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

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

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

Feb 24th CSP and CC Weekend Update

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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

Could have been assigned, but took in a bit more premium ...

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Let me start with closing the "story" on last week's thought process to being assigned.  In last weekend's blog entry here I gave excruciating details on three stocks/option plays where the underlying had been put to me.  The three symbols were AMAT, MU, and SQ.

The gist of the story was that I had maximum profit potential at the following levels in these three stocks, which were all part of individual covered-calls:

• AMAT:  $300 maximum profit (put to me at $50 and potentially called away at $53)
• MU:   $300 maximum profit (put to me at $41 and potentially called away at $44)
• SQ:   $150 maximum profit (put to me at $41.50 and potentially called away at $43)

These underlyings were all in the money (ITM), so would have been called away with options expiration.  The closing values for each were:

• AMAT:  $54.90, ITM $1.90
• MU:  $44.21, ITM $0.21
• SQ:  $44.11, ITM $0.11

I noticed that as we were coming up into 3:59 pm ET, I had an opportunity to close the option leg and then close the stock, as the combined proceeds of closing the leg and selling the stock would have been greater than simply having the underlying's called away.  So I (rapidly) closed the following trades (ignore AVAV -- not part of this story) to capture the excess premium:

Here is how that story turned out:

So, for SQ, I was anticipating a $150 maximum profit but was able to capture $260-$71 = $189.  For both MU and AMAT I was expecting $300 maximum profit but was able to capture $321.25 + $4.00 = $325.25 for MU and $504.25 - $178 = $326.25 respectively.

I readily acknowledge that this is not the norm but I was able to do this, resulting in $90.50 increased value capture ($840.50 versus an anticipated $750).  The final numbers for each of these trades is as follows:

AMAT

• Premium from CSP (incl commission): $40
• Premium from CC:  (incl commission): $29
• Days from selling CSP to CC expiration:  12
• Original CSP amount:  $5000
• CC-CSP Value:  $300 (if ITM)
• Additional net premium/value received from sale:  $24.25 =  ($504.25 - $300 - $178 - $2)
• Total profit:  $393.25 = $40 + $29 + $300 + $24.25
• Return on AMAT transaction chain:  $393.25 / $5000 = 7.865%
• Annualized return on AMAT transaction chain:  7.865% * 365 / 12 = 239%

MU

• Premium from CSP (incl commission): $44
• Premium from CC:  (incl commission): $24
• Days from selling CSP to CC expiration:  19
• Original CSP amount:  $4100
• CC-CSP Value:  $300 (if ITM)
• Additional net premium/value received from sale:  $23.25 =  ($321.25 - $300 + $4 - $2)
• Total profit:  $391.25 = $44 + $24 + $300 + $23.25
• Return on MU transaction chain:  $391.25 / $4100 = 9.542%
• Annualized return on MU transaction chain:  9.542% * 365 / 19 = 183%

SQ

• Premium from CSP (incl commission): $29
• Premium from CC:  (incl commission): $39
• Days from selling CSP to CC expiration:  19
• Original CSP amount:  $4150
• CC-CSP Value:  $150 (if ITM)
• Additional net premium/value received from sale:  $37 =  ($260 - $150 - $71 - $2)
• Total profit:  $255 = $29 + $39 + $150 + $37
• Return on SQ transaction chain:  $255 / $4150 = 6.144%
• Annualized return on SQ transaction chain:  6.144% * 365 / 19 = 118%

So, the plan worked out in my favor. It doesn't always go this way, but I wanted to close the loop so that you can see how to do a cradle-to-grave analysis on the trades.

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I closed a couple of other trades this week; here is the accounting:

