How to view the entire chart:
1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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As you know, my PCCRC has a bullish bias, but it is protected to the downside, as long as the stock falls in high volatility. The worse case scenario is a fall in the stock price with a drop in IV as well. In such cases, there is little we can do, but wait for a bottom and make the modifications necessary to take some money off the table, selling profitable puts, and hope that the bounce is good enough to take us back to some break even or slight loss area.
This was the case with ERTS. You'd remember that I entered this trade back in Nov. Here is the URL for that article:
http://stockoftheday.blogspot.com/2006/11/proposed-trade-on-erts.html
Even in that bad case scenario, I estimate that the greatest loss would be about 20%, but more often 10%. Here I would like to explain how you can take money off the table, modify your trade for a bounce, and limit your loss going forward. If I am right, ERTS will go higher from here. I even have evidence that ERTS may reach new highs (following the RET elliott analysis).
For now, I would like you to take a look at what was done today in my account. Note that 1,100 shares were assigned to my account, thus 11 of my short puts have dissappeared from the account. I will finish this article after the close today. For now, take a look at the activity in my account:
Here are the modifications of the trade today.
1. Assigment. Today I found 1100 shares of ERTS in my account as a consequence of the assigment of 11 short Dec. Puts, and I don't pay commissions for this assigment, since I did not request any action. For the sake of clarity, the puts are erased from my account, as if I had bought them at $0, but without commissions.
2. Sell of assigned shares. Naturally, I did not have cash in my account, nor did I have buying power to keep 1100 shares at $60/share, which were trading at $52.49 early this morning. I cannot keep those shares overnight without a margin call, which would require that I send money to my broker immediately, or they could close any position of their choosing to upset the negative balance in my account. Naturally, I sold the 1100 shares at the current market price. Ironically, the stock had bounced from the previous day close, so the assigment resulted in a small balance in my favor. I'll explain.
Yesterday, the close price for the Dec. 60 puts was 8.1/8.3. If I were to buy the puts back, I would have had to pay $8.3/share, or $9130 total. Instead I paid nothing for those contracts. Instead, I was assigned $1100 share at $60, a debit of $66000 in my account which I promptly sold at $52.49/share or $57,739 total. My loss was -$8,261, almost $1000 less than what I would have had to pay to close the short puts.
3. Rollover. Seeing that the stock was bouncing from near the 200dMA, I thought that it may be making a bottom here. I checked my technical indicators and became suddenly bullish, at least in the short term. So, on top of closing the long shares, I had to either buy calls or sell puts. The easiest thing to do was to do the equivalent of a rollover by selling 11 Jan 60 puts, to maintain the character of the trade. Naturally, I could have sold those yesterday for $8.2, so taken together, the three steps amount to only a small advantage for me.
4. Sell of March puts. Up to this point, all the steps above are equivalent to a rollover, that I could have done last friday, as a usually do. But I decided to wait feeling that the bounce was about to happen, I did not want to commit to another month in this trade. The March puts are profitable, and selling a good portion of them is equivalent to a profit taking move. I don't rule out buying them back because this bounce could be a false start. I will discuss the technicals on ERTS in another post. For now, here is the steps taken today:
5 comments:
Hi Juan,
On AMZN, why would you make it more bullish rather than neutral?
Mary
Hi Juan
Obviously every stock is not going to continue in the anticipated direction and ERTS is an example of that. When the January short options are close to expiry can you still profit by rolling them to February or will that be too close to expiry of the long positions? Without backtesting the trade myself I can't see whether there is a point where you need to close out all positions or else face a loss. Or will continued sale of the closer month options still produce a profit (or at least protect your invested capital) even if the stock doesn't move too much?
thanks
Kevin
That is certainly a matter of preference and your confidence on the potentiality of the stock trend.
Remember that the PCCRC is a protective trade, so if the stock reverses and goes south, you may have a limited loss or even a gain, if the I.V. raises along with the stock decline. This is actually common.
When the stock price declines in low volatility, it tends to bounce back. This is what we are observing with ERTS. Although I have an unrealized loss in my current position, it could even turn into a winner, if the stock goes to new highs.
With AMZN, I am short-term neutral, but I would not hesitate to modify my position if I thought that it will turn bullish. Yes, I am long-term bullish, but my position is not long-term. I have to be concious of the short-term corrections.
I hope this helps.
ERTS is a good example of the worse case scenario. The stock declined but not strongly enough and not with sufficiently high IV to cause a profit.
I will dedicate an article to ERTS shortly, so that I can explain exactly what one needs to do to stay in the position. Exiting at a loss is always an option, but I have kept going with ERTS because I have until March still. I may go back closer to break even, while still collecting premium from shorts, which frees capital for other trades.
In the long run, the PCCRC is a successful form of trading because you can stay long enough to see the trade succeed or at least stay low in the loss. My plan with ERTS was to sell long puts at the bottom. IF the rally weakens, I might buy back puts in the hope that the stock will decline to new lows and make me a profit. So far, the rally is strong, and my Eliott analysis indicates that the stock will go back to $60.... We'll see.
Rolling shorts to February may not bring much profit, but it may keep you in the trade. Because the shorts are soo deep in-the-money, I have had to deal with assigment repeatedly. I have been assigned Dec. and Jan short puts well beyond my cash balance, so I have simply closed them and sell new Jan puts. I could have chosen to sell Feb puts instead, which would prevent assigment for a longer while. I think that selling Jan puts will pay off, if the rally to $60 is strong and quick. I will explain this in more detail when I enter the whole history of the trade in my next article.
I always consider closing the position one week before expiration. This is my opportunity to see clearly if there is a point in continuing the trade. However, this trade is not the same as a vertical spread or a long option, you will NOT lose all your money, quite the contrary, staying in the trade may reduce your loss AND free capital so you can open other positions.
The ERTS trade will illustrate that clearly.
Thanks Juan.
I will look forward to reading more on ERTS and AMZN.
Regards,
Mary
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