Playing Leapfrog With Molycorp

Apr. 09, 2014 9:54 AM ETMolycorp, Inc. (MCP)39 Comments
George Acs profile picture
George Acs
3.38K Followers

Summary

  • The serial sale of puts may be a good means of attenuating risk.
  • Large bid and ask spreads shouldn't be allowed to stand in the way of completing trades.
  • Cumulative return may be significant and outstrip risk in time.

The case study woven in this article is still one that is evolving and has not yet come to its final outcome, although interim outcomes have been realized. It is a story of another variation of a covered option strategy that seeks to transform risk into reward, but does so in a less traditional manner.

While I'm not by nature a risk-taker, and tend to use a covered option strategy to help limit my risk and exposure, I do recognize that there is a corner of most every portfolio that should be reserved for more risky propositions.

The size of that corner depends very much on individual tolerance, but the use of cash covered sales of put contracts can be a nice way to tame risk, even among very risky stocks.

For illustrative purposes, I will use Molycorp (MCP), a fallen angel of momentum investors, and whose direct ownership is not for the faint of heart, having at one time been among the kind of Momentum stocks, a new generation of which are currently under siege.

However, while using Molycorp as an example, the same approach may be used for other stocks that have a volatile trading range, expanded weekly options available for trading and sufficient volume of options trading. All of those criteria are critical before considering to undertake the strategy. Additionally, the stock should have a history of regularly occurring alternating direction price moves during short time frames.

The basic building block of the strategy is the sale of put contracts on a stock that meets the above criteria. The other building blocks are simply more put contract sales at various times dictated by the price moves of the underlying shares.

The sale of a put contract may obligate you to assume ownership of shares, perhaps at a price

This article was written by

George Acs profile picture
3.38K Followers
I am a simple individual investor who believes that the playing field is level, but may require active management of one's holdings. I've devised a series of steps that constitute a highly defined covered option strategy that most anyone can follow and that I've described in Option to Profit (2011). Having retired from a career in Pediatric Dentistry, approximately 10 years ahead of schedule, after spending the previous 10 years working just 2 1/2 days each week, I now spend my time trading.For almost 5 years I alerted others of trading opportunities in large cap positions through the Option to Profit subscription service, a premium subscription service that provided actionable Trading Alerts via text messaging or e-mail at my old site www.optiontoprofit.com. As of January 2, 2017, the site  and the name "Option to Profit" are no longer mine. as I've again joined the dark side and taken the easy money. But I've returned to my blogging roots on January 2, 2017 by resurrecting the old TheAcsMan.com ad supported web site, open to all.That, too, ended and the new, subscriber based LEAPtoProfit.com which launched July 2018 and is geared to the less active trader who is either shifting into a "buy and hold" strategy, as am I in this next to final stage of my investing career or seeks to milk an existing "buy and hold" portfolio.Current;y. the LEAPtoProfit p[ortfolio is fully invested and the paywall has been removed until December 2019 when I expect an infusion of cash from position assignments.Ultimately, I hope to make my stock portfolio improve the quality of my life. Whatever stage of life you are in, you can make your stocks improve that quality by putting them to work for you and perhaps LEAPtoProfit can be part of that process.

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