1. AVAV 180216P50 was sold on 1/16 and I collected $0.90 at $1 commission.  I bought the position back on 2/16 for $0.05, netting $90 - $5 - $2 (commissions) = $83.  The duration was 32 days, inclusive of start/ending dates.  ROO was $83 / $5000 = 1.66% and AROO was 1.66% * 365 / 32 = 18.9%, including all commissions.
2. EXEL 180216P28 was sold on 2/5 and I collected $0.50 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $50 - $5 - $2 (commissions) = $43.  The duration was 12 days, inclusive of start/ending dates.  ROO was $43 / $2800 = 1.54% and AROO was 1.54% * 365 / 12 = 46.7%, including all commissions.
3. TSN 180223P70 was sold on 2/12 and I collected $0.30 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $30 - $5 - $2 (commissions) = $23.  The duration was 4 days, inclusive of start/ending dates.  ROO was $23 / $7000 = 0.329% and AROO was 0.329% * 365 / 4 = 30.0%, including all commissions.
4. XEL 180216P27 was sold on 2/8 and I collected $0.30 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $30 - $5 - $2 (commissions) = $23.  The duration was 8 days, inclusive of start/ending dates.  ROO was $23 / $2700 = 0.85% and AROO was 0.85% * 365 / 8 = 38.9%, including all commissions.
5. NVCR 180216P20 was sold on 2/12 and I collected $0.35 at $1 commission.  I bought the position back on 2/15 for $0.05, netting $35 - $5 - $2 (commissions) = $28.  The duration was 4 days, inclusive of start/ending dates.  ROO was $28 / $2000 = 1.4% and AROO was 1.4% * 365 / 4 = 128%, including all commissions.

I did not have one losing trade all week.

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Here's how I am positioned going into the President's Day shortened week:

COP 180223P55 is ITM right now, with the underlying sitting at $54.77.  If nothing changes this will be put to me at the end of the week.   I bought this on 2/5 and received a premium of $0.50.  Maximum option pain indicates a bit higher movement is possible this week, but of course, this is pure speculation (option pain does not always reflect reality):

PYPL 180223P75 is OTM right now, with the underlying sitting at $78.16.  I collected $1.00 in premium on 2/5.  Option pain suggests that this could come down towards my strike by the end of the week:

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SQM was Put to Me

I sold SQM 180216P55 on 1/18 for $0.95.  Friday's SQM close was $54.56, so I was put the stock at $55.00

From a Greenfield perspective, SQM meets all of my criteria.  I do not mind holding this stock at all, except that a month is a long time to wait for the next OE :)

SQM reports earnings on 2/28, after the close.  I am expecting that EPS will be higher but revenues will be lower, and given where we are in the ER cycle as a whole, I think they will get punished.  

An ATM credit straddle is showing about $3.20 expected movement from Friday's close, using the March expiration.  Of course, this needs to be re-evaluated the day prior to ER, but this suggests that I should be looking to sell a call at least above $54.56 + 3.20 > $57.76, or at a strike greater than $58.  The nearest strike is $60, so at a bid premium of $0.80, let's see if it meets the 20% requirement.  With 25 days left to March expiration, we have:

$80 / $5500 * 365 / 25 = 21.2%

Barely.  The delta at the 60 strike is 0.26, which (loosely) infers that there is a 74% chance of being OTM and holding the position at OE.  I like deltas 0.20 or lower.  

The order for Tuesday (Monday is a holiday) is STO 180316C60 limit $0.85.

SQM Trade Analysis

If the price of SQM rises above $60, I'll make $500 from the stock appreciation (put to me at $55 and called away at $60), plus the premium from the CSP of + $94 (incl comm), plus this CC premium of $79 (premium of $80 less $1 comm), so $173 in total premiums, for a total of $673.  The original amount invested was $5500 on 1/18 (cash secured put), so for 33 + 25 = 58 total days the annualized return is (673/5500) * 365/58 = 77%.

If the price of SQM is above $55 but below $60 then I'll still have the amount above $55 as paper profit plus the banked premium of the CSP ($94 incl comm), plus the banked CC premium of $79 (incl comm).  The call will expire worthless and I keep the premium.  The AROO for all premium received ($173 incl comm) and amount tied up ($5,500) is 19.8% (= $173 / $5500 * 365 / 58).  I could sell the shares on the market to collect the paper profit or I could sell another call against the underlying.

If the price of SQM is below my new break even of $55.00 - $0.94 (CSP) - $0.79 (CC) = $53.27 (3.14% reduction off of retail) or lower I'll still be underwater (but owning a quality stock).  I keep all the premiums and will sell another call to further lower my basis.

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I have the following CSPs in play right now:

EXEL 180316P25
SRNE 180316P5
ECHO 180316P25
SQM 180316P50
SAIA 180316P70
NAV 180309P35
PYPL 180223P75
COP 180223P55

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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.

Regards,

pgd