Monday, April 16, 2018

CSP Candidates for Monday, April 16

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I've been a traveling fool the past two months and time to detail updates has been lacking.  If you have specific questions, email me.  I am fully committed to my CSP / CC strategy and am staying nearly 100% invested.  My starting equity is in the $75K range, so my position size is less than or equal to $7,500.  Here are the numbers and corresponding equity graph:



Click on the image to enlarge.

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Here are CSP positions that I'm looking to enter for Monday, April 16.  These will change after the open so if the conditions persist, I'll most likely place the trade.  These stocks all meet my criteria AND have favorable divergent effective volume.

Click on the images to enlarge.  If a given weekly expiration is not listed, it is because there are no candidates lighting up my watch list prior to the open.  Of course, this may change after the open, but ...




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As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd

Sunday, March 18, 2018

Tracking SQM, EXEL, Performance, and CSP Candidates - March 17th Update

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I've been on the road quite a bit the past two weeks so have not had an opportunity to write.  Today is my attempt to provide a catch up on what has been happening.

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Update on SQM

I continue to hold 100 shares of SQM and the SQM 042018C55 call.  My cost basis has been lowered and my last blog entry here describes how I have achieved a present cost basis of $52.78, down from the put-to-me level of $55.00.  The $55 call will be bought back at $0.05 if the price drops that low.

Late on 3/15 I rolled the SQM 031618P50 put to the SQM 042018P50 put for a net credit of $1.40.  My basis continues to drop from $53.96 to $53.96 - $1.40 + 0.02 (commissions) = $52.58.  The put will be bought back at $0.05 if the price drops that low, but given the existing price of SQM, I think there is little chance of that happening.

SQM closed at $49.66 on 3/16.

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EXEL was Put to Me

EXEL closed at $24.64 on 3/16 and because I held the $25 put, I now am the proud owner of 100 shares of the stock.  

EXEL just experienced a major drop from $29.50-ish to $23.24 over 5 days and is losing attractiveness for me.  I'd like to get out of the position.  They do not report earnings until late May, so there is no pending earnings report in the next 4 weeks. 

I sold the EXEL 031618P25 contract on 2/16 for $0.47 and collected $0.46 (commission).  The basis for the stock is presently $25.00 - 0.46 = $24.54, so even though the stock was put to me at a supposed loss, I still have a slight paper-profit in the position.

Obligated money ($2500 in this case) needs to work.  My money management rules and win/loss results to date show that I need to collect at least $40 premium to hit or exceed a 12% annualized rate of return, so this opens up selling any call from the April 23 to the April 27.

I want to get out of the position with a high probability of profit, and I want this profit to exceed 12% (annualized).  This means, at a minimum, the return on option needs to be in excess of 0.12 * 35 (days to expiration) / 365 (days in a year) = 1.15% ROO.

If I sell the April 22 call at the bids that are published ($2.65) this weekend, my basis will drop to about $21.89 and I'll make about $0.11 when/if called away.  This is 0.44% on the position and annualizes to 4.6%, and is too small for what I need the money to generate over the next 35 days.

If I sell the April 23 call at the bids that are published ($2.20) this weekend, my basis will drop to about $22.34 and I'll make about $0.66 when/if called away.  This is 2.64% on the position and annualizes to 27.5%.  This has a high probability of occurring and is in my target ROO zone, so I'm seriously considering selling this call on Monday after the open.

Here's the profit and loss for this proposed trade, noting that I want to get out of the trade in April (with a high probability of profit):

Click on the image to enlarge.

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Trades over the Last Two Weeks

Despite not writing, I've been busy placing orders to sell positions.  Here are the tables for both accounts since my last entry:


Click on either table to enlarge.

I sorted each by contract so that you could see what was opened/closed within the past two weeks.  many were bought back (Buy to Close) at $0.05 as the stock price moved away from the option.  Because these are cash-secured puts, the money is then released to sell another put.  

Rinse/repeat.

Here are my holdings going into the open on Monday, March 19th:


I note that the stock position Open P/L% is incorrect, as there is no way to assign premium capture to the underlying when the stock is put to you.  My actual basis for each of the stock positions is lower than indicated (which is the entire purpose of this strategy).

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Performance Since 2/1

I received an email this week asking about performance for the CSP - CC strategy that I'm forward-testing, in real time, for all of you to see.  Here is the equity graph since 2/1/18:

Click on the image to enlarge.

The equity graph is relatively accurate, but I note with some disdain,  TradeStation does not accurately track closed sequences where stocks have been put to you, so the entries of the blog found here (AMAT, MU, SQ) are NOT included in the graph or the performance statistics that follow.  This is a bug that TradeStation users have been dealing with for years, and TradeStation simply does not care to fix.  Frustrating.


Noteable are the following statistics since 2/1:
  • 36 trades, 33 are profitable (91.67%)
  • Average Winning Trade:  $30.53
  • Annualized Rate of Return:  14.3%
  • Percent Time in Market:  77%
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CSP Candidates for Monday

Here are candidates that I'm looking at for Monday:

April 20th Monthly OE:

May 18th Monthly OE:

March 23rd Weekly OE:

March 29th Weekly OE:

April 6th Weekly OE:
Click on any table to enlarge.

Note, these are not recommendations for you -- they are simply what I am considering for ME.  You absolutely must do your own due diligence on these, and you must take ownership for your actions.

I note that MIK has an ER in 4 days, so you'll want to look at each of these in that context.

These all meet the following criteria, at least with the market-closed ask/bid pricing:
  • My minimum total collected premium requirements between Monday morning, March 19th and the OE date (the duration the money would be tied up);
  • Probability of being OTM on OE > 68%
  • Minimum annualized return on option (AROO) > 12%, including a $0.05 buy-to-close order and commissions
  • Total risk is 10% of portfolio value, or < $7,500 per position.  This is why you see a "1" or "2"  or "3" in the "#..." column, which is the number of contracts to buy to fill a full position.
I also note that these will change after the open, but not by much (generally).  Some may or may not meet the criteria stipulated above just after the open.

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If you see anything wrong in my calculations, please let me know. 

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd














Thursday, March 8, 2018

Tracking SQM - March 8th Update

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SQM History

I sold SQM 180216P55 on 1/18 for $0.95, lowering the basis by $0.94 (to include $0.01 commission), for a new cost basis of $54.06.

100 shares of SQM were put to me on 2/16 at $55.00.

I sold SQM 180316C60 on 2/20 for $0.85 and bought the call back on 3/1 for $0.05, with a $0.01 commission, netting $0.79.  The cost basis reduces to $54.06 - $0.79 = $53.27.

I sold SQM 180420C55 on 3/6 and collected $0.50.  Commissions reduce this to $0.49, and the new cost basis is $53.27 - $0.49 = $52.78.  I still hold the $55 call and will buy it back to close the leg if it drops to $0.05.

