Yahoo and Alibaba are Climbing Higher

Alibaba and Yahoo have been steadily crankin' these past few weeks even when the rest of the market has been chopping up.  I've been trying my new strategy on YHOO options and have been doing well.  I also picked up some BABA too.  Technically they are both on a trend and the "trend is your friend." Fundamentally they both are sound companies and trading at low multiples,Yahoo especially. The P/E for the technology software service industry is 20-60 and YHOO is at a bargain rate of around 6.  With all that new 6-8 billion in cash from selling some BABA IPO shares, that is a serious discount. 

Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.

Win in Any Market … Play the Opposite Side

I know a lot of people have been hit with the market sell off over the past week or so.  I started my options strategy at this time and got hammered on a bio tech stock that had bad results on a failed trial.  This got me focused on really tightening up my strategy to make it work with a higher percentage of success.

At my level of trading I’m looking at ETFs that trade around $40 a share that preferably have weekly options with a high premium.  I am trying to sell puts for the premium on Thursday and use the time decay to make my buy back price lower thus netting me a profit.

With the whole market on a downward tailspin right now the only ETF that fits this criteria is VXX.  The VXX is an ETF that follows the volatility of the market and it moves in contrary motion to the S&P 500. 

I got into a position on Monday and closed today making a decent profit.  I just got into another position and hopefully with all of this volatility I can get out today with another profit. 

Trading Strategy – Cash Secured Puts

After setting up my new trade strategy over the past couple of weeks I realized that buying the stocks is like buying a car.  Why own the car and deal with all the headache of getting it fixed and replacing parts when you can lease for a cheaper price and get a nicer car.  The correlation is similar to stocks versus options.  If you can trade options and get better leverage, i.e. make more money, why buy the stock that has inherent risks of losing value?

I started out trading options but never really appreciated the seller’s side of the option chain.  If you become the seller you net your premium and then wait for the trade to play out.  I always like getting my money up front.  In any deal if you can get paid first before the actual transaction you are headed in the right direction. 

The trades I am making now are selling cash secured puts.  This is probably the safest option trade.  The only potential loss you have is by being assigned the stocks at a low price at expiration.  But if you traded on a decent stock, why wouldn’t you want that stock at a discount? Other than this you are net positive because you got your money up front as the seller of the put option.

As with any trade you have to make a smart decision about where and when to sell and where and when buy.  But if you are good at technical analysis then you should be OK if you keep your trades farther out of the money.  The key is to check the support and resistance lines to make sure your strike price is beyond that and then you will more than likely be OK.

More info on cash secured puts:

Options Industry Council - Cash Secured Puts

Selling Cash Covered Put Options

Here are some great videos that explain credit spreads which are the other safe play that I may be getting into soon.

Credit Spread Option Trading Strategies part 1

Credit Spread Option Trading Strategies part 2

Market Conditions 9-29-14

Today’s market was crazy and I hope everyone has survived with some dignity left.  I have been revamping my strategy over the past couple weeks and haven’t been posting as much.  I fortunately got out of my Ford trade last week to initiate my new trading strategy.  As providence would have it, I got out just in time. 

I started to advocate selling covered calls for safe extra income but after I started learning how to sell cash secured puts and credit spreads, I no longer feel that covered calls are the best option trade.  The problem with covered calls and especially in a market that has become volatile, is that your money is tied up in a security that may lose value while you wait for the expiration of the option.  If you sell a cash secured put you keep your money safe in your account while you wait for expiration.

What happened to Ford today was a confirmation of that fact.  I had initially planned to hold Ford until the October 18^th expiration of one of my covered calls.  After learning about selling cash secured puts I liquidated my Ford position and started selling a few out of the money puts on some volatile bio tech stocks.  If I get assigned the shares at the end of expiration I will have bought the stock at an extreme low which is not a bad situation because the stock will most likely rebound.  If I am able to wait till expiration then I will keep the entire premium.

This is my new strategy now and I will provide more details as my trade develops.  In the meantime it is important in this market with its new found volatility, to keep as much cash as possible and to enter options trades without owning the underlying stock.  Credit spreads are probably the best plays in this market.

Alibaba IPO

It's a staple of China's internet economy. It is Paypal, Amazon, Linked In, Youtube, Twitter and a bunch of other companies all rolled into one in a country of a billion people. Now it's making a play for the international market namely the U.S... will it continue to grow? Will a billion people make more people...uh yes. Market movement is not absolute but population growth is.

Alibaba may have a rocky start, we all know how IPOs are...chaos... it may fluctuate for a day, 3 days, a week, a month...but like Facebook who had a horrible IPO it recovered and kept moving up...yes it is a guess but it's not about will it go up but when.

REITS Are Taking Heat

I quit while I was ahead.  I got out of CYS as well.  The REIT sector is taking a hit and even though the dividend yield is enticing I don’t know how they will sustain it going forward.  If it starts to make a recovery I will re-examine it, but for now I will stick to my covered call strategy to reap the “dividends” I’m looking for.

Here’s another article about the drop in the REIT market:

Why REITS Are Falling And Will They Recover?