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  • Get The Biggest Upside In The Stock Market 16 comments
    Jul 7, 2014 6:59 PM | about stocks: TNXP

    (Author's note: working title was "Call Options, Then Email Derivatives and Text Leverage")

    Our last article on Tonix Pharmaceuticals (NASDAQ:TNXP) led to some conversations about using call options, and we wanted to humbly offer our thoughts in the royal third person.

    Common Stock is Probably Best

    In order to get an informational edge in the market, you have to stick to the smaller stocks, the ones that can't interest big money. Our time is not well spent trying to know Coca-Cola better than the hundreds of analysts covering it.

    But the small stocks usually have no options trading at all, and if they do, they are probably illiquid. So usually the common stock is the way to go.

    How Liquid?

    One question we got is "how liquid do the call options need to be?" Our answer was "hold out for your price, if you get it that is liquid enough."

    Which begs the question "what is my price?"

    So here is our Holy Trinity Strategy for buying call options.

    Holy Trinity Strategy

    If you do not have a catalyst looming but you like a stock, the common stock is the much better choice. Options lose value with each passing day, everything else being equal, and you do not want to stay long in that situation.

    So the first part of the trinity is:

    1) Have a catalyst

    But not just any catalyst, one that is in the near term. You do not want to stay long in an asset class that loses value every day, so the rule of thumb here, and the second part of the trinity, is:

    2) Sell within a single digit number of days

    So this can put you there for the action, and time decay does not bite you too much. You still should probably buy the common stock instead of the call options. But you have permission to buy if you:

    3) Pay nothing or next to nothing for options

    Sound too good to be true? It usually is, and you should usually buy the common stock.

    But when options are approaching expiration, you can sometimes get them very cheaply. And if that coincides with your catalyst, and you are right about that catalyst, there is no bigger upside in the stock market.

    Bonanza

    We have been lucky, and we know we have been lucky, but we have employed this strategy several times, always with bonanza results.

    We noted in the comments section of the Tonix article that we did this with MannKind (NASDAQ:MNKD). We were in the common stock, anxiously anticipating a catalyst, and someone started unloading out-of-the-money call options that were expiring in two weeks. They were looking to sell for 2 cents each, just looking to get anything for something that would likely be completely worthless in 10 days. We (foolishly/brilliantly) bought all of them we could, selling out all of our common stock. Within a week those calls were in the money by 35 cents, and we netted more than 1,000%.

    The key was that we were not looking to force our way into the options, we assumed they were a bad deal until a motivated seller gave them to us for next to nothing.

    But you can actually do better than next to nothing.

    On June 28, 2012 we published an article boldly titled: "Get Long Right Now, Market Is Low Risk And High Reward For 30 Hours." Two days later we published an article titled: "30 Hours Later Up 23.2%."

    What did we see? In addition to predicting one of Bank of America's biggest one day gains (thank you), we found FREE LEVERAGE in the form of costless call options, call options that had not expired but literally had a time premium of zero. See the articles for more info. And keep this one in mind too, that is the strategy.

    Stick with the Common

    What to do? Stick with the common stock, keep an eye on the options to see if the stars align, and pounce if they do.

    Disclosure: The author is long TNXP.

    Stocks: TNXP
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Comments (16)
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  • sheldond
    , contributor
    Comments (1287) | Send Message
     
    Thanks for the explanation of how you might employ options....and the three rules applied.

     

    I almost always stick to the common but try and trade in and out a few times when I see obvious action. Might be worth taking a look at for an occasional dabble. When I see the statistics on options it makes me think it is a massive shell game. But I think I just figured out another way they might be useful to my approach.

