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Archive for January 7th, 2010

GME – An Opportunity

Posted by mounddweller on January 7, 2010

Hi All,

GMEs earnings announcement today presented me with a great opportunity to expand my position.  The stock sold off hard at the opening bell diving over $4.50 to trade as low as $19.42.  In seeing this big drop I did a quick read of the press release to ensure nothing was fundamentally wrong with the company then I started looking at puts.  My first look was at the JAN $19 puts.  However, with only 9 days to expiration it had little to offer.  It was priced at $0.35 bid.  That wouldn’t do. 

What I was looking for was a put that had enough premium that when the bounce I was expecting came I could buy it back for a quick profit.  Next up, the FEB $19 put.  Now here was a put I could like.  It was at $0.85 bid.  This was the one I wanted.

So, now knowing what I wanted to sell I began to closely watch the stock trade.  I was wanting to sell the put at the point of maximum pessimism.  This is something that, with practice, you can begin to sense and see in the trades.  The trick is in having the courage to pull the trigger when that point comes.  So many times in the past I have chickened out when the exact moment arrived.  Not today.  I pulled the trigger and sold 3 FEB $19 puts for $0.95.   Believe it or not, the stock almost immediately began to turn around.  Less than an hour later I could have bought my puts back for $0.45!    Did I?  No, I did not.  Why?  Well,  partly because I was being greedy.  Of course, the stock then bounced around the rest of the day and I didn’t get another chance to buy it back.  However, it looks like I might have another chance tomorrow as the stock was up in after-hours trading.

OK, so by selling the FEB $19 puts what did it do for me?  Well, first off I am getting a 5% ROIC  on my cash secured puts (0.95/19).  5% in 44 days to expiration is 41.44% annualized.  Also, if I’m successful in buying the puts back at a steep discount to my sales price or if I hold them and they expire OTM I will have significantly reduced the net cost of my existing long stock and short call position.  You’ll recall I bought the stock on 12/21 at $22.65 and sold the JAN $22.5 call for $0.96.  That makes my net cost $21.69.  

If I’m wrong and GME continues to sell off and I end up having the stock put to me at $19 I still am in a good position.  My net cost on the new position will be $18.05.  I’ll then own 500 shares with a total net cost of $19.51.

Regards,

Troy

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