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   Strategies & Market TrendsA Study of Covered Strangle in a Rather Neutral Market


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To: PAL who wrote (13)8/20/2001 3:14:58 AM
From: PAL
   of 23
 
Under buy/write the maxim return will be achieved when the stock closed at 65 or higher. The holding will then be all cash:

1,800 times 65 = $ 117,000
cash = $ 5,510
_________

Total $ 122,510 or a gain of $12,510 on the original $ 110,000 which translates to 11.37%.

________________________________________________________

Summary

100% cash/short put:

Maximum return: stock at least 60, profit of 10.36% versus risk when stock closed at 54.30.

Buy/write:

Maximum return: stock at least 65, profit of 11.37% versus risk when stock closed at 58.05

Covered strangle:

Maximum return: stock at least 65, profit of 20.31% versus risk when stock closed at 56.175

(see posts # 10 and # 12)

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To: PAL who wrote (14)8/20/2001 3:25:00 AM
From: PAL
   of 23
 
Since the options expired worthless, there is no open position. There is a temptation to immediately open a new position. But I think we do not have to be in the market all the time. Therefore, I am willing to wait until such time to sell puts/and or calls.

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To: PAL who wrote (14)8/20/2001 11:14:38 AM
From: PAL
   of 23
 
On the one end of the spectrum we have $ 110,000 cash and keep it that way. The risk is practically zero in money market account and the maximum return is the interest earned.

On the other end of the spectrum is buy and hold:
Based on a price of $ 62.25, you have 1,767 shares of Qualcomm and a few dollars change. The risk is if qcom falls below 62.25, and the maximum profit is unlimited.

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To: PAL who wrote (16)8/20/2001 6:12:49 PM
From: PAL
   of 23
 
Memo to the diary: August 20, 2001 after the close:

Dow 10,320.07 +79.29 +0.8%
Nasdaq 1,881.35 +14.34 +0.8%
S&P 500 1,171.41 +9.44 +0.8%
QCOM closed at 63.71 +2.15 or 3.49%


Based on last Friday's close, the five strategies stood as follows (including the value of the holding as of 8/17/01):

a. 100% cash : $ 110,000 value: $ 110,000

b. 100% cash/short put : $ 121,400 value: $ 121,400
see post # 6 :
Message 16231120

c. covered strangle : 1,000 sh of qcom plus $ 57,650
value $ 119,210
see post #5:
Message 16229088

d. buy/write : 1,800 sh of qcom plus $ 5,510
value $ 116,318
see post #11
Message 16233058

e. buy and hold : 1,767 sh of qcom plus $ 4.25
value $ 108,781
see post #16
Message 16234140

Did not do anything today on QCOM: it is not near the low (to sell puts) nor the high (to sell calls) of the trading range.

I will so a covered strangle again whenever the environment is favorable. This will be an actual trade. I will then compare with other strategies.

When I do the actual sell on the calls, I will also enter a similar "pseudo trade" on buy/write, and conversely, when I make a real trade of selling puts, I will do a "pseudo trade" for 100% cash/short put. The appropriate "pseudo trades" will also be performed if the actual shares are sold/bought.

Until the next real trade.

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To: PAL who wrote (17)8/21/2001 7:10:38 PM
From: PAL
   of 23
 
Augus 21, 2001 after the close:

The Fed cut fed funds rate to 3.5%, the lowest level since Spring 1994, and the discount rate to 3%. Many expected that the market would rally, but ...

Dow 10,174.14 -145.93 -1.4%
Nasdaq 1,831.30 -50.05 -2.7%
S&P 500 1,157.26 -14.15 -1.2%
QCOM 62.44 -1.27 -1.99%


did not do anything, the market is still moving sideways: down on Fraiday, up on Monday, down today.

Current holding is still:

1,000 sh of qcom plus $ 57,650

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To: PAL who wrote (18)8/22/2001 11:06:11 PM
From: PAL
   of 23
 
August 22, 2001 after the close.

Dow 10,276.90 +102.76 +1.0%
Nasdaq 1,860.01 +28.71 +1.6%
S&P 500 1,165.31 +8.05 +0.7%
QCOM 63.75 +1.31 +2.10%


Bounching back again. Still in the middle of the trading range.

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To: PAL who wrote (19)8/23/2001 7:37:23 PM
From: PAL
   of 23
 
August 23, 2001 after the close.

Dow 10,229.15 -47.75 -0.5%
Nasdaq 1,842.97 -17.04 -0.9%
S&P 500 1,162.09 -3.22 -0.3%
QCOM 62.95 -0.80 -1.25%


The stock was strong in the morning reaching to a day high of 65.85, but then retreated.

Make sure to think twice if I want to sell options expiring in September since it is a triple witching month: it is known for heavy trading volumes and increased market volatility (especially about 30 to 60 minutes before the close).

Also remember that dollar for dollar you get more money buying longer term option. For example you could purchase jan02/60 (expiring in 5 months) put on qcom for $ 800/contract. By the same comparison, you could purchase apr02/60 (expiring in 8 months) put on qcom for $ 1,000/contract. An additional $ 200 for 3 more months means more bang for your buck.

Calculate it differently:

jan02/60: $ 160/month
apr02/60: $ 125/month

Option is a time-decay asset, they decay or lose value as they approach expiration. A large part of the decay comes in the final month before expiration (some call it front month). Buying option that expire in more than six months gets you pass this "decay curve".

