I feel like I have a sense of what I should be doing in this market.  Back in April, I put a note on my calendar to move to cash in September.  Perhaps not a bad idea.  I moved to about 30%-35% cash during the downturn today.  Perhaps that was foolish.  Perhaps it wasn’t enough.  Only time will tell.

I also took the opportunity to place a few trades on vehicles that will move with the downturn.   I looked to the Diamonds (essentially a trade on the DJIA) and to AIG.  View my trading log to see the few moves that I made.

I placed 1 option trade on AIG that turned a profit of 5.57% in about an hour.  The problem is that I left another 8-10% on the table. The stock reacted the way I expected and I only have a small gain to show for it.

I can’t believe how wrong I have been on AIG over the past few weeks.  I have been calling for them to “go away”.  As I often say, we are never wrong, we are  just early or late.  I am not alone in the feeling that AIG is simply a trading vehicle at this point.  (Investors Trading 3 Stocks that May be Doomed).  This is nearly an ideal vehicle.  There is more than 80% of the company tied up in hands that will not act (remember the taxpayers own more than 80%). This could be manipulation.  I don’t see AIG as a long term play.  As a short term trading vehicle it is great. One analyst has this to say about AIG.

“their price is almost certain to go to zero”.

The other trades made between yesterday and today were in options on the Diamonds (DIA).  I bought puts (a bet that the shares will move lower).  In all cases I left much more on the table than I took off.  I have become tight after a few plays of mine headed the complete opposite of my expectations.  I did pull a few percent on each play, but holding a bit longer would have yielded gains of more than 8x my profit (approx 80% gains).  I am not talking about holding for the rest of the day, I am talking about simply sticking with the momentum (10 more minutes).  On 2 occasions, I was headed out of the office and was forced to place a conservative limit, but on the others, a more disciplined approach could have yielded much more.

HINDSIGHT!

Today was a very poor day for the market. I don’t feel comfortable that I raised some cash today and the small profits in my trades simply kept my spirits up.

FAIR WARNING!: This market could get ugly. Down, down, down. Vacation time is over and there is big money ready to move this market. I don’t think that we will be able to digest bad news the way we have been able to for the past few weeks.  In fact, the market shrugged off some good news today. Not a great sign for the bulls. Stay tuned.

Bob

This trade in WLP was outlined by Andrew Wilkinson today. It shows how you can utilize options to make a bullish play on a stock without laying out the cost for the shares. If successful, this trade could yield 3x your money within a two month period. Try to follow below.

WLP– The Indiana-based health benefits company edged onto our ‘most active by options volume’ market scanner after one investor appears to have established a ratio call spread in the August contract. Shares of the firm are up slightly by about 1.5% to $49.71. Hoping for continued bullish movement, the trader purchased 5,000 calls at the just out-of-the-money August 50 strike price for a premium of 3.50 each and simultaneously sold 10,000 calls at the higher August 55 strike for 1.54 per contract. The net cost of the transaction amounts to 42 cents and yields maximum potential profits of 4.58 if shares can rally up to $55.00 by expiration. The investor would begin to amass profits if shares increase just 71 cents from the current price to surpass the breakeven point at $50.42 by expiration in a couple of months. – WellPoint, Inc.

Bob and Scott Discuss options and basic option strategy.  Options are an area of investing/trading that is very misunderstood.  It might just take a gain or a loss for most to understand how the movements in a contract / stock impact their money.

There is also a discussion regarding naked shorts and the story of Overstock.com vs. Rocker Partners.

Episode 4 - Options and More Options

Bought 400 BZH (Beazer Homes) at $3.42 per share.  Missed a ton of the upward movement on this stock, but I feel there is still room to run.

I am also utilizing call options to reduce my basis in the stock. I sold 4 of the  June 5 call options for $0.35 each.  This provided me with an effective price between $3.10-$3.20 while still allowing for a significant upside.

Bought BZH @ $3.42
Sold Call options BZHFA @ $0.35

Bank error in my favor!

This trade of Celgene call options has a short story behind it.