In another transaction, I sold SQM 180316P50 on 2/16 and received $1.05, and after commissions, $1.04.  The basis for this put, if it closes below $50 on 3/16, will be $55 - $1.04 = $53.96.  I still hold the $50 put and will buy it back to close the leg if it drops to $0.05.  If this put expires worthless on 3/16 the credit received will offset the shares that I currently hold.

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SQM Strategy as of 3/8

The major drop in SQM's price has me looking for ways to continue to lower my basis on the stock without taking on significantly more risk.

My longer-termed outlook on SQM is unchanged.  On an EPS/revenue basis, although some slowing has occurred, the stock is a good stock.  The YoY and QoQ historical numbers are positive, and there are less than 250 companies on all the exchanges who can claim the same.  I feel that there is low risk holding SQM for the near-term (1-2 months).  There is higher risk with holding in the May-July time frame, as the slowing in earnings may continue and drop below last year's levels.

If I were to buy shares on the market today, say at $49 limit, I would have a cost basis of ($4900 + $5278) / 200 shares = $10,178 / 200 = $50.89.  The $10,178 value is about 36% larger of a position in any one stock than I like to have, so this is less than ideal.  If I were to do this I would have to close the SQM 180316P50 leg so not to have further exposure, since that leg could be assigned at any time (theoretically) if the underlying is trading under $50 (it is presently near the money).  Presently, the 180316P50 leg would close for nearly $2.00, taking my basis back up (with the $49 stock purchase) to around $51.89.

If I sit pat and do nothing, my present basis of $52.78 holds provided that SQM closes above $50 on 3/16.  The open put leg will expire worthless and I keep the $1.04 that I collected (net of commissions).  This would drop my basis on the stock that I hold to $51.74.

If I sit pat and do nothing, and if the price of SQM is below $50 on 3/16, then another 100 shares will be put to me at $50, but because I received $1.04 credit (net of commissions), my true cost for these 100 shares is $48.96.  My new cost basis would be ($4896 + $5278) / 200 shares = $10,174 / 200 = $50.87.

Sitting pat and lowering my basis to $51.74 (SQM closes above $50 on 3/16) or $50.87 (SQM closes below $50 on 3/16) is my best approach forward at this time.

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If you see anything wrong in my calculations, please let me know.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be used as a recommendation to buy/sell any security -- you need to do your own work.  I'm simply giving you a detailed glimpse into my thinking.

Regards,

pgd

Monday, March 5, 2018

Just was assigned ROKU -- what calls to sell?

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left.  If you're on a mobile device you should see something in the frame that allows you to subscribe.  Having your email helps me to notify you when Google mucks up email distribution.

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There is an earlier update from Sunday, March 4th, that can be found here:

https://greekgodtrading.blogspot.com/2018/03/just-was-assigned-mro-now-what.html

and

https://greekgodtrading.blogspot.com/2018/03/march-3rd-csp-and-cc-weekend-update.html 

The first link provides an analysis of MRO and the last link provides the weekend overview that I normally do.

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ROKU

Here's the history that got me to where I am today:

  • ROKU 180302P40 was sold on 2/23 and I collected $75 at $1 commission.  ROKU closed at $37.60 on 3/2, below my strike, so 100 shares were put to me.  The duration was 8 days, inclusive of start/ending dates.  ROO was $74/4000 = 1.85% and AROO was 1.85% * 365 / 8 = 84%.  My new basis for the stock is $40.00 - $0.74 = $39.26, inclusive of commissions.
Step 2:  Has my position changed on whether I should own ROKU?

  • ER:  ROKU does not report earnings until 5/23, after the close.  This is far in the future, so no worries.
  • Dividends:  ROKU does not pay a dividend.
  • Earnings:  ROKU is issuing guidance that earnings are in trouble but revenues should be up.  See here.  There is plenty of time to play with this stock since ER is May, but I would not want to hold it across ER or have a long contract until May.
  • Revenues:  ROKU looks good in terms of revenues.
  • Price:  As I write this, the close on Friday 3/2 at $37.57 and is -19% below the 50-day MA.  
Here is the price chart for ROKU:

Click on the image to enlarge.

My standard review is the same:
  1. RSI is in the lower range, suggesting that a move up is possible.  We do not know when -- we simply know that it's hanging out here for a bit.
  2. We're near the lower Keltner Channel.  If we start to see some strength, in the form of closing on higher highs, then this is to be considered a bullish buying opportunity (sell some puts?)
  3. The Know Sure Thing line is converged and basically isn't telling us anything.  We need the black line to head upwards for a bullish signal.
So, there is nothing in the price or ER that has me doing the "run away" dance, but ROKU is certainly not in a bull trend.  It's not in a bear trend either -- so we may be able to play on this.

Step 3:  Selecting the CC

Given the results of the MRO analysis, I'm not going to consider the front weeklies for ROKU.  On the table are the possibilities for 3/16:

Let's look at ITM --> ATM --> OTM calls for 3/16.  Here are the probabilities of ROKU being above/below a certain dollar amount on 3/16:

Click on the image to enlarge.

ITM-:  The deeper in-the-money call for ROKU (ROKU 180316C37, open interest 70 contracts) has a bid/ask of $1.60/1.85, so the likely fill would be $1.70 and including commissions, $1.69.  The ROO would be $169/3926 = 4.30% and the AROO would be 4.30% * 365 / 11 days to expiration = 143%.  The new cost basis would be $39.26 - $1.69 = $37.57, which is above the call strike.  I'd be guaranteed to lose $57 with this contract.

ITM:  The in-the-money call for ROKU (ROKU 180316C37.5, open interest 34 contracts) has a bid/ask of $1.35/1.65, so the likely fill would be $1.45, and including commissions, $1.44.  The ROO would be $144/3926 = 3.67% and the AROO would be 3.67% * 365 / 11 days to expiration = 121%.  The new cost basis would be $39.26 - $1.44 = $37.82, which is above the call strike.  I'd be guaranteed to lose $32 with this contract.

ATM:  The at-the-money call for ROKU (ROKU 180316C38, open interest 97 contracts) has a bid/ask of $1.25/$1.40, so the likely fill would be $1.30, and including commissions, $1.29.  The ROO would be $129/3926 = 3.29% and the AROO would be 3.29% * 365 / 11 days to expiration = 109%.  The new cost basis would be $39.26 - $1.29 = $37.97, inclusive of commissions.  If called away, I would make ($38 - 37.97) = $0.03, and the total return on the chain isn't even worth calculating.  This is the break-even scenario.

