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revtodd64
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I blog about covered call investing at my website: bloomingcactus.typepad.com/revtodds_ira_plot I generally write monthly covered calls and try to make 3-5% a month in my IRA account. My blogsite includes articles about my strategy and trade alerts as I put them on. I have a goal to make an... More
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  • Two trades this morning on JNPR and MIPS

    JNPR and MIPS both hit my buy targets this morning.  

     

    JNPR had enough open interest to combine it with a July $40 married put.  MIPS did not have enough open interest on the put side, so I went with a call diagonal, buying the July $15 at $3.47 and selling the July $17.50 at $.80.  This trade may move very quickly.  If MIPS gets over $18 I should be able to get a quick 10 to 15% gain.  If it calms down in a nice uptrend this could be a nice gainer in one month.  Good luck out there!  I have to do payroll. 
    Dec 13 10:40 AM | Link | Comment!
  • JNPR Married Put for next week

    Juniper Networks is approaching a 52 week high and breakout point at $36.  IBD adds $.10 to that number to get a buy point at $36.10.  They are currently ranked in the IBD 100 growth stocks and Bloomberg had a favorable article too.  Over the weekend Juniper is trading at $35.88, so if the market is moving up this week, JNPR should hit that buy point.  If it does so on increased volume, my plan is to enter a married put trade, probably buying the January 2010 $40 put.  The put currently trades at $7.65.

    That may look like expensive insurance, but here is how I look at it.  Since JNPR is about $4 away from the $40 strike, that is the intrinsic value of the put.  I am gauranteed a $40 sale price, so $3.65 of the put is my maximum amount at risk in the trade, which is about 8 percent.  I should be able to lower even that small risk over time selling covered calls or credit spreads as the stock fluctuates.

    Tags: JNPR
    Dec 11 4:03 PM | Link | Comment!
  • The Plot 2.0
     






















    This article marks the start of my 2011 trading plan, which begins next Friday for me, since I will be selling options on positions with a January 2011 expiration.  Past readers know that I began “the plot” seeking to make 3 to 5% a month writing monthly covered calls.  I made great money on this strategy in the first half of 2009 due to the high VIX and strong market surge in the Spring.  But it is much harder to make money with a low VIX.  Even though I was closing 85% of my trades successfully, I wasn’t making much money due to some quick downward hits of Green Mountain Coffee and VMW.  I was capping gains on stocks where I could have made thousands, and only getting small downside protection when losses hit.  You can make money this way, but it is time consuming and you have to right!  This discipline has improved my stock picking, entries and exits that will serve me well in “The Plot 2.0,” since I plan to use the same stock analysis, entries and philosophy.

     

    My major change is a move away from the covered call to the married put as my base trade.  These two trades have opposite tradeoffs.  Covered calls cap upside potential, with some small downside protection; while married puts have unlimited upside potential with limited downside risk.  The downside is that you have to pay for the put, much like paying for fire insurance on your business.  The goal with a married put is that I want to capture around 60 to 70 percent of upside potential, while keeping my losses capped between 3 and 8%.  The great thing about a married put is that it has a built in limit order over the life of the put, and yet you can still hold the stock without fear if you believe it will recover.

     

    Obviously married puts work best with stocks ready to make major moves, so I can safely go after stocks that may be part of a bubble.  I can go after oil, precious metals, semiconductors or whatever I like, as long as there is enough option volume on the stock to put a put for protection.  My major entry points will be from the CANSLIM approach from Investors Business Daily, which targets high growth stocks that our breaking out to new highs or bouncing off support at the 50-day moving average.  (Take a look a William O’Neal’s book here.  It is a great guide for growth stock investing.)  Occasionally, I will mix in some value stocks that I believe in, but I’m mainly looking for stocks ready to move rather than long-term value stocks or dividend stocks. 

     

    Many people don’t like married puts, because they limit gains, but not as dramatically as you might think.  First, if you buy in-the-money puts, remember that much of the value of the put is intrinsic and will hold as the stock moves up.  For example, if I buy a $50 stock and a $55 put for $8, the put will hold at least $3 of value as the stock moves up to a $55 value.  In simple terms, a stock moves up $5 and I would capture $3 of the move (about 60 percent of the gain) while keeping my downside risk fully insured.  While giving up some profit, I am more likely to invest in a big gainer if I know my downside is protected.  Ten covered call trade might get me 3 to 5% over a month, if I’m right 85% of the time, whereas I might only need to be right around half the time with a married put if I can get one or two big gainers. 

     

    The second important thing to note is that I can still pull income out of a married put trade if I chose.  If my $50 stock moves up to $53 or $54 dollars and I have the $55 put, I might chose to write a $55 call and cash in on the premium.  If the stock goes up I might also sell a bull put spread out of the money for income to defray the cost of the put, or sell a bear call spread on a downturn.  Over the course of a 6 to 8 month put, I have a decent chance of selling enough income to pay for the put cost and leave all my gains intact.  I’ll show more of these trades in action as I get geared up.  I anticipate having 70 to 80% of my trades be married puts to start with. 

     

    During solid market moves, I plan to use diagonal trades, which is much like writing a covered call on a LEAP option.  For example, I just entered a trade on PCLN, which has been a big mover lately and a top rated IBD growth stock.  PCLN has a $420.99 buy point, so as it crossed that mark on Friday, I bought a July $420 call and sold a January 2011 $440 call against it.  If Priceline moves up about 5% to $440, I should gain 15 to 30% depending on how fast the move is.  If it flounders I have downside protection, and I can sell calls again for six more months, possibly paying for my original call for a risk free trade!  One thing I like about diagonals beyond the nice risk/reward picture is that I will consider a high priced stock like Priceline.  Writing a covered call would cost me over $40,000 which is more than my margin account, and a huge chunk of my IRA.  It would be too many eggs in one basket. 

     

    My goal is to be a growth-oriented trader with a long-term view, trading with the advantages of LEAP options to hedge against market volatility and increase my risk/reward picture.  My posts will be less trade alert oriented, though I do plan to keep writing about my trading ideas.  I will also be adding in market perspectives, book reviews and my thoughts on economics, trading and whatever interests me along the way.  I want to make this site educational and user-friendly for retail traders with part-time commitments like myself.  It is always richer if you post your ideas as well.  Little guys like us can beat the market and secure our future if we stick together!

     

    Revtodd

     

     

    Dec 11 3:06 PM | Link | 1 Comment
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