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  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    Hello djohnsonhot,

    You are correct, in fact we strongly advocate that you should never enter a naked put, bull put or bear put debit spread unless one was prepared to own the stock. In the first part of this article we reviewed some of the recent bullish components of PCLN. Due to the high stock price of PCLN we discussed the potential of this leveraged bull put credit spread to take advantage of the bullish sentiment without putting up the large amount of capital to purchase shares of stock or sell a naked put.

    But your point is indeed essential as we must be aware of the possibility of being assigned early on the short put and thus having to fulfill our obligation to buy shares of stock at the 600 strike.
    Nov 26 11:44 AM | Likes Like |Link to Comment
  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    Hello Common Cents,

    In the article we did mention that 'these are some basic adjustments that may be considered' for the spread position. We wanted to keep the discussion simple and basic as you mentioned, and perhaps follow up at a later time with a discussion of the Greeks for various spreads.

    Over the years I have found it easier and more successful to manage short term spreads based on the values discussed, though management techniques for diagonal and horizontal time spreads, as well as mult-leg spreads greater than two legs, require a more intense view of the Greeks for trade entry and adjustment.

    Thank you again for your comment and feed back!
    Nov 26 11:39 AM | Likes Like |Link to Comment
  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    Hello Common Cents, at times we have used a delta requirement / filter of only looking for spreads where the short option delta is less than 0.30 (for a bear call spread) or greater than -0.30 (for puts). A management technique that may be used is if the option delta reaches 0.35 or 0.40 we may look to adjust or close the position.

    I personally have not used other Greek values for managing a spread. However, if we see a shift in implied volatility from one day to the next we may have to re-evaluate the underlying and the spread position if new concerns have emerged while we are in the trade.

    Have you used other Greek values for your spread adjustments?
    Nov 23 11:28 AM | Likes Like |Link to Comment
  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    Hello olafl, great points! In this discussion of PCLN we initially identified the Bull Put that matched our base criteria, but in general we would also look further OTM when opening a spread. Typically we would look for the short option to be at least 7% to 10% OTM to start, with a theoretical probability of expiring greater than 75%. We do prefer to keep our spreads within the 30-60 day time frame as this increases our annualized return (if we plan on trading more spreads over time) and also gives us more opportunities to roll the position if the need arises, but you bring up a valid point of giving the spread more time.

    Though it is speculative, if we are more bullish on a particular stock we may reduce those filters to look for a better premium.

    The 1% to 1.5% lower target is a value that was discussed in our Iron Condor book, which discussed managing either leg of the spread on a broad based index. As you mentioned, it never hurts to be more conservative (using a higher percentage target price) on a stock which has higher volatility.

    I have talked with several investors who use the 'if closing price has doubled initial net credit rule' to manage the spreads. This works well in the longer term spread positions you mentioned, but investors who use shorter term positions, either 30 day or weekly options, hoping for a high probability with a small credit may end up having more losses than winners over time as the target is triggered more often than not.
    Nov 23 11:18 AM | Likes Like |Link to Comment
  • Gassing Up With Wal-Mart For The Long Term [View article]
    Hello Sagunne, we also feel that WalMart is a good investment as discussed in the article, but we always want to point out the lingering concerns that may exist for any stock we discuss. Although we can not see the full details of the benefits, insurance and experience the conditions as an employee of WalMart. However, we can see a rash of these types of disagreements from the National Hockey League to Hostess to WalMart. We always want to be aware of all possible concerns before entering any investment.
    Nov 23 11:07 AM | Likes Like |Link to Comment
  • Options Spread Parity Comparison For Priceline [View article]
    Thank you for following our articles! We are glad to hear that you are enjoying them. What types of strategies are you trading or researching?
    Nov 16 03:28 PM | Likes Like |Link to Comment
  • Insuring High Dividend Securities - Good Idea Or Waste Of Time? [View article]
    Jarinek84, you bring up valid points. I used the comparison of the 2013 JAN 17.5 call as that option would represent the 'parity' trade to the 2013 JAN 17.5 put in the married put trade. I also used the comparison of holding the option to this point as that is where we stood with the married put position. This makes a fair comparison between the two.

    The 2013 JAN 15 call would have a loss of over -70% today from the initial purchase price, but at one point during the trade would have had about a 40% gain.

    But as you mentioned each investor has their own risk-reward tolerance and must decide which positions suit their portfolio based on account size, market sentiment and exposure to risk.

    We are often surprised by investors who tell us they like to use leveraged options positions to avoid the capital required to buy stock but will still invest $5,000 or more into one long call or spread position. The issue there is that they are risking too much of their portfolio into one position that may result in a 100% loss if not managed properly. When we use long calls or leveraged positions we still make sure that the monetary amount at risk does not represent more than 1-2% of our total portfolio value.

