New Low Option Strategies

Option Expired: Qualcomm (QCOM)

2010-07-16T14:06:00.000-07:00

On April 23, 2010, I purchased shares of Qualcomm (QCOM) at $38. In addition to owning the shares outright, I highlighted a strategy that could potentially minimize the loss or limit the gain and lower the risk. As the expiration date arrived, this strategy has allowed me to minimized the loss from QCOM falling to $36. Both options (Calls and Puts) are worthless at the expiration and we pocketed the premium.

Let's recap the three scenarios I gave on 4/23/10:

Scenario 1 (stock rise 18% to $45)
This is an ideal scenario. Gain from stock is 18.42%. The stock gets "called" away and we are no longer owners of the stock. We get to keep the stock with a $0.46 premium and add that to our gain. Total gain is 19.63% in three months.

Scenario 2 (stock stay at $38)
For three months, the stock has done nothing. Given that the company doesn't pay any dividend, our gain is $0.46 from the premium we sold.

Scenario 3 (stock dropped 30% to $26.60)
This is the least ideal scenario because we sold the $30 Put, we have to buy shares when price fall below $30. Given that we bought at $38, our loss would be 30%. We are forced to buy more shares at $30 and take an additional loss of 11%. Here is a little break down of the transaction:
Initial buy: $38 x 100 = $3,800
2nd buy prompted by options: $30 x 100 = $3,000
Total cost = $6,800
Since we collected $0.46 x 100 = $46 our cost is $6,754
We now own 200 shares at $26.60 = $5,320
Our loss is 21.23%

With shares trading at $36, we are somewhere between scenario 2 and 3. In addition to the premium we collected for $0.46, QCOM paid a dividend of $0.19 on 5/26/10 which minimized our loss further. Here are the results (and possible results) based on today's closing price of $36. For simplicity sake, we will exclude the commissions and fees from our calculation.

Without Options and Dividend

$36 - a 5.26% loss.

With Dividend and no Options

$36.19 - a 4.76% loss.

With Options and no Dividend

$36.46 - a 4.05% loss.

With Dividend and Options (outlined strategy)

$36.65 - a 3.55% loss.

It is obvious that using options worked to our advantage. The premium we received is more than twice the dividend paid by the company. Instead of taking in 0.5% in dividends for the quarter, our strategy added additional 1.21%.

A savvy investor may continue to deploy this strategy for another quarter creating an additional income stream besides the dividend (ex-dividend is 8/25/10). Right now a similar strategy would yield an even higher premium as Put option prices have exploded. October $43 Calls are selling at the same price, $0.18 but the Puts have more than doubled in price. The October $30 Put closed the day at $0.67. Selling both would yield an additional $0.85 or 2.36%.

We'll post an update next week after reviewing the situation. For now, we are happy with a 3.55% loss versus a loss of 5.26%.

Option Expired: Monsanto (MON)

2010-06-17T17:12:00.000-07:00

I speculated in Monsanto (MON) on May 13, 2010 and wrote an article backing my thoughts on my action. That speculation turned out to be a complete loss, 100%. While this trade turned out to be a complete loss, I noted that my option contract once bought was considered worthless. This is the nature of the risk in options. Investors and traders should only risk discretionary capital when venturing into options.

The chart below shows the buy point, strike price, and current price.

When I entered this trade, the RSI (top indicator) was at an extreme oversold condition. As a result, I assumed that shares would rebound to at least the $60 range which would allow my Call option premium to be worth more. Although the RSI moved up from the depressed level, the price failed to do so. A gap down in late May only made matters worse. However, if you expect the worst and you receive the worst, you're at breakeven. That's how I view this trade.

So far, buying Calls or Puts to speculate have proven to be a losing proposition. Using options as a hedge may be a better use but we'll have to wait until the next opportunity arises. The Qualcomm trade, however, is still on track.

Upside Speculation in Monsanto (MON)

2010-05-13T16:15:00.000-07:00

As part of the thinking and learning process, I will try to capture as much as I can in option strategies. This lead me to Monsanto (MON) which have be hated by the market and everyone else including columnist at Barron's. We took position in this name around $70 to find it move one direction, down. At $55, I thought I'd take a cheap shot at this stock rebound through an out right Call option.

My goal is not to take delivery of the shares but plan to sell back the options at a (hopefully) higher price. This is because I don't have $6,250 to take delivery of the shares. Using options allow me to risk up front premium which I paid $50 for the right to buy MON anytime before June 18, 2010 at $62.50.

The breakdown
MON @ $55.50
$62.50 Call (June 10') => $0.50

Chart below shows the option data.

I have approximately 35 days for MON to rise 13%. This sounds like a tough task and it may very well be, but MON has fallen 18% over the same period going to 4/7. Roughly speaking, I expect the stock to retrace 60% of the decline. Chart below shows the macro view of MON.

The key to this trade is to consider all your premium to be worth nothing! That's correct, after placing this trade, I consider myself losing $50. If I regained that money back or profit, then I gained. My view is that the loss ($50) is minimal to the potential gain, I am willing to speculate.A quick technical look and you can see that RSI is at extreme oversold of 16.02. Then again, I said the samething to myself at RSI 20.
This trade should resolve much sooner than my previous strategy on QCOM so check back sooner than later - Art

Qualcomm (QCOM) at $38

2010-04-23T16:23:00.000-07:00

I purchased Qualcomm today (4/23/10) at $38. In addition to owning the share out-right, I'd also would like to sell upside Call and downside Put around 20% out for July 16, 2010. Here is the breakdown

QCOM @ $38
$45 Call (July 10') => $0.18
$30 Put (July 10') => $0.28
Total proceed $0.46

I have created 1.21% of premium.
Here are the possible outcome.

Scenario 1 (stock rise 18% to $45)
This is an ideal scenario. Gain from stock is 18.42%. The stock gets "called" away and we are no longer own the stock. We get to keep the stock $0.46 premium and add that to our gain. Total gain is 19.63% in three months.

Scenario 2 (stock stay at $38)
For three months, the stock has done nothing. Given that the company doesn't pay any dividend, our gain is $0.46 from the premium we sold.

Scenario 3 (stock dropped 30% to $26.60)
This is bad. Because we sold the $30 Put, we have to buy shares when price fall below $30. Given that we bought at $38, our lost is 30%. We are forced to buy more shares at $30 and take an additional loss of 11%. Here is a little break down of the transaction:
Initial buy: $38 x 100 = $3,800
2nd buy prompted by options: $30 x 100 = $3,000
Total cost = $6,800
Since we collected $0.46 x 100 = $46 our cost is $6,754
We now own 200 shares at $26.60 = $5,320
Our loss is 21.23%

This illustration is an example of what could happen. We will look at at this strategy in July.