OTM:  The out-of-the-money call (ROKU 180316C38.5, open interest 11 contracts), which has a bid/ask of $0.70/$1.20 and would provide a likely fill at $0.90.  Including commissions this would drop to $0.89.  The ROO would be $89/3926 = 2.27% and the AROO would be 2.27% * 365 / 11 = 75%.  The new cost basis would drop to $39.26 - 0.89 = $38.37, inclusive of commissions.  If called away, I would make ($38.50 - $38.37) = $0.13, so the total return on the chain would be 13/3837 = 0.34%, and the annualized return would be 0.34% * 365 / 21 days since inception = 5.89%.

OTM+:  The further out-of-the-money call (ROKU 180316C39, open interest 138 contracts), which has a bid/ask of $0.80/$1.05 (note the bid/ask compared to the 38.50 call) and would provide a likely fill at $0.90.  Including commissions this would drop to $0.89.  The ROO would be $89/3926 = 2.27% and the AROO would be 2.27% * 365 / 11 = 75%.  The new cost basis would drop to $39.26 - 0.89 = $38.37, inclusive of commissions.  If called away, I would make ($39 - $38.37) = $0.63, so the total return on the chain would be 63/3837 = 1.64%, and the annualized return would be 1.64% * 365 / 21 days since inception = 28.54%.

I note that the chances of being called away are 39% with this call.

OTM++:  The further out-of-the-money call (ROKU 180316C40, open interest 6846 contracts), which has a bid/ask of $0.60/0.70 and would provide a likely fill at $0.60.  Including commissions this would drop to $0.59.  The ROO would be $59/3926 = 1.50% and the AROO would be 1.50% * 365 / 11 = 50.0%.  The new cost basis would drop to $39.26 - 0.59 = $38.67, inclusive of commissions.  If called away, I would make ($40 - $38.67) = $1.33, so the total return on the chain would be 133/3867 = 3.44%, and the annualized return would be 3.44% * 365 / 21 days since inception = 60.0%.

I note that the 40 strike has 32% chance of being called away.

OTM+++:  The further out-of-the-money call (ROKU 180316C41, open interest 215 contracts), which has a bid/ask of $0.40/0.50 and would provide a likely fill at $0.40.  Including commissions this would drop to $0.39.  The ROO would be $39/3926 = 0.99% and the AROO would be 0.99% * 365 / 11 = 33.0%.  The new cost basis would drop to $39.26 - 0.39 = $38.87, inclusive of commissions.  If called away, I would make ($41 - $38.87) = $2.13, so the total return on the chain would be 213/3887 = 5.48%, and the annualized return would be 5.48% * 365 / 21 days since inception = 95.2%.

The 41 call has a 30% chance of being called away, which is more/less 1 standard deviation.  I note too that for just 2% difference in the chances of being called away I could pocket $80 additional dollars, which is a good tradeoff.

The order is 

STO 1 ROKU 180316C41 limit 0.40 GTC

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Here's the P&L chart:

Click on the image to enlarge.

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd

Sunday, March 4, 2018

Just was assigned MRO, now what?

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left.  If you're on a mobile device you should see something in the frame that allows you to subscribe.  Having your email helps me to notify you when Google mucks up email distribution.

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There is an earlier update from Sunday, March 4th, that can be found here:  https://greekgodtrading.blogspot.com/2018/03/march-3rd-csp-and-cc-weekend-update.html   

That update provides the weekend overview that I normally do -- this entry is focused on the analysis of MRO.

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MRO

I was just assigned MRO as of the close on 3/2; now what?

First, let's look at the accounting that got me here:

  • MRO 180302P15 was sold on 2/26 and I collected $16 per contract at $1 commission per contract, for a total of ($16-$1) * 3 contracts = $45 total.  MRO closed at $14.86 on 3/2, below my strike, so 300 shares were put to me.  The duration was 5 days, inclusive of start/ending dates.  ROO was $45/4500 = 1% and AROO was 1% * 365 / 5 = 73%.  My new basis for the stock is $15.00 - $0.15 = $14.85, inclusive of commissions.

Step 2:  Has my position changed on whether I should own MRO?
  • ER:  MRO does not report earnings until 5/16, after the close.  This is far in the future, so no worries.
  • Dividends:  MRO went ex-Div on 2/20.  This is prior to ownership of both the put option as well as shares, so nothing here to consider.
  • Earnings:  MRO could be getting into trouble here, as a number of analysts are predicting a bumpy road ahead.  See here and here.  If there was a reason not to hold onto MRO, this is it.
  • Revenues:  MRO looks like it will continue to have solid revenue numbers on both a QoQ and YoY basis.  See here.
  • Price:  As I write this, the close on Friday 3/2 at $14.86 was -15.2% below the 50-day MA.  The 200d MA < 150d MA < 50d MA, which is a long-term uptrend on the stock.  I note that the 100d EMA < 50d EMA, which is shorter-term bullish, but the trend on the 50d EMA and 100d EMA are both downward, which is ominous.  See the chart that follows:
Click on the image to enlarge.

The chart shows the following additional price info:
  1. The RSI is in oversold territory.  This suggests a move upward, but of course, we do not know when.  We could continue lower at this pace and RSI would remain at these low levels, indicating that a turn around is just around the corner, when it is not.  
  2. We are walking down the lower Keltner channel.  Generally this is a bullish indicator, but you can see that we are not making new highs but are continuing to make lower lows.  This too suggests a move upward at any time, but right now the trend is downward.
  3. The Know Sure Thing (KST) lines are starting to converge, and when the black line intersects the red line from below, we'll have some confidence of being bullish in MRO.
Answer to Step 2:  No, I am still bullish on MRO, but not across earnings.  It appears that their next ER will be negative, so I'll want to be clear of the stock by then.  Everything else suggests that the downtrend is abating and we could turn upwards at any time.

Step 3:  Selecting the CC

Much of this is moot -- I was put the stock and now I own 300 shares at a $14.85 cost basis.  We are about to move higher, but we are early.  It makes sense to shorten the outlook and since we have weekly options available, keeping the time short to sell calls is a good objective.

Let's look at ITM --> ATM --> OTM calls for 3/9.  Here are the probabilities of MRO being above/below a certain dollar amount on 3/9:






Click on the image to enlarge.