If you I am a seller of an option, make sure that I remember the above.

Option trade in nickel increments below $ 3 and dime increments above $ 3. The problem with option is that in addition to the large spread between bid and ask (around 8%), the commission is considerable more than that for equity trade.

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To: PAL who wrote (20)8/28/2001 11:29:32 PM
From: PAL
   of 23
 
Memo to the diary:

He been away for a short vacation with my lovely wife, my son and his friend, my wife's sister and her husband and their two children. A wonderful time in LV. Away from the daily routine. I did not even check the market. Gambling is in LV, the stock market is for investment. Therefore, I don't do daytrading. Went to the show: Sheena Easton who sang the title son of a James Bond's "For Your Eyes Only". She has a beautiful voice, nice band, nice backup singers.

Friday, August 24, 2001.

Dow 10,423.17 +194.02 +1.8%
Nasdaq 1,916.80 +73.83 +4.0%
S&P 500 1,183.93 +22.84 +1.96%
QCOM 66.11 +3.16 +5.0%


Monday, August 27. 2001

Dow 10,382.35 -40.82 -0.4%
Nasdaq 1,912.41 -4.39 -0.23%
S&P 500 1,179.21 -5.72 -0.48%
QCOM 64.97 -1.14 -1.72%


Tuesday, August 28, 2001 after the close


Dow 10,222.03 -160.32 -1.5%
Nasdaq 1,864.98 -47.43 -2.5%
S&P 500 1,179.21 0.00 0.0%
QCOM 62.80 -2.17 -3.34%


The market is still in the cha cha cha mood. More likely will stay in this plus minus 7 to 8 % range on either side of nasdaq 2000. Nobody knows where the bottom is. Some analysts predict gloom and doom and say nasdaq will come down to `1,400. Maybe the same group that predicted gasoline will be at $ 3.00/gallon this summer. I was in Las Vegas, and premium gas was only $ 1.48/gallon, and summer is two third gone.

Learn from blackjack table: dumb move.
dumb move: you have two face cards, the dealer has 10 showing. you split the card. this is greedy and dumb.

In the stock market: avoid the dumb move. The dumb move is usually based on emotion. Many times emotion has an upper hand than common sense. For example: the need to be in the market all the time. Nobody can consistently time the market.

Even with all the books and theories, common sense is the main ingredient. If a situation arises that does not make sense, that is because it is not common.

I will watch the market again tomorrow. If it tanks again, it might be time to sell put. just remember the time frame and reread response #20 (previous post).

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To: PAL who wrote (21)8/29/2001 9:57:21 PM
From: PAL
   of 23
 
Wednesday, August 29, 2001 after the close.

Dow 10,090.90 -131.13 -1.3%
Nasdaq 1,843.17 -21.81 -1.2%
S&P 500 1,148.56 -30.65 -2.6%
QCOM 62.72 -0.08 -0.13%


Took a risky move. Sold 10 Jan02/65 put on qcom (aaomm) at $10.20, collecting $ 10,200 premium. Then immediately bought 100 shares of QCOM at 62.25. (Don't we want more shares of qcom paid by those premium?). Now the covered strangle strategy has the holdings as follows:

1,100 shares of QCOM plus $ 61,625 cash. The cash is as follows:

$ 57,650 (see post # 17) + $ 10,200 - $ 6,225 = $ 61,625.

If assigned, then I am short of $ 3,375.

This is a risky move. First we do not know where the market is heading, and second we are selling put before selling the call, which means that the downside protection is less (compare that if we have sold the call first). Nevertheless, I am in the camp where I think the market is movinf sideways plus minus 8% of nasdaq 2000, and now we are at the lower range of nasdaq.

What about 100% cash/short put. For comparison we must make a pseudo trade as well. in this situation we have
$ 121,400 in cash, so we should have sold 19 contracts of Jan02/65 puts at $ 10.20 and should receive $ 19,380. Therefore, total cash is $ 121,400 + $ 19,380 = $ 149,780.

No action taken to the other 3 strategies.

Summary

a. 100% cash : $ 110,000 value: $ 110,000 - no change

b. 100% cash/short put : $ 149,780 and 19 short puts Jan02/65

c. covered strangle : 1,100 shares of qcom plus $ 61,625 and 10 short puts Jan02/65

d. buy/write : 1,800 sh of qcom plus $ 5,510 - no change

e. buy and hold : 1,767 sh of qcom plus $ 4.25 - no change

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To: PAL who wrote (22)8/30/2001 1:51:41 PM
From: PAL
   of 23
 
This is a risky move. First we do not know where the market is heading, and second we are selling put before selling the call, which means that the downside protection is less (compare that if we have sold the call first). Nevertheless, I am in the camp where I think the market is moving sideways plus minus 8% of nasdaq 2000, and now we are at the lower range of nasdaq.

Later I will outline the risk level with yesterday's move. Nasdaq is now 10% below 2,000 which is outside the range of 7 to 8 % I am comfortable with. The market looks like moving lower from the range bound neutral environment. Be prepared to take some losses to avoid large ones.

If the market does not find a support right here, then abandon the strategy for rather neutral market. But don't just jump in immediately into another strategy. Don't need to be in the market all the time.

aaomm is at $11.30, thus I am $1.10 under water.

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