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pocohonta
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I trade mostly options of US equities and indices. I've been trading since early 1990. My favorite technical analysis tools are Schwab StreetSmart Edge, candle stick chart patterns, gap trading techniques and pattern recognition using Recognia and seasonality. I utilize options trading... More
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  • Not Quite Dividend Arbitrage But Still The Same Gain On $AAPL

    As of Thursday 11/6 11:30AM PT, I have the following quote on AAPL and options that I'm interested in:

    AAPL $108.44 (-0.42)

    AAPL 11/7 108.00 Put $0.3/$0.31

    AAPL 11/14 108.00 Put $0.96/$0.98

    AAPL 11/14 106.00 Put $0.39/$0.40

    AAPL 11/14 108.00 Call $1.4/$1.42

    Now, before I present my trading strategy, here's a quick primer on dividend arbitrage: It's a trade where you own the stock that is about to go ex-dividend plus you own a deep ITM put option, at a price that will allow you to sell your stock for a net gain equal to the dividend that you collect. So in essence, you pocket the dividend without taking any risk while your buy/sell trade is at break-even.

    In reality, option prices already price in the expected dividend, so this riskless trade does not exist (especially on a heavily traded stock such as AAPL). So, here's is the "next best thing" that I'm proposing.

    Trade #1: sell 11/7/2014 Apple $108 put options at $0.31. Here, the risk is that Apple fall below $108 and you rack up substantial loss in exchange for only $0.31.

    Trade #2: create a 'hedging' debit-spread using 11/14/2014 Apple $106 & $108 put (0.97-0.4=$0.57). Here, the risk is $0.57 if Apple stays above $108 by next week, but you gain up to $2 if it goes below $108.

    Notice that trade #2 becomes a hedge for trade #1 should Apple dip below $108 on 11/7. (almost like a protected put at $108 but only protects you down to $106). However, this becomes a losing trade if Apple stays above $108 because on Monday I'll have paid for $0.57-.31=$0.26 in put spread that I don't want. I can mitigate this risk by closing out the spread, hopefully at 0.26 to break even.

    Trade #3: On Monday, sell to open 11/14/2014 108 Call at market price. Notice that #3 creates a covered call with the Apple stock that was just put to you on Friday when your 11/7/2014 108 Put goes in-the-money. The market price you get will be at least $0.47 less than the $1.41 quote, but assuming the stock didn't move wildly, we should expect at least $0.57 to $0.95. (more if Apple moves up on Monday morning). Let's just assume we got in at $.75

    So, here's a tally of what will happen on Monday 11/10/2014:

    We collected $0.31 from the sale of the 11/7/2014 108 put.

    Stock went down below $108 so this put forces us to buy 100 shares of Apple at 108.

    We already paid $0.57 for the 11/14/2014 116/118 put spread.

    We will collect $0.75 (see assumption above) from the sale of 11/14/14 118 put on Monday.

    On Friday 11/14/2014, here's the profit/loss:

    1) if it closes at 106, then the cost 108-0.31+0.57-0.75=107.51

    but the profit is 106-107.51+2, or a gain of $0.49

    2) if it closes at 107, then profit is 107-107.51+1, or a gain of also $0.49.

    3) if it closes at 108, then profit is 108-107.51, or a gain of $0.49.

    4) if it closes at anything above 108, then profit is still 107.51-108 because the put spread is now worthless but the covered call forces you to sell at 108.

    5) if it closes at anything below 106, however, this is where the risk will add up. Let's say it closes at 105, then the loss now becomes: 105-107.51+2= -0.51. Likewise, at 104, it is -1.51 and so on.

    Considering the commission cost, bid/ask spreads on the trades and the price movement between Friday and Monday, this type of trades cannot be done on a small account (I'm thinking an account with $110k is the minimum for a lot of 10 contracts per trade)

    The rate of return for this "low risk" trade is 0.49/110=0.004454, or 23% on annualized basis since we are looking at one week time frame. And assuming you are "put" the stock at $108 over the weekend, you'll get the dividend which is ex-dividend on Monday.