  • ITM:  The in-the-money call for MRO (MRO 180309C14.5, open interest 24 contracts) has a bid/ask of $0.56/0.60, so the likely fill would be $0.57 and including commissions, $0.56.  The ROO would be $56/1485 = 3.78% and the AROO would be 3.78% * 365 / 5 days to expiration = 275%.  The new cost basis would be $14.85 - $0.56 = $14.29.  If called away (almost guaranteed), I would make ($14.50 - $14.29) = 0.21, so the total return on the chain would be 21/1429 = 1.47%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 1.47% * 365 / 12 = 44.7%.  The chance of being called away (measured from 3/4) is 70%.
  • ATMThe at-the-money call for MRO (MRO 180309C15, open interest 274 contracts) has a bid/ask of $0.28/0.31, so the likely fill would be $0.29, and including commissions, $0.28.  The ROO would be $28/1485 = 1.89% and the AROO would be 1.89% * 365 / 5 days to expiration = 138%.  The new cost basis would be $14.85 - $0.28 = $14.57.  If called away, I would make ($15 - $14.57) = 0.43, so the total return on the chain would be 43/1457 = 2.95%.  Because the chain started on 2/26 and could end on 3/09 this is 12 days, inclusive of starting and ending dates, and the annualized return would be 2.95% * 365 / 12 = 89%.  The chance of being called away (measured from 3/4) is 42%.
  • OTMLet's look at the 15.50 call (MRO 180309C15.5, open interest 243 contracts), which has a bid/ask of $0.11/0.14 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 5 = 54%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($15.50 - $14.74) = $0.76, so the total return on the chain would be 76/1474 = 5.16%, and the annualized return would be 5.16% * 365 / 12 = 157%.  I note that the table above suggests that there is only an 18% chance of this occurring (measured from 3/4) so I would have to be content with making the ROO of 0.74%, lowering the basis to $14.74, and achieving a 54% AROO on the leg.
While I'm here, let's look at the 16 call (MRO 180309C16), which has a bid/ask of $0.04/0.06 and would most likely fill at $0.04 (maybe 0.05, but midpoints are rarely taken).  With commission this would drop to $0.03.  The ROO would be $3/1485 = 0.2% and the AROO would be 0.2% * 365 / 5 = 14.8%.  This is getting into my minimum AROO that I will take on a position -- 12% to 24%, so I'd rather not go here.


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Often, buying in the same week leaves some money on the table.  Let's do the same analysis with the 3/16 OE:

Here are the probabilities of being above/below a given strike, using 40% historical volatility and 12 days to expiration:


Click on the image to enlarge.

  • DEEP ITM:  The in-the-money call for MRO (MRO 180316C14, open interest 254 contracts) has a bid/ask of $1.04/1.09, so the likely fill would be $1.06 and including commissions, $1.05.  The ROO would be $105/1485 = 7.07% and the AROO would be 7.07% * 365 / 12 days to expiration = 215%.  The new cost basis would be $14.85 - $1.06 = $13.79.  If called away (almost guaranteed), I would make ($14 - $13.79) = 0.21, so the total return on the chain would be 21/1379 = 1.52%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 1.52% * 365 / 19 = 29.3%.  The chance of being called away (measured from 3/4) is 79%.
  • ITM:  The in-the-money call for MRO (MRO 180316C14.5, open interest 459 contracts) has a bid/ask of $0.70/0.75 so the likely fill would be $0.72 and including commissions, $0.71.  The ROO would be $71/1485 = 4.78% and the AROO would be 4.78% * 365 / 12 days to expiration = 145%.  The new cost basis would be $14.85 - $0.71 = $14.14.  If called away (probable), I would make ($14.50 - $14.14) = 0.36, so the total return on the chain would be 36/1414 = 2.55%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 2.55% * 365 / 19 = 48.9%.  The chance of being called away (measured from 3/4) is 63%.
  • ATM:  The at-the-money call for MRO (MRO 180316C15, open interest 3,374 contracts) has a bid/ask of $0.43/0.46, so the likely fill would be $0.44, and including commissions, $0.43.  The ROO would be $43/1485 = 2.90% and the AROO would be 2.90% * 365 / 12 days to expiration = 88%.  The new cost basis would be $14.85 - $0.43 = $14.42.  If called away, I would make ($15 - $14.42) = 0.58, so the total return on the chain would be 58/1442 = 4.02%.  Because the chain started on 2/26 and could end on 3/16 this is 19 days, inclusive of starting and ending dates, and the annualized return would be 4.02% * 365 / 19 = 77%.  The chance of being called away (measured from 3/4) is 44%.
  • OTM:  Let's look at the 15.50 call (MRO 180316C15.5, open interest 935 contracts), which has a bid/ask of $0.24/0.25 and would provide a likely fill at $0.24.  Including commissions this would drop to $0.23.  The ROO would be $23/1485 = 1.55% and the AROO would be 1.55% * 365 / 12 = 47%.  The new cost basis would drop to $14.85 - $0.23 = $14.62, inclusive of commissions.  If called away, I would make ($15.50 - $14.62) = $0.88, so the total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.  The chance of being called away is 28%, measured from 3/4.
  • DEEP OTM:  Let's look at the 16 call (MRO 180316C6, open interest 1679 contracts), which has a bid/ask of $0.12/0.13 and would provide a likely fill at $0.12.  Including commissions this would drop to $0.11.  The ROO would be $11/1485 = 0.74% and the AROO would be 0.74% * 365 / 12 = 22%.  The new cost basis would drop to $14.85 - $0.11 = $14.74, inclusive of commissions.  If called away, I would make ($16 - $14.74) = $1.26, so the total return on the chain would be 126/1474 = 8.55%, and the annualized return would be 8.55% * 365 / 19 = 164%.  The chance of being called away is 15%, measured from 3/4.
Summary with the 3/16 OE:
  • MRO 180316C14:  ROO:  7.07%, AROO: 215%, New Basis if NOT Called: $13.79, Chance of Being Called:  79%, Overall return on entire chain if called: 1.52%, Annualized return on entire chain if called:  29.3%
  • MRO 180316C14.5:  ROO:  4.78%, AROO: 145%, New Basis if NOT Called: $14.14, Chance of Being Called:  63%, Overall return on entire chain if called:  2.55%, Annualized return on entire chain if called:  48.9%
  • MRO 180316C15:  ROO:  2.90%, AROO: 88%, New Basis if NOT Called: $14.42, Chance of Being Called:  44%, Overall return on entire chain:  4.02%, Annualized return on entire chain if called:  77%
  • MRO 180316C15.5:  ROO:  1.55%, AROO: 47%, New Basis if NOT Called: $14.62, Chance of Being Called:  28%, Overall return on entire chain if called:  6.02%, Annualized return on entire chain if called:  117%
  • MRO 180316C16:  ROO:  0.74%, AROO: 22%, New Basis if NOT Called: $14.74, Chance of Being Called:  15%, Overall return on entire chain if called:  8.55%, Annualized return on entire chain if called:  164%
Summary with the 3/9 OE:
  • MRO 180309C14.5:  ROO:  3.78%, AROO 275%, New Basis if NOT Called: $14.29, Chance of Being Called:  70%, Overall return on entire chain if called:  1.47%, Annualized return on entire chain if called: 44.7%
  • MRO 180309C15:  ROO:  1.89%, AROO 138%, New Basis if NOT Called: $14.57, Chance of Being Called:  42%, Overall return on entire chain if called:  2.95%, Annualized return on entire chain if called: 89%
  • MRO 180309C15.5:  ROO:  0.74%, AROO 54%, New Basis if NOT Called: $14.74, Chance of Being Called:  18%, Overall return on entire chain if called:  5.16%, Annualized return on entire chain if called: 157%
Discussion of Strike Selection of Tradeoffs:
  • In general, selling the ITM strike may benefit me in the short term with the higher ROO on the leg, but the entire chain return is lower because the spread between the lower basis and the call strike limits the overall gains (sell put -> put stock -> sell call -> called away = chain).  That's not my goal.  My goal is to maximize the overall gains from the entire chain, because the money is tied up and it needs to be working hard from the moment the initial put is sold to when the stock is called away.
  • The flip side of this is that it is not a bad goal to have the call expire worthless (e.g. stock price closes below the call strike) and then sell a new call.  The continued lowering of the basis every time this occurs is another desired outcome, because when the stock is finally called away, the maximum profit occurs between the basis and the strike price.  Hence, lowering the basis of the chain is a major goal too.
  • Take a look at the ATM calls for both 3/9 and 3/16.  Both have roughly the same probability of being ITM at options expiration (44% for the 3/16 vs 42% for the 3/9).  I note the following when looking at these two:

