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Posts Tagged ‘short-term trade’

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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