     

    Best,

     

    D
    7 Jul 2014, 07:13 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » Thanks D,

     

    It's the kind of thing you can keep an eye for, but not plan around, like (insert joke here)..
    7 Jul 2014, 07:24 PM Reply Like
  • New Bee
    , contributor
    Comments (37) | Send Message
     
    great informational . I follow pretty much same ideas except I like selling deep out of money puts to create a long position instead of common.
    7 Jul 2014, 07:27 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » Thanks New Bee, that is the way to put time decay to work for you.
    7 Jul 2014, 07:29 PM Reply Like
  • pcaflisch
    , contributor
    Comments (244) | Send Message
     
    I am a newbie with options but generally use LEAPS where available but buy deep in the money, 90+ percent deltas. Still get leverage but with minimal time decay. GILD right now comes to mind.
    7 Jul 2014, 07:43 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » True that on the deltas in deep ITM GILD LEAPS, you can get some leverage and not need much performance to make up for it. If you are going to hold the common anyway that sure looks reasonable to me.
    7 Jul 2014, 07:53 PM Reply Like
  • petethepanzer
    , contributor
    Comments (1072) | Send Message
     
    joe can you elaborate on out of the money call options they sound ideal for biotechs like tnxp that have the data release fairly known in the specific quarter

     

    when i said priced at a third i meant these out of the money options
    8 Jul 2014, 02:11 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » Sure...
    8 Jul 2014, 02:12 PM Reply Like
  • petethepanzer
    , contributor
    Comments (1072) | Send Message
     
    http://bit.ly/1jc1VhE

     

    are they ideal for tnxp since we know the when and the how much then theres no missing variable
    8 Jul 2014, 02:41 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » Like the blog post says is usually the case, the common stock looks best to me right now.

     

    That question is what got this conversation started in the first place:

     

    http://bit.ly/1lRCKf5

     

    I think an overweight common stock position is a little better than options now, closer to the catalyst we'll see what the prices are..
    8 Jul 2014, 02:49 PM Reply Like
  • petethepanzer
    , contributor
    Comments (1072) | Send Message
     
    yes but someone pointed out you can magnify a gain by 3x with the 15 or $20 out of the money options

     

    therefore you can decrease your bet size by a third therefore you can be extremely light weight and still have the same gain in tnxp
    8 Jul 2014, 02:54 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » What about the strategy of waiting in common until options are cheaper? Why lock out the chance for a 10 bagger?
    8 Jul 2014, 03:26 PM Reply Like
  • petethepanzer
    , contributor
    Comments (1072) | Send Message
     
    why would the options get cheaper assuming the options traders are about as smart as you are...the only thing going for you is that they dont want to lock their money up but you have the patience to do so

     

    the common only has to triple to get the 10 bagger with the $15 strike price out of the money
    8 Jul 2014, 03:52 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » Not against it, and in the end I think it will work wonderfully, but it is still not the best choice IMO RE:

     

    You are betting that the market will see the light before the trial results, not betting on the results. All things being equal the calls will lose value (time premium). The stock may rise between now and then, and I think it should and will, but I think it should have already risen a lot. I am not nearly as willing to make a leveraged bet on the market agreeing with me with no new information as I am willing to make a leveraged bet on a new information catalyst. By staying in the common you get the benefit if the market sees the light, and you can still buy calls when you are paying less for time premium.
    8 Jul 2014, 04:12 PM Reply Like
  • petethepanzer
    , contributor
    Comments (1072) | Send Message
     
    ok i can see your point so but buying these type of options would be ideal for mnkd when it was around $2 and the correction would be magnified by out of the money options

     

    also does market cap matter ie. tnxp when it was 20m might still be bad for the out of the money call options because of liquidity even though the trending upside would be highly predictable...am i overstating the liquidity issue
    8 Jul 2014, 05:18 PM Reply Like
  • Joe Springer
    , contributor
    Comments (2324) | Send Message
     
    Author’s reply » You are not overstating the liquidity issue, but more that the options just won't be there at all, there were either no or almost no options trading for TNXP when I went long originally.
    MannKind was something like 30 times TNXP's size when I went long, so the options were there.
    Yes absolutely, (reasonably priced) out of the money options are the best way to play a move up, being on board for the cross-over from out of the money to in the money is definitely the biggest potential gain.
    8 Jul 2014, 06:26 PM Reply Like
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