The Money Tree

Safely Generating Income in Retirement

What Others are Trading – June 2011

Posted by mounddweller on May 31, 2011

Fellow Traders,

New month, new opportunity to post your favorite new trades, or update us on your old ones.

Regards,

Troy

 

 

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4 Responses to “What Others are Trading – June 2011”

  1. Vijay said

    Aloha Troy,

    Any suggestions for traders who entered the 6/40 puts on IDCC and are now under water ?? I am thinking of rolling out and down.. Thanks for your time.

    Vijay

    • mounddweller said

      Vijay,

      You don’t mention how much you originally sold the JUN $40 puts for but today they closed at $3.20 bid so I presume you sold them for substantially less. Before I discuss my ideas on how I might play it I first want to remind everyone that you must think through all possible scenarios before placing any trade. Know what your stop-loss position is going to be and then if it is hit don’t hesitate, close out the position. This is especially important to remember now that we are entering a period of higher volatility and uncertaintly. Acknowledge that some trades are not going to work out in your favor and plan accordingly.

      Now, that being said, here are the ideas I might consider if I had sold the IDCC JUN $40 puts.

      (1) figure out your net loss if you were to close the position at the open on Monday. If the net loss is more than you’re comfortable with, close the trade immediately. If you’ve exceeded your maximum loss there’s no since hoping the trade will recover. Get out now and don’t lose any more sleep over it. There will be other trades, earn back your lost capital on those trades instead of hoping and praying this one will come back.

      (2) If you haven’t exceeded your maximum permissable loss consider letting the trade run a while longer. There are two weeks left to JUN expiration. The stock appears to be oversold and thus due for a bounce. If a rebound occurs this will give you a chance to lesson your loss or perhaps close with a small gain. If the stock continues to slide, once you hit your maximum loss, close the trade.

      (3) If you hold the trade to expiration and you are still at less than your maximum permissable loss, then your next steps depend on how you feel about IDCC. What are your objectives for the stock? Do you want to own it long-term? If so, consider accepting assignment at $40 and then selling covered calls. If not, consider rolling out a few months for a net credit. In conjunction with this consider rolling out but reducing the number of contracts you roll out. For example, if you are currently short 5 contracts, see how far out you need to go to reduce your position to 4 contracts but still earn a net credit on the trade.

      Vijay, my bottom line on what I might do would be decided by why I wanted to do the trade in the first place.

      If I placed the trade because I like IDCC and ultimately want to own the stock then I would consider holding on and working the trade and earning income until either (1) the stock recovers above my strike price or (2) I accept assignment of the stock and begin selling covered calls.

      If I placed the trade just because it had a great premium and I wanted to earn a little income on my capital, I would admit the trade went against me, and close it immediately on Monday.

      Hope this helps you consider your options. Remember, your decisions are your own. You have to do what is best for you and your situation. What I would do may or may not be relevant to your current situation.

      Regards,
      Troy

      • Vijay said

        Troy,

        First, thank you so much for your detailed analysis and suggestions. I am truly appreciative of the content and it definitely has given me lots to think about.

        FYI..I sold 3 Put contracts of IDCC around 5/17 for $1/contract when the stock was around 44.90 during the day.
        I liked IDCC and did some investigation on the stock. I figured the support was $40 from a price perspective as well as the 200 MA. I also looked at some ratings.
        Here is the link: http://navelliergrowth.investorplace.com/portfolio-grader/report-card.html
        I figured I had a downside cushion to $39 and was OK with owning the stock at this price. However, my ideas have now changed and so I am considering rolling out to Jan. 2012 at the strike of $30. Essentially, I will come close to break-even with this roll-out (counting my $1.00 which I received as premium). I am going that far down and out, as that is the price I see as the next MAJOR support, with minor support around $33.
        While this is not exactly a money-making trade since I will break even if IDCC stays above $30 in January 2012, at least I don’t incur a loss.
        My 2nd option of choice is what you suggested in that to own the stock at $40 and then write monthly covered calls and work myself out of the hole…
        Guess I’ll evaluate both options over the weekend and make a decision some time next week.

        Thanks once again for your excellent alternatives.

        vijay

  2. Rich said

    This morning I made the following adjustments to my Alcoa scorecard:

    I bought to close 7 Jul 16 puts @ 1.56 and sold to open 6 Oct 16 puts @ 2.06 for a net credit and it also freed up $1600 in cash.

    I then sold to open 1 Jul 14 put @ .33 ( this would give me a 2.2% return on this contract if AA stays above 14 by Jul expire)

    I now have a JUL 14 and a JUL 15 put contract in play. I would like to see Alcoa trend back above 15 by Jul expire. If not I will have to roll out or out and down again.

    YTD I have a 6.02% ROI on my Alcoa scorecard.

    Rich

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