The Deliberate ...'s  Instablog

It's time to plan our next move in NOK. Since opening an initial position with short put options in August 2012, we repeatedly lowered our basis in the shares that were assigned to us in October. We sold additional puts that expired and aggressively sold covered calls until our new basis in the position presently stands at 1.24.

Looking at the chart, the recent sell-off in anticipation of first quarter earnings presents us with a new opportunity. In fact, price is back near the breakout point where the trend reversal was confirmed in November. Since July, the stock has made higher lows and higher highs, with Fibonacci and chart support in the 2.70 - 3.00 range

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We believe that the up trend will remain in tact; and our objective is to accumulate more shares and lower our existing basis in order to enhance profitability. To do that, we will sell NOK July 3.50 puts for .75 with half of our existing position; and we will sell NOK June 3.00 puts for .35 on the other half position. There are any number of combinations that could result from this trade. However, our objective is to have the June options expire worthless and be assigned shares on the July options. If the objective is achieved, we will add to our NOK stock position by 50% at an average share price of 2.40. Combining this with our existing NOK stock holdings will result in an overall average share price of 1.66. This average price is within pennies of the July 2012 low.

Disclosure: I am long NOK.

Back in January we posted a chart showing AAPL stock holders what they might expect for price action during the year. One of the things we said was that resistance should be strong in the 475.00 range due to a chart gap and Fibonacci resistance.

Sure enough, on February 11th the 475.00 resistance area was tested and the stock closed a tad above it....on one day. Since then, the stock has resumed its obvious down trend (lower highs and lower lows). However, it is presently perched at the 390.00 - 410.00 support band; and odds are good that it may bounce from here.

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Someone looking at the chart today may say that buying puts might be a good strategy to protect a long position. However, we think that the horse has already left that barn. Purchasing puts after a steady decline almost always affords a marginal return or loss. We would rather reduce our cost basis in an existing position where price has eroded by selling covered calls and naked puts. However, as in most things, timing is everything.

Aggressive traders may want to sell May 370 puts for 10.00. The effect is a potential opportunity to own AAPL shares at 360.00, or if the options expire the annualized return on investment is about 32%.

Our experience is that as a general rule the options with the shorter term expiration dates (30 -60 days) have higher implied volatility and more quickly eroding time value (theta) than longer term options. Also, while having lower value in absolute dollars and cents than options with strikes at-the-money (ATM) or in-the-money (ITM), farther out-of-the-money (OTM) options generally have higher option implied volatility and lower risk (higher probability of expiration) for option sellers.

For those already holding AAPL shares, selling the May 370 put has the effect of reducing your cost basis by either adding to the position or a subtraction of the premium fully earned at expiration from the original cost basis in the position. If you could reduce your cost basis by about $10.00 every 30 days while the stock trades sideways to up, that would not be a bad thing.

However, there is no guarantee that the price will hold up (another good reason for a shorter term expiration period), so you need to carefully monitor price action. The next level of solid support appears to be all the way down to 320.00. Whether or when the price declines to that level is a guess; however, it is definitely not out of the question. Investors who have no intention of divesting their shares should consider some option techniques for improving their returns over time. Covered calls is another popular technique; however, timing is also important and we would not probably look to sell calls until price jumps up to the 460.00 - 470.00 range.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The option techniques we employ can be used with any optionable stock. The use of the AAPL stock chart is by way of example; and it is not a specific recommendation to trade the stock or its options. Rely upon your own due diligence, skill and experience before entering into any securities transaction.

Planning ahead if you want to protect positions in AAPL, lower your cost basis or add to your position using options, here are some key support and resistance levels.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.