    a)  The cost basis is lower for the March 16 $15 call than for the March 9th.  If the stock is not called away, this will matter.  This points to selling the March 16 OE series.

    b) The ROO for the option leg is higher for the March 16th $15 call:  4.78% vs. 1.89%.  This makes sense, since going out in time generally results in collecting more premium.  This too points me to the March 16 OE series.

    c) if the stock is called away, I'm better off from the "entire chain" perspective with the March 16th $15 call than with the March 9th.  The difference is 4.02% vs. 2.95%, but because of the time portion that the money is tied up, the 3/9 OE has better annualized numbers (12 days vs. 19 days).  We put dollars in the bank, not annualized numbers, so for me, collecting over 1% more for the same risk is more attractive.  This points me to the March 16 OE series.
  • Personally, I like probabilities that are 30% or less of being ITM at OE.  This suggests that the March 16 15.50 call or the March 16 16.00 call are my candidates.  The 15.50 call has the lower cost basis if NOT called ($14.61 vs. $14.74), which is one of my goals, so this is what I'm selling:
STO 3 MRO 180316C15.5 limit 0.24 GTC.

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Final Analysis on MRO 180316C15.5 limit 0.24

If the sale goes through and I'm filled at $0.24 my basis will be lowered by ($0.24 - $0.01 commission) = $0.23, which will be $14.85 - $0.23 = $14.62.  

Case 1:  Stock is below $15.50 at OE.  The option expires worthless and my new basis remains $14.62.  Time to sell another call.

Case 2:  Stock is above $15.50 at OE.  The stock will be called and my profit will be $15.50 - $14.62 = $0.88, inclusive of commissions.  The total return on the chain would be 88/1462 = 6.02%, and the annualized return would be 6.02% * 365 / 19 = 116%.

Here's the profit/loss chart:

Click on the image to enlarge.

Note that there are 3 contracts being sold because I have 300 shares of MRO.  

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd




March 3rd CSP and CC Weekend Update

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Summary

The following trades were placed this week:

Click on the image to enlarge.

There are two images because I am trading two accounts and TradeStation will not permit a combined orders retrieval across all managed accounts.

Details

Here is the accounting:

All of the GTC orders that are shown were automatically closed out once the underlying had moved far enough away from the associated option strike that the option was virtually worthless.  If you are not doing this with your CSP or CC trades, you should.  Guidance from many is that this should be done around 50%-80% of the overall premium collected; I just set it at $0.05 and leave it at that.  The benefit of doing this is that it releases the money obligated under the CSP earlier than options expiration (OE), and this allows you to place another trade earlier.  The pennies add up.
  • ETFC 180302P50 was sold on 2/22 and I collected $32 at $1 commission.  I bought the position back on 3/2 for $0.05, netting $32 - $5 - $2 (commissions) = $25.  The duration was 9 days, inclusive of start/ending dates.  ROO was $25 / $5000 = 0.50% and AROO was 0.50% * 365 / 9 = 20%, including all commissions.
  • INTC 180302P45 was sold on 2/21 and I collected $28 at $1 commission.  I bought the position back on 3/2 for $0.05, netting $28 - $5 - $2 (commissions) = $21.  The duration was 10 days, inclusive of start/ending dates.  ROO was $21 / $4500 = 0.47% and AROO was 0.47% * 365 / 10 = 17%, including all commissions.
  • SQM 180316C60 was sold on 2/20 and I collected $85 at $1 commission.  I bought the position back on 3/1 for $0.05, netting $85 - $5 - $2 (commissions) = $78.  The duration was 10 days, inclusive of start/ending dates.  ROO was $78 / $5406 = 1.44% and AROO was 1.44% * 365 / 10 = 53%, including all commissions.
Note that for this SQM call I'm using a $5,406 basis (not the strike) which was described in last week's blog here.  This lower basis, which results due to the stock being purchased through selling the SQM 180216P55 put, is the true cost of the position from the call perspective.

Because the SQM March 60 Call was closed and my net was $78, the new basis for any further work based on this position is $54.07 - $0.78 = $53.29, not the $55 as shown in my TradeStation registry.
  • MRO 180302P15 was sold on 2/26 and I collected $16 per contract at $1 commission per contract, for a total of ($16-$1) * 3 = $45.  MRO closed at $14.86 on 3/2, below my strike, so 300 shares were put to me.  The duration was 5 days, inclusive of start/ending dates.  ROO was $45/4500 = 1% and AROO was 1% * 365 / 5 = 73%.  My new basis for the stock is $15.00 - $0.15 = $14.85, inclusive of commissions.
  • ROKU 180302P40 was sold on 2/23 and I collected $75 at $1 commission.  ROKU closed at $37.60 on 3/2, below my strike, so 100 shares were put to me.  The duration was 8 days, inclusive of start/ending dates.  ROO was $74/4000 = 1.85% and AROO was 1.85% * 365 / 8 = 84%.  My new basis for the stock is $40.00 - $0.74 = $39.26, inclusive of commissions.
I am presently holding the following positions:


"Red" means that the position is moving against me (paper losses) and "Green" indicates that I have paper profit.  I do not put too much consideration into the colors given the amount of calendar days between now and contract expiration for each of the options.  I also do not worry so much about the stock positions being underwater, as this is by design for MRO and ROKU, since these were just put to me and by definition, will be underwater.