I have discussed how good Schwab’s StreetSmart Pro software is.  Well, they dropped the ball on this option bracket order (note to self: don’t do bracket orders for options).    I bought my 4 contracts on Celgene and did the order as a bracket.  When placing a bracket order you are placing the buy and the sell order at the same time.  Schwab’s software is great in that it allows you to determine what you want your sell order to trigger on.  You can trigger based upon price, percent gain, etc.  I used percent gain on this order.  I placed my buy of 4 CELG July 40 calls @ $3.50.  The other side of the bracket was the sell order which I placed with the goal of an 8% profit above the $3.50.  Conservative trade, but a good percentage gain for a short term trade.

I received confirmation this morning that my call options sold @ $3.40 this morning.  The message was “condition met”.  It triggered because it saw my 8% gain condition as being met.  I had to call Schwab on this one to have it corrected.  Somehow, the order was triggered at a loss because the software/system reset the price that it was basing the 8% gain on.  When I called they stated that I had changed it to make it an 8% gain on the contracts at a price of $3.10.  They were saying that I changed the buy side of the bracket after it had executed. (not possible).

I asked the rep to look into this further because I did not believe that I changed anything.  In fact, during the first call he stated that I made the change but could not provide any sort of confirmation, time, date, etc.  When he returned my call, about 10 minutes later, he stated that the system reset the price in error and the contracts were back in my account.  Since the bid was up around $4.00, they didn’t just execute the 8% above $3.50 order (would have been around $3.75 for you lazy math folks).

I was please that this bank error worked out in my favor.  I sold 1 contract @ $3.90 and the remaining 3 @ $4.10.  I’ll update the total profit in my trading log.

I still think that CELG is a great long term play for the reasons outlined in my “Celgene is a Bargain” post.  This was purely a trade.  I am long CELG in both my retirement and primary account.

I know that I could probably have waited this one out and watched the contracts go to $0, but I am taking my profit and running.

Bought 10 Citi Apr 4 calls (CD W) for $0.11.   Profit of $247.   Pretty big in percentage terms (66.15%).

UPDATE (11:07am): Currently at $0.05 per contract.  Dropped all the way to $0.02.  Hindsight says that I should have been more patient, but…. “can’t go broke taking profits”.  I truly feel that this will be a dead contract at the end of the day and would have given me 100% profit, but I am OK with the 66% gain in 1 day.

Sold 10 Call options on Citi at $0.39 a contract. Total premium taken in $373.53. This is a covered call since I do own the 1,000 underlying shares of C.

As with my trade 2 days ago, I wouldn’t mind being taken out of 1,000 shares of Citi at $3.39. It would be fine if I had to deliver on the contract tomorrow. It is a heck of a premium for 1 day. Granted, earnings are tomorrow.

If it dips prior to the close, I will still be looking to cover for a small gain.

Sold 10 April $4.00 calls on Citi at $0.44 per contract.  By selling the calls, I am essentially betting that the stock will go down.  By doing this at the open, I got a great price due to the gap.  GS helped the financials at the open, but the economic data pulled things back to reality.

Sold 10 @ $0.44 netting me $423 (after trading fees).

If Citi remains below $4.00, I won’t have to deliver.  I do hold the underlying shares so these are covered calls (as opposed to naked).  However, with earnings looming, I might just decide to cover these contracts.  If they get dow to the low teens, I’ll take my $250-$300 and run.

4/15/2009 Update. Might have missed my exit on this one.  I had an order to cover at $0.21 per contract to net a couple hundred dollar profit.  It came within $.02 of that.  Back up to $0.32 now.   Since I have the underlying shares, I can’t really lose on this.  This trade going bad is essentially like getting $4.44 for 1,000 of my shares.  If you offered me that a week ago, I would have jumped at it.

Covered call writing can be a good way to generate income on your portfolio assuming you would be OK with losing the underlying shares at the strike price pluse the premium you took in.   In my case, I have 1,000 shares with a basis below $3.00 a share.   I sold 10 calls with a $4 strike for $0.44.  If C jumps, I will have to deliver the 1,000 shares (100 per contract).  I will essentially be getting $4 + $0.44 = $4.44.  (strike plus contract premium).

Citi has been a great story to follow. Active, volatile, speculative.

With options expiration coming on Friday, I would tend to believe that there will be a run to a strike price. Where do the most market makers get out clean (by clean I mean a tidy profit)? $4.00

However, there is a wrench thrown into this wheel. Citi reports earnings before the open on Friday.  Tough one to play.