    Thanks again for the comment, and happy trading!
    Nov 12 11:40 AM | 1 Like Like |Link to Comment
  • Insurance And Income: Protecting Johnson & Johnson [View article]
    Hello marytormey, it is a potential risk, which is another reason to use a put option to protect the investment so there is only a single digit risk in the absolute worst case scenario. One hopes that after the $2.2 billion fine to Johnson & Johnson for the marketing of Risperdal that they would avoid such erroneous and fraudulent marketing, but we can not know the future.
    Nov 12 11:33 AM | Likes Like |Link to Comment
  • Insuring High Dividend Securities - Good Idea Or Waste Of Time? [View article]
    Hello alloptstrat,

    Yes, the liquidity can be a problem. I generally enter option trades using a limit order at the median price between the bid and asked and enter the option position before buying the stock. Then when the protective option is purchased the stock is purchased at market since the spreads are much smaller.

    Based on our article you can see we are not very keen on these high dividend positions for this strategy. Your observation is just another concern.
    Nov 9 12:34 PM | Likes Like |Link to Comment
  • Insuring High Dividend Securities - Good Idea Or Waste Of Time? [View article]
    Hello Windwood,

    Yes, I was referring to using long calls on the VIX to help hedge a portfolio. Here is a link to an article that discusses our approach when using VIX calls for a portfolio hedge:

    http://bit.ly/SzXw5w
    Nov 9 10:54 AM | Likes Like |Link to Comment
  • Insuring High Dividend Securities - Good Idea Or Waste Of Time? [View article]
    Hello Jarinek84, investing in the married put position allows us to avoid the 'Lie of Leverage'. Does the long call have a similar risk-reward profile on a static profit and loss chart? Yes. Does the long call require less capital? Yes. Is a long call a parity trade to the married put? No.

    On December 21st, 2011 the 2013 JAN 17.50 call was priced at $0.34. If you opened 1 contract, it would cost you $34.00. In comparison, opening 100 shares of NLY and purchasing the 2013 JAN 17.50 put option cost us $2,015.00. So, is the long call better? Not exactly...

    Although we have invested $2,015 into the position we are only risking $2.65 per share for a potential 13 month trade. Because we own the stock and the timing of the entry, we would receive 5 dividend payments at an average of about $0.54 per payment, or $2.70 total. If we stay in the position through expiration we would have a true risk of -$0.05 (guaranteed profit of $0.05), assuming the dividend payment is not lowered, of course.

    The true risk of the long call is $0.34, or 100% of the investment. Yes, if you only bought 1 contract your risk is only $0.34, but you are risking 100% of that value. You do not receive the dividend when trading a long call. Looking at the closing prices for the 2013 JAN 17.5 call on NLY since DEC 21, 2011, the option never reached a profit. The call is currently priced at $0.03 which would be a loss of -$0.31, or -91.2% of what you invested.

    If we liquidated the NLY married put right now we would have a loss of -$0.12, or only -0.6% of our invested capital.

    You might say that a loss of -$0.31 is not that bad, but that is under the assumption that you only purchased 1 contract. As we know, long call investors looking to use leverage would typically purchase more calls and this risk a higher monetary amount due to the leveraged risk.

    Thanks for the comment, and let me know if you would like to run through some other examples or thoughts comparing the long call to the married put position.
    Nov 9 10:39 AM | 1 Like Like |Link to Comment
  • Insuring High Dividend Securities - Good Idea Or Waste Of Time? [View article]
    Hello Windwood, I think purchasing ITM married puts for protection is a great idea, and I use it often in my account. I have also used ITM put options on ETFs as you mentioned to insure my portfolio, as well as purchasing OTM call options on the VIX to hedge a portfolio against unexpected volatility jumps and black swan events. Have you ever looked into using the volatility securities as a portfolio hedge?

    Many of my positions now are insured 1:1 using the married put technique for direct insurance on the securities I am holding. We just submitted a new article that should be posted soon using a similar married put play on Johnson & Johnson.
    Nov 8 06:17 PM | Likes Like |Link to Comment
  • Earnings Option Strategy Comparison: Married Put Vs. Long Strangle For eBay [View article]
    Hello liusing, are you referring to simply buying the 30 strike call on GNC rather than entering the married put, or using the deeper ITM 30 call on GNC in place of the 35 call in the ITM Long Strangle?
    Nov 1 05:35 PM | Likes Like |Link to Comment
  • Earnings Option Strategy Comparison: Married Put Vs. Long Strangle For eBay [View article]
    Hello Bionic1, we absolutely support and encourage protected positions such as the collar trade as well as the married put position. The return you listed would be a good return for a short term trade. The slight advantage of the married put position over the collar trade is that we leave our upside open in case the earnings announcement is really strong, whereas the collar caps the upside gain. If we were assigned at $51, that 5.8% gain would be a great return, but if the stock had moved up 10%, 12% or 15% we would realize more upside gain with the married put position. Also, with both eBay and GNC, even though we are entering the position near an earnings date for comparison, we are also long term bullish after the earnings event and looking for further growth. Thanks for the comment, and Happy Trading!
    Oct 31 11:48 AM | Likes Like |Link to Comment
  • Win The Cola Wars With A Married Put [View article]
    A large gap-down in price over-night/at-opening will not be protected by a stop order, whereas a married will protect from an over-night/at-opening gap-down.
    Oct 21 05:16 PM | Likes Like |Link to Comment
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