Note:  SQM's average price is incorrect.  As I disclosed in last week's blog (here), SQM was put to me at $55 on 2/16.  I sold SQM 180216P55 on 1/18 for $0.94 and sold the 60 call on this for $0.78 (see above), both inclusive of commissions, so the basis should be lowered by $0.94 + $0.78 = $1.72, resulting in a real average price of $53.28, not $55.00.  TradeStation does not chain transactions, nor does it give me the ability to chain transactions, so it has no knowledge in the reports of what the true cost basis should be.

ROKU and MRO also show an incorrect average price.  The correct values were calculated above ($39.26 and $14.85, respectively).

4 new positions were opened during the past week (MRO 180302P15, NAV 180309P35, BOOT 180420P15, and MZOR 180316P60), resulting in the collection of (3 x $0.15) +  (2 * $0.34) + (5 * $0.39) and (1 * $1.34) = $4.52 being collected, adjusted for commissions, respectively.  Starting account value for the beginning of the week was $75,283, so this represents a capture of $452 / $75283 = 0.6%, inclusive of commissions.  Annualized, this translates into 0.6% * 365 / 5 = 44%.  Note that I close these for $0.05 each and with 10 contracts (11, but MRO was already put to me), the buy-back of the positions could reduce the premium collected by $5 * 10 open contracts = $50, so the worse-case annualized value would be ($452 - $50) / $75283 * 365 / 5 = 39%. 

I didn't put the previous week's premium collection into last week's blog, so here it is:


Total premium collected was $3.87 - $0.08 (commissions) = $3.79 in the top account and $1.55 - $0.06 (commissions) = $1.49 = $5.28.  The annualized value is in alignment with what I showed above.

Strategy for the Upcoming Week

NAV

NAV is scheduled to report earnings on 3/8, before the open, which is this Thursday.  Earnings are expected to take a significant hit, so I expect volatility to increase a significant amount.  I presently hold the NAV 180309P35 contract in both accounts so am slightly overweight from where I normally like to be.

The closest at-the-money call bid is the March 9th 36.50 Call which is at $1.40.  The same put strike is $1.70.  These two ATM bids suggest that the market is expecting a $1.40 + $1.70 = $3.10 swing in price, either way, with a 68% chance of occurring.  From Friday's close we could see a 68% chance of prices moving from $36.06 +/- $3, which fully incapsulates my put strike.

I find it illustrative to understand where option maximum pain exists for a given contract.  Here's the view as of 3/4:


This suggests that option pain is well above my put strike at $40.50 but there is no guarantee that underlying will close at maximum pain.  This is only a guide and it suggests that we will move up from here.

Another useful chart is this:

Click on the image to enlarge.

I take away the following from this chart (online version here):

  1. The 50d EMA is above the 100d EMA (which is good), but both are in a downtrend (which is worrisome if it continues.
  2. We are walking down the lower Keltner channel line, which is a possible buying opportunity.  Note that we need prices to move upwards from here to actually enter.  Nevertheless, this indicates that we are oversold.
  3. The RSI is REALLY oversold.
  4. The Know Sure Thing line is starting to converge from below.  When this occurs, we have a buy signal.
It appears that selling the March 9th 35 Put may have been premature, but it is what it is.  If I am put the stock, there are several indications that it will move up from here.  We'll see.

Based on the above, I'm not taking any action in NAV prior to earnings release.  I think it will move upward, but your crystal ball is as good as mine...

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LVS

Las Vegas Sands doesn't report until April 25 so nothing to worry about there.

The max-pain chart suggests that price will continue to move up this week from the close of $71.51 to (ideally) $75:


Again, note that the underlying does not "need" to move up -- this simply is the ideal point where people lose the most money.

Stockcharts for LVS is relatively bullish from here:



I take away the following from this chart (online version here):

  1. The 50d EMA is above the 100d EMA (which is good) and both have a positive slope.  This is fully bullish.
  2. We just touched the lower Keltner channel line, which is a possible buying opportunity if the price starts closing above the previous day's high.
  3. The RSI is oversold and has typically rallied from this level.
  4. The Know Sure Thing line is bearish on the long side and does not indicate that a long position should be held.  Given this, being put the stock on Friday, if this is the case, could be premature.
Like NAV, nothing to do here before OE this Friday.  I'm just presenting this as food for thought.

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SQM

SQM is the only stock that I own that is seriously underwater.  Because I was not paying attention, I did not reserve enough capital in my account to adjust the position with unlimited degrees of freedom, so my flexibility is limited.

Here's the option pain for the March 16 OE:


As you can see, Friday's close of $46.73 is well below the option pain of $55 for March.  Here's the April chart:


Same presentation, although the bias is lower at $53.44.  Note that options for SQM trade in $5 increments.

This all being said, there is little chance of the price closing above $55 by 3/16:

Click on the image to enlarge.

The chart above tells me that at the current volatility (HistVol = 47%), there is only a 6% chance that the price will claw it's way back to $55 by 3/16.  Your guess is as good as mine as to how far it will recover by then, if at all.

Here's the chart:


Same analysis as the prior two stocks -- but note that the KST is whipsawing around itself AND is at a good, historically low value.  This and the Keltner channel tracking suggest that we will move up from here.

The link for this chart is here.

Given that my only real degree of freedom here is to sell a call, and that the $60 calls are presently worthless, and that my break-even is $53.28, my only option is to sell the March 55 or April 55 call.  The chances of the March 55 call being hit is only 9% on 3/16 (shown previously); here are the probability chart for the April 55 call:


Click on the image to enlarge.

Going out a month to the April 55 call suggests that I improve the odds of being ITM by about 13%, from 6% to 19%.  Neither is very likely but obviously, April 55 is more likely than March 55.

Let's do the numbers.

Let's consider the SQM 031618C55 March 55 call, noting that it only has a 9% chance of happening.

Using the bid, the premium I could collect is $5.  My basis on the call is $53.28, so the ROO is ($5 - $1)/5328 = 0.08%, inclusive of commissions.  The number of days between Monday morning, 3/5 and OE on 3/16 is 12 days, so the annualized return on option (AROO) is 0.08% * 365 / 12 = 2.3%, inclusive of commissions.  My new basis will be $53.28 - $0.04 = $53.24.  If the stock closes above $55 on 3/16 I'll make ($55 - 53.24) * 100 = $176 and the leg will close out with 176/5324 = 3.31% ROO.  Since this entire chain started with the sell of SQM 180216P55 on 1/18 and this would be the end of the chain, the total days between 1/18 and 3/16 would be 58 days and the AROO on the entire chain would be 3.31% * 365 / 58 = 20.8%, inclusive of commissions.  Remember, the chances of capturing the 20.8% are less than 6% -- more probable is only capturing an additional 2.3% (annualized) from selling the call, and the leg would continue after 3/16.

Now, let's look at the April 55 call.  Longer timeframe and correspondingly higher premium.

