To follow are 2 recent trades I've put on plus 3rd trade that you can put on for yourself today.
Trade #1 – May 6th bear call spread on Yahoo
After reporting good numbers last month, YHOO had moved up steadily for 2.5 weeks. On May 6th, it was announced that David Einhorn (Greenlight Capital) had taken a significant stake in the company. This news sent the stock above $18.50 a share, nearly a 15% move off its base.
My trading partner, Dan, and I believed that YHOO was overbought and it would pull back to its 50 day average, which was $17 a share. Additionally, when a large investor files a 13D, disclosing a 5% or greater interest in a company’s stock, the shares of that company often shoot up over the next 48-72 hours. Institutions, hedge funds, and independent traders jump on to the positive momentum of the news and speculators begin to buy calls. At some point, the air will leave the balloon, and those people chasing the stock will realize fundamentally, while the company’s shares have just possibly found “strong hands;” nothing has changed from prior to the announcement that could sustain this news-driven rally. I also got additional confirmation from Pro17, as the April 17th forecast on YHOO called for a max price target of $17.75.
A Great Strategy For this situation is the Bear Call Spread, which is a bearish (or neutral) trade with limited risk that benefits from high volatility, when a stock is showing strong resistance and it wants go lower.
Here's the trade we entered on May 6th. Note: STO = sell to open; BTO = buy to open; STC = sell to close; and BTC = buy to close
Trade Details
STO-5 YHOO May11 19 Calls
BTO 5 YHOO May 11 20 Calls
for a net credit of $.22 per contract
Max Risk: $395
Max Reward: $105 or 26% by May 20th
Profit Range: $0 – $19.21
Max Profit at: $0 – $19
As of this morning, May 13th, YHOO is currently trading at $16.01. We currently have a 20+% profit on this trade. We could close it out here but we're going let the options expire worthless next Friday (5/20) and capture the full 26% (if YHOO stays under $19, a 95% probability).
Trade #2 – May 11th iron condor on SPX using weekly options
Each week, I look for a high probability trade using weekly options. The goal is to generate a 4 to 6% return each week with this strategy. Because this trade structure does require a relatively large capital risk compared with the reward, I look for a trade with a 90% of higher probability of success.
On Wednesday, we took advantage of the increased volatility due to the market selloff and entered into the following iron condor on the SPX. I liked this trade because: a) I felt that the S&P would not break below 1300 or above 1365 by Friday's close; b) the Pro17 system expected downward pressure in the S&P, giving me confidence to go out just 28 points on the calls I was selling; c) it had a 97% probability that the 1300 put and the 1365 call would expire worthless on Friday; and d) the trade would reach its full profit potential in just two days time. Again, as this is a credit spread, we're looking for this position to expire worthless, giving us the maximum yield from the trade.
Here’s the trade we entered on May 11th:
Stock / Symbol: S&P 500 INDEX / SPX
Price at trade post: $1337
Option Strategy: iron condor
BTO 2 SPX MayWk2 1295 Puts
STO -2 SPX MayWk2 1300 Puts
STO -2 SPX MayWk2 1365 Calls
BTO 2 SPX MayWk2 1370 Calls
for a net credit of $0.30 per contract
Max Risk: $940
Max Reward: $60 or 6.38% by May 13th
Profit Range: $1299.70 – $1365.30
Max Profit at: $1300 – $1365
With weekly options expiring today (5/13/11) and with the SPX comfortably within the 1300 – 1365 range, the puts and calls we sold will expire worthless. The puts and calls we purchased will also expire worthless but we don’t care because we only purchased them to limit our risk on the trade. With the options expiring worthless, we get to keep the entire premium received when we opened the trade for a 6.38% return in just one week.
As long as the conditions are right, we’ll continue to place a similar trade each week. That’s equivalent to 24% per month!!
Trade #3 – May 12th Calendar Call Spread on MSFT
MSFT is a great stock to trade a using a calendar spread because it doesn’t move all that much. I’m suggesting on trade on MSFT using a calendar call spread because we think that the stock is close to a bottom and has more upside than downside. Providing additional support for this thesis is the Pro17 system’s recommendation of going long MSFT at the 23.50 to 24.50 range with an eventual upside target of $27.
If the stock is trading under $26 by June expiration, you’ll have taken in a 22% uncalled return and will then sell the July 26 strike calls against the position. We got filled on this trade yesterday afternoon at a debit of $0.79 per contract. You can get in on this one today at an even better price - $0.74 per contract.
Here’s the trade:
Stock / Symbol: Microsoft / MSFT
Price at trade post: $25.27 (current price is $25)
Option Strategy: calendar call spread
Max Risk: $444
Max Reward: $298 or 67% by Jun 17th
Profit Range: $24.89 – $27.32
Max Profit at: $26
Uncalled Return: 22%
Trade Details:
BTO 6 MSFT Oct11 26 Calls
STO -6 MSFT Jun11 26 Calls
for a net debit of $0.74 per contract
Requirements:
Cost/Proceeds $444.00
Option Requirement $0.00
Total Requirements $444.00
Estimated Commission $15.00
Good luck on this one. Depending upon conditions, we post 1 to 3 new trades a week. Join us now and get in on all of our low risk, high probability trades.
Mike
