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Hari Swaminathan
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OptionTiger.com is founded by Hari Swaminathan, an entrepreneur, everyday person and a self-taught Options trader for over 5 years. Hari also writes the blog at OptionTiger.com, an insightful commentary of the most important issues in macroeconomics, investing, trading, Option strategies, Index... More
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  • Fiscal Cliff – Using Option Trades For Dividend Plays

    This post was originally written on December 5, 2012 at http://www.optiontiger.com/fiscal-cliff-using-option-trades-for-dividend-plays/

    As we all know, several companies are rushing to issue dividends this month to avoid (much) higher dividend taxes if there is no resolution to the fiscal cliff negotiations post Jan 1, 2013. This post is about using Option trades for dividend plays and there are many big companies in this pack. Walmart, Costco, Las Vegas Sands are all issuing fairly large dividends. The Chicago Tribune has a complete list here -

    (click to enlarge)COSTCO

    So how can we play the dividends game ? In general when a stock issues a dividend, the stock price falls by an amount approximately equal to the dividend. Also generally, the stock recovers this amount fairly easily. Take the example of Costco (NASDAQ:COST) - its planning to issue a dividend of $7/share. Its currently trading at around $105 (rounded up). So whenever the ex-dividend date comes along, COST shares will come down by approximately $7. Now in general, strong stocks (and COST is definitely a strong stock) will recover this amount of $7 in some time - say 3 to 5 months. It may happen sooner due to other fundamental reasons, but even in the absence of any fundamental reasons, its reasonable to assume it will happen. The obvious caveat here is that the broad markets could nosedive if the fiscal cliff negotiations fail, or due to a myriad number of reasons which we know as "Market Risk". But we ignore these for the sake of understanding the specific trade strategy.

    Post the dividend date (and perhaps any big gyrations produced by the markets based on the fiscal cliff deal), you could buy shares of COST in multiples of 100 - say 100, 500 or 1000 depending upon your capital available. You'll get it at a good price (ex-dividend and maybe some fiscal cliff effects). Once the markets stabilize (and they should stabilize in some time even if there is no deal) after the new year and COST tries to make its way up again, you can sell Monthly Calls at about $5 Out of the Money each month. This is your standard Covered Call strategy, but what makes this a safer strategy is the fact that COST is not going make up the $7 dividend in a hurry. This is a large dividend, and no company, even one as good as COST will make up this ground in a month or two. So if you bought shares at say $95, then selling $5 strikes OTM Calls for a period of 4 to 5 months could get you at least $10 in premiums. This would then reduce your cost basis of the COST shares to $85/share. This is a very attractive price point to own COST even for the long term.

    The other potentially great trade is possible if there is no deal and the markets crash for a couple of weeks. COST (Beta of 1.2) will also crash a bit more than the S&P 500 because of its Beta of 1.2. This could mean COST could be trading at 80 to 85 per share ex-dividend and fiscal cliff effects. Write some Put Options at $80 or $75 strike prices if you don't mind owning it at these prices. If you pick up the stock, that's great - if the stock does not hit your Put strike, the premium is yours.

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

    May 15 12:05 PM | Link | Comment!
  • Priceline Bear Call Trade – Update

    This post was originally written on December 11, 2012 at http://www.optiontiger.com/priceline-bear-call-trade-update/

    We put the Priceline Bear Call Trade (NASDAQ:PCLN) on Dec 3. At that time, PCLN had stuck its head above the upper Bollinger Band. Just because a stock goes above or below the 2-Standard Deviation bands does not automatically trigger a trade. However, we noted that Priceline had already made an impressive move up of 25%. When these two factors combined, it provided a strong entry signal. This was going to be a "mean reversion" play.

    (click to enlarge)

    PCLN-trade-Chart

    As of today on Dec 11th, we can see Priceline has dropped by about $50. Out of a maximum profit of $2700, we have a clear profit of $2050. Normally this would be enough reason to close the trade out. However, upon close examination (see chart below), the following points can be observed -

    (click to enlarge)PCLN-trade-2

    · The 725 Short Call got us a premium of $8

    · The 740 Long Call cost us $5.3

    · Today, the 725 Call is going for 1.55 (a profit of almost $6.5)

    · The Long Call is going for 0.90 cents

    · The trade has a profit of $2050

    Instead of closing the trade, I'm going to take the suggestion of a fellow Linkedin group member, and close the 725 short call for a profit of $6.5. Now I paid only 5.3 for my Long Call, so I have already paid for this Long call. And I still have 38 days in case PCLN turns around and makes a move to the upside, everything that the Long Call gains will be bonus profits. Great adjustment and great trade entry !!

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

    May 15 11:58 AM | Link | Comment!
  • Trade Idea – LinkedIn Short Strangle

    This post was originally written on December 11, 2012 at http://www.optiontiger.com/trade-idea-linkedin-short-strangle/

    Linkedin has made a nice move upwards. Its up over 20% in the last month, and is hitting the upper Bollinger band today. Both factors combined produce this Trade idea - Linkedin short strangle

    (click to enlarge)LNKD-Chart

    (click to enlarge)LNKD-Profit-Loss

    TRADE IDEA:

    - LinkedIn should turn back to come well into the Bands again.

    - However, the momentum is still up (look at the MACD in the chart 1 above)

    - Therefore a safer strategy is a Short Strangle at (Jan expiry) 115 Call and 110 Put

    - Credit of $7.9, Max profit of $7900, Margin 21K (33% return in 38 days)

    - The credit and Margin is very favorable which is one of the reasons for the trade

    - Breakevens at 102 and 123 , creating a $21 profit range (Chart 2 above)

    - Position is designed with a Negative delta bias because of Bollinger band reading

    - Trade holding time is approximately 3 to 4 weeks.

    Please post your thoughts on this trade.

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

    May 15 11:49 AM | Link | Comment!
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