    Note: selling cash-secured (naked) put (as in trade 1), debit bearish spread (as in trade 2), and covered call (as in trade 3) requires the appropriate options level and cash.

    Disclosure: The author is long AAPL.

    Additional disclosure: currently have long AAPL calls

    Nov 06 3:39 PM | Link | 3 Comments
  • Stock Tips From The San Francisco Money Show.

    I just came back from the Money Show which ended last Saturday. It was a convention held at San Francisco Hilton Union Square.

    Among the highlights of my trip, I got a golf ball signed by Mr. Steve Forbes along with new his book on monetary policy, titled "Money" which he also autographed. Mr. Forbes was adamant about pegging US dollar to the gold in his book. During his keynote speech, he believes the Feds (central banks) for the most part, despite their good intention, did not help grow the economy but instead hindered it. As for me, I'm just glad that I can show off my "Forbes" golf balls to my golf buddies.

    I've attended several seminars presented by acclaimed traders and hedge fund managers. Here is a summary of the "stock tips" that I picked up.

    SWKS (long) They are bullish on this stock based on technical.

    GMCR (long via 130-150 call spread). Despite it being up, option actions after the earning release indicate room for additional up moves and the option prices indicates that market is expecting 8% move in the next 30 days. So an OTM call above 145 will likely expire worthless but ATM calls will do well. My take on this trade is that since GMCR is already >135, a better trade is to long the Sep 135-145 call spread.

    HLF (short) Either Ackerman or "someone" doubled down on his bet that HLF is a pyramid scheme on Friday via Jan 50 puts. I checked and indeed there are unusual buying volume and OI is doubled.

    AAPL (long) up trend, and lots of people in the audience own or is bullish about it. No less than 5 speakers had to mention Apple in one form or another, as if it is a popularity contest. When pressed by the audience, the presenter from IBD said that it is on an uptrend and therefore bullish, period.

    TTWO (long) They are bullish on this stock based on technical. My personal opinion is that they will do well going into Christmas gift-giving season.

    TSLA (long) But wait until pullback to support before buying.

    JAZZ (short) They are bearish based on technical.

    CAT (short) but wait until it reaches resistance)

    GOOG (long) based on the technical, it's ready to resume uptrend

    TJX (IV trade) this stock has high historic volatility, but currently has low implied volatility. It recently had a good earning announcement which explains the IV collapse. So the speaker is looking at a calendar spread (ie. Sep-Dec ATM calendar spread)

    Emerging market (long) It took a hit even though rest of the world's market is up.

    Speakers are mostly bearish on Russian and utilities, As for US market, the consensus is that we have a bullish environment currently, and even a "tired bull market is still a bull market".

    Several speakers talked about risk management and trade size, but to sum it up, my three take-away are:
    1) it's not how many times you got your predictions right, but how little money you lost when you are wrong.
    2) never let emotion get in the way. If you are emotional, then getting out of the position will help clear your head for a better subsequent trade.
    3) this is counter-intuitive, but when placing a trade in a fast-moving market, instead of a "market" order, place a "limit" order above the highest bid instead (say, the quote is 101/101.5 and you want to ensure execution, then place a buy order at 101.6 so that you get in the front of the line. You'll still get a market order price of 10.5 but your trade gets executed first, before the market moves up against you)

    I made trades based on these info, so..... right now I have:

    SWKS short 8/29 55 puts (bullish bet that it will close at 55 or higher this week, with the intention of buying the stock if necessary)
    GMCR long Sep 135-145 call spread (bullish bet and fortunately, it's up again today. Their 2.0 coffee makers will be a hit this Christmas)
    HLF long Jan 50 put (bearish bet, same price as what Mr. Ackerman paid on Friday. I have no opinion on the legality of Herbalife's MLM pyramid scheme, but just the manic debate around it is enough for me to be bearish )
    TTWO long 12/20 $22 call (bullish bet on the Christmas season now)
    AAPL short 100 8/29 put, (bullish bet that it won't fall below 100 this week. 100 is a new psychological support)
    and AAPL long 90 & 95 Jan call LEAPS (which I already have before this conference)

    Except for HLF, my trades have a theme, which is to bet on companies that will benefit from the Christmas gift-giving season in December (iPhones, video games, coffee makers)

    After I close out some of these swing trades, I plan to get SCHE and SPY as a longer term investment, and add some bonds to balance it out. I will wait for a good entry point on TSLA, JAZZ, GOOG and CAT. I also plan to keep my AAPL LEAPS for a while and most likely exercise it in January if I haven't sold or roll it forward by then.

