday they were worth $8, so I plan on closing some out Monday to clear up some margin and move up 25 points to the 1175/1150 spreads which are selling for $40/spread. Statistically, the 1150 has a 99.98% chance of success and the 1175 has a 99.85% chance of success. (I will take those odds) I try to stay above the 95% chance of success line, it means lower profits, but drastically lower risk profiles.

I also went back to the good ole days where I dealt with Covered Calls (a.k.a. synthetic puts) where I buy shares in a company, and then lock in profits by selling calls at a certain strike price. The trade went as follows:

I bought shares of CLF (Cliff Natural Resources) for $95.835/share and sold calls at the $90 strike price for $7.52285/share. This leads to a MAXIMUM profit of $1.68785/share. I will break down the trade a little further here... I wanted to go lower risk for this trade since their earning will be released on the 28th, and this stock tends to have larger swings, so I decided that I would go ITM, where I will loose $5.835 a share on the stock, but since I received over $5.835/share on the contract premiums, I will make the difference as long as the stock stays above $90. If it doesn't, then my cost basis for the stock would drop to $88.30 (over 8% of downside protection). Another reason to go ITM on this trade is leverage is so low, that I only needed to come up with 10% of the total trade to put it on, so my leveraged return is over 20% for 28 days of holding the stock. I only did this trade in a small fraction of my portfolio, it is a speculative play.