The Money Tree

Safely Generating Income in Retirement

New Short-term Trade – GME

Posted by mounddweller on May 17, 2010

NOTE:  What follows violates almost every single rule in Ron’s approach to trading covered calls and naked puts.  Procede with extreme caution.

For many months now I’ve been considering the opportunities that might exist in selling naked puts in the week of expiration.  Certainly this is not a new idea.  There’s even at least one book written on the subject; however, I don’t recommend you buy it.  I found it to be very technical and overly complicated.  Despite my disappoinment in the book I still think the idea has merit.  Consequently, this weekend I went in search of a couple of good opportunities with which to test the waters.

My objective in doing these types of trades will be to pick up some quick cash by selling what I feel are mispriced puts which have little risk of assignment.

The stock I chose for my first foray in this type of trade is GME.  I chose GME for a number of reasons but the most important one was that I am already familiar with the company and the stock.  I have successfully traded it twice before in the past year; albeit using a different strategy.

My criteria for placing this type of trade are as follows:

(1) ROIC > 0.5% or 36.5% annualized (in this trade it was 1.75%)

(2) Put Factor (PF) > 2 (in this case it was over 3)

(3) Dowside protection > 10% (in this trade it was only 9.02%)

Note:  These are preliminary criteria.   Since I’m experimenting with this strategy they are subject to change based on my actual results going forward.

Here are the specifics of the trade I executed earlier today: Sold 3 MAY GME $20 puts at $0.35

If you find this particular trade intriquing you can still get into it.  Using today’s closing prices it is even more appealing than when I first saw it over the weekend.  Today GME closed at $22.02.  With only 4 days to expiration the MAY $20 put is at $0.24/0.27.   Selling the puts at $0.24 generates a yield of 1.2% (annualized that is over 100%).  Ron’s PF is 4.09 and he estimates the probability of assignment is < 1.00%.

BEFORE EXECUTING THIS TRADE IT IS IMPORTANT TO NOTE THAT GME WILL REPORT FIRST QUARTER EARNINGS ON THURSDAY.  THAT IS WHY THE PREMIUMS ARE SO HIGH.  THERE IS A LARGE AMOUNT OF UNCERTAINTY AS TO WHAT THEY ARE GOING TO REPORT.  INDUSTRY SALES WERE DOWN SHARPLY IN APRIL.

Below are a VISIONS Stock Explorer screenprint and Price Chart for GME.  One look at the chart will show you why Ron would not endorse or support entering this type of trade.

 

I’m very much interested in hearing your thoughts on this trade.  Please comment and let me know what you think.  If you choose to execute this or a similar trade let me know how it turns out.

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2 Responses to “New Short-term Trade – GME”

  1. Rich said

    Troy, I think I have looked at the same book at Barnes & Nobel about selling puts just before expiration. Concept seems good but book was way too technical and short on a procedure. Is it possible to use Visions to find these opportunities? By the way, I’m a little skeptical about Ron’s probability of assignment percentage. I sold a Jan 20 put on SPWRA back in Jan when the stock was trading at about 22 and Visions had the probibility of assignment at <1%. I got assigned and the stock has fallen down below 13 since then. It will take me awhile to work my way out of that one.

    By the way, I'm playing around in my virtual trading account with spreads and puts on the SPX index. Looks like you can pick up some quick gains but will play in the virtual world and see if I can figure out a plan to pursue this.

    Rich

  2. Rich said

    I see that GME closed above 21 today. Looks like you had a good pick.

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