Using the bid, the premium I collect on the SQM 042018C55 April 55 call most likely would be $70.  My basis on the call is $53.28, so the ROO is ($70 - $1)/5328 = 1.30%.  The number of days between Monday morning, 3/5 and 4/20 is 47 days, so the annualized return on option (AROO) is 1.30% * 365 / 47 = 10.1%, inclusive of commissions.  My new basis will be $53.28 - 0.69 = $52.59.  If the stock closes above $55 on 4/20 I'll make ($55 - 52.59) * 100 = $241 and the leg will close out with 241/5259 = 4.58% ROO.  Since this entire chain started with the sell of SQM 180216P55 on 1/18 and this would be the end of the chain, the total days between 1/18 and 4/20 would be 93 days and the AROO on the entire chain would be 4.58% * 365 / 93 = 18.0%, inclusive of commissions.  Remember, the chances of capturing this 18% are about 19%, with a very high likelihood of capturing an additional 10.1% on selling the call.

This is a no-brainer.  The better path is to sell the April 55 call for at least $70, capture an additional 10% on ROO, lower the basis at least $0.69, and improve my chances of having the stock called away at $55 due to the longer time frame.

The order is STO 1 SQM 042018C55 limit 0.70 GTC.

As always, this is NOT a recommendation for you.  It's what *I* am going to do.  Your individual situation may be very different from mine and this could be a rabbit hole in your universe.

Here's the combined Profit and Loss for the 100 shares that I presently own and selling the call, with the cost basis of 52.28 reflected in the green vertical line.

Click on the image to enlarge.

I note that TradeStation's method suggests that this has a good chance of being ITM on 4/20 -- I'll have to take a note on what volatility they are using to calculate this, as I'm using historical volatility in my charts and for this to be ITM by 4/20, TradeStation must be using something much higher than 47%.

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So, that's all for today.

I'll update the ROKU call after I get time to analyze it later this week.  I'm a single parent for the next two days while my wife travels, and I'm traveling W-F, so need to work the ROKU analysis in.

Update 3/4 later:  MRO is updated and can be found here:  https://greekgodtrading.blogspot.com/2018/03/just-was-assigned-mro-now-what.html 

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be considered investment/trading advice -- it is only provided for educational purposes.

Regards,

pgd

Saturday, February 24, 2018

Feb 24th CSP and CC Weekend Update

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If you are on the blog page in a web browser from a computer, please subscribe to this using the "Follow by Email" link to the left.  If you're on a mobile device you should see something in the frame that allows you to subscribe.  Having your email helps me to notify you when Google mucks up email distribution.

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Summary

This was a busy week for me.  A number of trades were closed, all for a profit.  Here's the trade blotter for the week:

Click on either image to enlarge.

There are two images because I am trading two accounts and TradeStation will not permit a combined orders retrieval across all managed accounts.

Details

Here is the accounting:
  • ETFC 180223P51 was sold on 2/21 and I collected $15 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $15 - $5 - $2 (commissions) = $8.  The duration was 3 days, inclusive of start/ending dates.  ROO was $8 / $5100 = 0.53% and AROO was 0.53% * 365 / 3 = 64%, including all commissions.  Barely worth the trouble to do, but I had a great probability of profit when I placed the trade.
You pick up a quarter on the ground when you see it, right?
  • COP 180223P55 was sold on 2/5 and I collected $50 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $50 - $5 - $2 (commissions) = $43.  The duration was 19 days, inclusive of start/ending dates.  ROO was $43 / $5500 = 0.78% and AROO was 0.78% * 365 / 19 = 15%, including all commissions.
  • AMAT 180223P55 was sold on 2/21 and I collected $25 at $1 commission.  I bought the position back on 2/23 for $0.05, netting $25 - $5 - $2 (commissions) = $18.  The duration was 3 days, inclusive of start/ending dates.  ROO was $18 / $5500 = 0.33% and AROO was 0.33% * 365 / 3 = 40%, including all commissions.
  • SRNE 180316P5 was sold on 2/12 and I collected $100 (4 contracts at $25) at $4 commissions.  I bought the position back on 2/22 for $0.05, netting $100 - $20 - $8 (commissions) = $72.  The duration was 11 days, inclusive of start/ending dates.  ROO was $72 / $2000 = 3.6% and AROO was 3.6% * 365 / 11 = 119%, including all commissions.  I like this trade.
  • CF 180223P41.5 was sold on 2/21 and I collected $17 at $1 commission.  I bought the position back on 2/22 for $0.05, netting $17 - $5 - $2 (commissions) = $10.  The duration was 2 days, inclusive of start/ending dates.  ROO was $10 / $4100 = 0.24% and AROO was 0.24% * 365 / 2 = 45%, including all commissions.
  • PYPL 180223P75 was sold on 2/5 and I collected $100 at $1 commission.  I bought the position back on 2/21 for $0.05, netting $100 - $5 - $2 (commissions) = $93.  The duration was 17 days, inclusive of start/ending dates.  ROO was $93 / $7500 = 1.24% and AROO was 1.24% * 365 / 17 = 27%, including all commissions.
  • ITB 180223P39.5 was sold on 2/21 and I collected $10 at $1 commission.  I bought the position back on 2/21 for $0.05, netting $10 - $5 - $2 (commissions) = $3.  The duration was 1 days, inclusive of start/ending dates.  ROO was $3 / $3950 = 0.08% and AROO was 0.08% * 365 / 1 = 28%, including all commissions (note my comment above regarding picking up a quarter that you find on the ground).  Factoring my personal time finding, executing, and documenting this trade here I've lost virtual money, but now I've found my "inside number" on what is too small of a trade.
I have the following positions:


"Red" means that the position is moving against me (paper losses) and "Green" indicates that I have paper profit.  I do not put too much consideration into the colors given the amount of calendar days between now and contract expiration for each of the options.

Note:  SQM's Average Price is incorrect.  As I disclosed in last week's blog (here), SQM was put to me at $55 on 2/16.  I sold SQM 180216P55 on 1/18 for $0.95, so the basis should be lowered by $0.94 (to include commission), resulting in a real Average Price of $54.06, not $55.00.  Note that I've also sold a call against the position, further lowering the basis (see below).  TradeStation does not chain transactions, nor does it give me the ability to chain transactions, so it has no knowledge in the reports of what the true cost basis should be.

I only have three contracts pending for the upcoming weekly expiration on 3/2 and two for 3/9 so feel "light".  Total premium collected for the 3/2 expiration is $32 + $28 + $75 = $135 and for the 3/9 expiration is $45 + $80 = $125. 

Is this light?  Let's look at the total premium collected.