    Disclosure: The author is long SWKS, GMCR, AAPL, TTWO.

    Additional disclosure: The author is short HLF via put options, and long SWKS, GMCR, AAPL and TTWO via options.

    Tags: SWKS, GMCR, HLF, AAPL, TTWO
    Aug 26 4:58 PM | Link | 1 Comment
  • Stock Split Arbitrage On $AAPL

    When Apple's share split 7 for 1 this weekend, the stock and the corresponding option prices will be adjusted accordingly. For every share of Apple stock you own, you'll get 7 shares, but the share price is divided by 7, so like Tim Cook said during the annual meeting two years ago, a stock split does nothing to the value of the stock.... Or does it?

    When the share price is divided by 7, the stock options' strike price are also divided by 7 and the result will be peculiar: For example, a June 13 2014 Call option with $645 strike price representing 100 AAPL shares will be converted to 700 shares at the strike price of $92.14. Well, if you divide 645 by 7, you actually get $92.1429 (92.142857 to be more exact). This leaves $0.0029 "on the table" if you are a short this call because if your counter-party decides to exercise this call and make you sell your 100 shares, you will get $92.14, instead of $92.1429. Rounding error, you say? I'd call it an arbitrage opportunity because that $0.0029 rounding error is then multiplied by 700 shares, or $2.03 per contract.

    In the financial world, traders (i.e. scalpers & high frequency traders) would gladly scalp pennies on the bid-ask spread all day long but for them that is still risky because the stock can move away from the price they are scalping at any time. So, if there is a way to scalp without taking on any risk, that is called arbitrage, and I contend that this rounding error is an arbitrage opportunity for those who have millions of dollar to trade.

    Apple closed at $645.57 today and the last trades on the $645 call was 9.75 bid/9.9 ask while the $645 put was $9.1 bid/9.2 ask.
    So let's say we can create a "short-around the box" position: sell AAPL at $645.60, sell "covered put" at 9.2 and buy "protective call" at 9.8 for a new proceed of $645. What this does is to ensure that you will (have the right AND the obligation to) buy AAPL at 645 on or before June 13... a wash with $0 profit.

    Now comes Monday, these position becomes 700 shares of AAPL at $92.228, our long call becomes the right to buy 700 shares at 92.14 while our short put becomes the obligation to sell 700 shares at 92.14. But remember, it really should have been 92.1429 so you automatically gained 0.0029 x 700 or $2.03.

    The $2.03 per contract "windfall" may not sound like much, but if let's say you have $6.456 Million to establish 100 (pre-split) positions of $64,560 each, that is $203 of riskless arbitrage.

    This type of trade cannot be profitably done by retail investors due to the cost of brokerage commission and the precise price in which the three-legged position must be simultaneously obtained.
    But as an "academic" example, it does illustrate that on Wall Street, there are pennies on the road to be picked up by those who notices it.

    Disclosure: I am long AAPL.

    Additional disclosure: I also long calls and hedged with puts on AAPL.

    Tags: AAPL, arbitrage
    Jun 06 7:37 PM | Link | 2 Comments
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  • At an all time high of $114.31 after hour, $AAPL just touched the pre-split price of $800. Still long via 15 LEAP calls
    Nov 14, 2014
  • $AAPL $109 pin. My short 109 put now worth $0. So predictable, just like last Friday & most other Fridays.
    Nov 7, 2014
  • Not Quite Dividend Arbitrage But Still The Same Gain On $AAPL http://seekingalpha.com/p/21pq1
    Nov 6, 2014
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