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The Deliberate Trader
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We are semi-professional traders. By that we mean that we are accomplished professionals in other fields, who have gained knowledge, skill and experience at trading the markets almost as a matter of self-defense. We were dissatisfied at the way fund managers, investment “professionals” and/or... More
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The Deliberate Trader, LLC
  • Investing In NOK By Trading Its Option Implied Volatility 12 comments
    Nov 23, 2012 2:50 PM | about stocks: NOK

    Nokia (NYSE:NOK) broke out on a candle chart on 11/19/12; and it broke out today on a point & figure chart, which is the best pure indicator of a stock's supply/demand picture.

    (click to enlarge)NOK Candle Chart

    (click to enlarge)NOK Point & Figure Chart

    We are betting that this breakout is the real deal; and we intend to continue to cash in. We sold NOK October 3.00 puts for .40 in late August and were assigned the shares at a net 2.60. We next aggressively sold December 3.00 puts a month ago at .42 to triple the existing position; and they are likely to expire worthless. This will reduce our net entry price down to 1.76.

    The trailing yield on the stock we will hold at 1.76 is almost 15%.

    Today's price action (11/23/12) closed a candlestick gap at 3.54. We expect the stock to consolidate or retrace at 3.80, in which case, we may add to the position by selling January 4.00 puts. We'll likely sell calls to cover when the stock hits the 4.50 - 5.00 range, which is real resistance.

    The key to the success of this trade has been inflated option implied volatility levels for this stock over the past several months.

    Happy holidays!

    Disclosure: I am long NOK.

    Themes: Options Stocks: NOK
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Comments (12)
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  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    love your strategy.
    29 Nov 2012, 09:17 PM Reply Like
  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    I am selling december $3.50 puts and january $3.50 puts
    29 Nov 2012, 09:20 PM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » Thanks. That could work well too.
    30 Nov 2012, 01:57 PM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » On 1/18/13 we sold NOK February 4.00 calls to cover for .55. While this trade was riskier than we like on a numbers crunching basis, from a charting standpoint, it looked like it could work out.

     

    If the calls expire, our effective basis will be 1.21.

     

    We think that a good year is ahead for NOK; but even if it isn't, we continue to lower our risk and improve profitability with options.
    31 Jan 2013, 02:07 PM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » We bought back the February 4.00 calls today for .03 to avoid the potential for a spike up in price tomorrow. The additional .52 cent premium effectively reduces our basis in the shares to 1.24.

     

    We are reluctant to sell more puts here as volatility is relatively low. However, if the share price tails off somewhat we will become aggressive with put sales, perhaps at the 4.00 - 5.00 strikes.
    14 Feb 2013, 02:14 PM Reply Like
  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    yes I am doing the same, I sold july $4.50 and $5 puts. Also started experimenting with deep itm leap calls.
    14 Feb 2013, 11:17 PM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » So you bought ITM calls? That's OK, but the share price is low enough that it doesn't give you that much more leverage.....and of course, the calls will expire.

     

    The next move for NOK will be interesting; but either way, we intend to take advantage of it. We are adding to the position and continuing to trade options to effectively reduce our basis in the investment.

     

    Take care.
    15 Feb 2013, 04:27 PM Reply Like
  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    Thanks DT again for your insights. Take care
    15 Feb 2013, 04:30 PM Reply Like
  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    I am still wondering why there are not more people selling puts and selling cash secured calls to lower their basis ?

     

    There is really not much downside to it in regards to Nokia.
    15 Feb 2013, 04:32 PM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » I think that there are several reasons why more investors don't use options (especially short options), but it is just a guess.

     

    I think that most investors are wary of options due to ignorance. Many consider it a form of gambling with lottery tickets. Many brokers have created a culture of mystery and negativity regarding the selling of options. It's like, "if you do it, you may go blind".

     

    In line with the previous comment, most investors do not understand option implied volatility; and consequently, they don't know how or when to use options. While it may seem like a "no brainer" with this security (NOK), there have been some not-so-subtle changes in the option market in NOK since last summer when we first started trading it.

     

    Specifically, I'm talking about a fall off in option implied volatility. As I indicated in the January comment above, the short options trade in NOK has become "riskier" because of the decline in option implied volatility. Our covered call trade worked, but it was not a low risk trade.

     

    As investors become more comfortable investing in NOK (which is what we expect is happening), selling puts in NOK will become less rewarding.

     

    But by then, we're expecting to have "loaded the boat" while we continue to try to reduce our average cost basis.

     

    Best wishes.
    16 Feb 2013, 10:16 AM Reply Like
  • The Deliberate Trader
    , contributor
    Comments (380) | Send Message
     
    Author’s reply » Cashed out of NOK this week. The risk of a backslide is greater than the potential reward going forward; and now all the chatter will be about Microsoft phones, not Nokia phones.
    7 Sep 2013, 12:54 PM Reply Like
  • Leont68
    , contributor
    Comments (1356) | Send Message
     
    I cashed out also, for the same reasons you stated above...
    7 Sep 2013, 03:50 PM Reply Like
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