The 3/16 monthly expiration equates to a value of $42*5 + $85 + $115 + $47 + $105 = $562.  This means that I've collected $822 with the weekly and monthly premium, will spend a total in $30 in commissions (15 round-trip contracts), and will most likely buy these back for $5 each (total 15* $5 = $75), so will net $822 - $30 - $75 = $717 on a cost of positions of  $47,906.  This is 1.50% return in total gain, and if we annualize it across the earliest entry to 3/16 (29 days from 2/16), it equates to 1.50% * 365 / 29 = 18.9% on the amount obligated, including commissions and buy-back costs.  Note that this is the minimum annualized rate -- because many of these positions have been added since then, and expire BEFORE 3/16, the actual number is between the number from the 2/16 date (18.9%) and yesterday's close (2/23, 22 days), which produces an annualized rate of 24.9% on the invested capital.

Of course, this is with all of these options expiring worthless.  There is a considerable amount of water to flow under the bridge between now and 3/16, so this may all be moot.

Another consideration is that SQM has earnings this coming week.  I hate holding a position across earnings, although if you look closely, I have both a CC as well as another CSP in place on SQM.  The implications of this are significant -- I'm heavily weighted to falling off the cliff below $50.  Here's the P/L chart:

Click on the image to enlarge.

Above $60 my profit is capped.  Below $50 I fall off at a delta of -2.00:  -1.00 for the stock that I own and another -1.00 once the $50-strike is put to me.    My current breakeven on SQM, since I sold a call against it, is the previous value of $54.06 (55 strike less the premimum received offset by commission $95 - $1) less the amount received on selling the covered call.

I received $85 less $1 commission on the covered call, so my new basis for SQM is $54.06 - $0.84 = $53.22.  Soooooo, I'll make money as long as the price remains above $53.22, but below this I start losing at a delta of -1.00, and once expiration kicks in, I start losing at the -2.00 rate.

To get an idea of what the crowd thinks will happen, it is useful to look at an at-the-money (ATM) credit spread in SQM.  The closing price on 2/23 was $58.01.  The bid for the 60 strike on the call side is $1.55 and the 55 strike on the put side is $0.90.  Together, we have $2.45 as an expected standard deviation move, so we could see (at any time) a move from $55.50 to $60.50 (rounded numbers -- this isn't an exact science).  A 2-standard deviation move is call: (1.55+0.35) + put (0.90 + 0.30) = $3.10 each way, so the market thinks that there is only an 15% chance the price will drop outside of $58-3.10 = 54.90 or $58+3.10 = 61.10.

This analysis needs to be done the day just before earnings reporting, but I think my break-even of $53.22 is safe.  There is no adjustment that I need to do right now, unless I want to close the 50-strike put and not be exposed as sharply on the down side.

My bias on SQM is that earnings will improve but revenues will drop, causing the stock to drop.  I think the 50 put strike and 60 call strike are safe, and if the stock does go over 60, I'll have $500 in gains from the stock being put to me at $55 (($60-$55) * 100).

Takeaways

Takeaway on SQM earnings:  there is no reason to adjust anything because my break-even is so low (outside of the 2-standard deviation expected move on Monday, 2-days before earnings), and if it moves higher outside of $60, my gains will offset any negative downside.

Your takeaway on the CSP-CC strategies that I am employing is that these methodologies are producing an annual gain of between 18% and 25%, on invested capital, depending upon how you run the numbers.

The other takeaway is that it will pay to be fully invested...  or will it?

The risks of this method are significant:
  1. An exogenous event, such as what occurred to VMW last month, took the share price from over $150 to around $108.  It's trading around $126 as I write this.   If you sold anything lower than $142 strikes for a February expiration you were put a stock substantially below your break-even.   While it's possible to climb out of the hole, you're selling premium for a long time on an uncertain stock just to get back to even (remember, you only want to do this on stocks that you want to hold).  If I were fully invested and were put the stock at a deep in-the-money level I would not have any other capital to deploy as the market dropped and stabilized until I unloaded several positions.  Having to wait until they recover may mean I miss significant opportunities to repair the damage because I have no capital to do so.
  2. Option premium is dropping right now, not increasing.  I'm being paid less to take the same amount of risk, relative to a higher market volatility.  If I have no capital to invest because I'm trying to maximize the gains I can pocket right now, then I cannot move into positions that stand to gain as the market conditions change until I unwrap my current positions.
So, the "other" takeway is NOT to be fully invested -- but to have some cash in reserve so as market conditions change, opportunities can be taken advantage of when they present themselves and in the natural course of order flow, not some manually-forced liquidation of positions prior to expiration or when value in the option has collapsed to near zero.

Right now I have $21,714 sitting on the sidelines, or about 31% of my account capital, waiting for opportunities to present themselves.

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Final Thoughts

Final Thought 1:  I was having lunch with a colleague last weekend and he and I were talking about how skeptical we were regarding the gains reported by others from selling CSPs or CCs.  This is why I'm being transparent in my numbers to you -- it forces me to go through the math and analyze the rewards as well as the risks, which I do not think others do.  If I'm presently achieving 18% annualized gain but am only 69% invested, straight-line math shows 18% * 69% = 12% annualized gain is realistic, for the entire portfolio, if no exogenous events occur over the next year.  There is ALWAYS an exogenous event around the corner so my actual gains most likely will be lower.  I know this, and I respect this.

Final Thought 2:  I alluded to it above, but after reading the published blog, I'm editing and adding this comment to be more explicit.  Money management is key to attaining ANY given rate of return.  If we have $100,000, and we have a series of alternatives, e.g. the 1-month Treasury risk-free rate of 1.33% (see link here), then we had better be collecting premium that at least beats this alternative, whatever it is, in the time frame of the contract (note that this flies against my comment above regarding "picking up a quarter on the sidewalk").  The key takeaway though is that the timeframe that capital is tied up really impacts this value.  For example, 8% yearly simple interest on $100,000 is .... wait for it .... $8,000.  Bi-monthly, which is 6 periods, indicates that to attain a 8% simple interest on $100K I must be collecting $1,333.33 every 2 months or I will fail.  Contrasting, I have to collect $666.67 every month to hit 8%.  If I invest in weeklies that are 2 weeks out I have to make sure that on those bi-weekly contracts I'm collecting $307.69 to hit 8% simple interest.  If I'm investing in weekly contracts then I need to regularly collect $153 in premium, week over week.  This really sets the minimum account/position size that you can safely trade.  It also presumes no exogenous events, and see my note in Final Thought 1 regarding this.  More on these rules in future blogs...

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If you see anything wrong in my calculations, please let me know.  I think I have all of the bugs out of the spreadsheet that I used, but ya never know until others look at it.

As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  Nothing I've written here is to be used as a recommendation to buy/sell any security -- you need to do your own work.  I'm simply giving you a detailed glimpse into my thinking.

Regards,

pgd