Profitable Trade: Caterpillar (CAT) Naked Puts

Today I closed the following transaction for a profit:

09/04/12   STO 2 CAT Sep22 2012 77.5 Puts @.57   102.46
09/14/12   BTC 2 CAT Sep 22 2012 77.5 Puts @.01    -2.04

I was able to close this trade for a penny and without commissions so I did. When I originally sold the puts CAT was down to $82.20. Ten days later it was over $93/share. Due to the steady rise in the stock, margin maintenance averaged down to ~$1700. As such, we earned $100.42 in 10 days on $1700 in margin maintenance. This equates to a 5.9% return on maintenance or 215% annual.

That's another thing I love about put selling. If the price of the stock skyrockets, you can close out your trade early. Each day the stock rises the amount of margin maintenance needed decreases thereby freeing capital for other trades. I remember when I exclusively traded covered calls that it would not be beneficial if the stock rose too much or too quickly. Buying back the calls when volatility was in an uptrend was not very profitable.

New Trade: Phillip Morris (PM) Naked Puts

Today with Phillip Morris showing weakness and trading down below $87/share I entered into the following transaction:

09/12/12   STO 2 PM Dec 22 2012 80 Puts @1.23    234.50

I've wanted to trade PM for a while but never had the opportunity as it was in a constant incline while I like to sell puts on weakness. Phillip Morris is a blue chip company with a rising dividend. In fact it raised it's quarterly dividend today to .85/share which increases PM's yield to 3.9%. The stock has been rising but appears to have support above 80. If put to us our yield on cost will be 4.3%.

If the puts expire worthless we will earn $234.50 in 101 days on initial margin maintenance of $2100. This equates to an 11.16% return on maintenance or 40.33% annual. We have downside protection in the neighborhood of 10%. In the event the stock tanks we should be able to roll down and out for a net credit. As such, an exit strategy is in place.

Profitable Trade: GDX Naked Puts

Yesterday I took advantage of the strength in GDX (precious metal miners ETF) and closed the transaction, without a commission as follows:


03/20/2012    STO 3 GDX Apr 21 2012 47.0 Put @ .53                  146.75
04/20/2012    BTC 3 GDX Apr 21 2012 47.0 Put @.63                   -201.24
04/20/2012    STO 3 GDX May 19 2012 45 Put @.97                     288.70
05/14/2012    BTC 3 GDX May 19 2012 45 Put @3.46                   1050.24
05/14/2012    STO 3 GDX Jun 16 2012 45 Put @3.99                    1194.68
06/01/2012    BTC 3 GDX Jun 16 2012 45 Put @1.20                   - 372.25
06/01/2012    STO 3 GDX Jul 21 2012 43 Put @1.60                      467.74
07/19/2012    BTC 3 GDX Jul 21 2012 43 Put @1.40                     -432.24
07/19/2012    STO 2 GDX Sep 22 2012 42 Put @2.41                    470.50
09/07/2012    BTC 2 GDX Sep 22 2012 42 Put @.04                        -8.04

This wild ride has come to an end with a profit in tow. We earned $504.36 in 5 1/2 months. Due to the rise in the stock price our average maintenance was lowered to ~2100 in average margin maintenance. This equates to a 24% return or 52% annual.

We rode this trade through a serious decline, a bottom and then a rise. I stuck to my guns and always sought to roll out and/or down for a net credit. In July I was able to roll down and out for a net credit and lower the number of contracts I had in play thereby lowering the amount of capital committed to the trade. Amazingly I got paid to do this.

This trade is my poster child for the power of rolling options. A five and a half month hold is longer than usual for me but at the end it was an educational, challenging and most importantly, a profitable trade.

Profitable Trade: Lowe's (LOW) Naked Puts

Yesterday the following puts expired worthless:

7/16/12  STO 4 LOW Aug 18 '12 24 Puts @.34   $122.97

At the time of this trade LOW was down ~3% to $25.90. It ended up in the high 27's. This was a 33 day trade with average margin maintenance of ~$1400. Our return on maintenance was 8.78% or 97.1% annual. I will look to trade Lowe's again should the price drop as it has a lot of daily moves but not much of a monthly one. This is perfect for put selling.

Waiting like a crocodile...

Ol' Chester is sitting on a bunch of maintenance money but the market keeps creeping up. This little rally looks a bit long in the tooth so I expect to see some down days in the near future. If we can see a string of two to three down days in a row I will look to enter a few put selling trades. I'm keeping an eye on SYY, FCX, LOW, MSFT, INTC, KMB, MCD, CTL, GE and other rising dividend/high dividend stocks. I wanna see some fear!

In the meantime, only my eyes are above the water while the rest of me lies in wait.

Trade Continuation: GDX Naked Puts

Today I took advantage of the strength in GDX to continue this trade as follows:

03/20/2012    STO 3 GDX Apr 21 2012 47.0 Put @ .53                  146.75
04/20/2012    BTC 3 GDX Apr 21 2012 47.0 Put @.63                   -201.24
04/20/2012    STO 3 GDX May 19 2012 45 Put @.97                     288.70
05/14/2012    BTC 3 GDX May 19 2012 45 Put @3.46                   1050.24
05/14/2012    STO 3 GDX Jun 16 2012 45 Put @3.99                    1194.68
06/01/2012    BTC 3 GDX Jun 16 2012 45 Put @1.20                   - 372.25
06/01/2012    STO 3 GDX Jul 21 2012 43 Put @1.60                      467.74

We were able to roll out and down two strikes for a  net credit of $95.49. This increases  the amount of option premium collected on this trade to $474.14. If put to us our cost basis will be down to $41.42. This ETF is presently trading at $45.84. Although GDX is volatile this is a nice cushion and we have multiple rolling opportunities available to us if need be. If these puts expire worthless we will earn $467.74 in 4 months on ~$3000 in margin maintenance. This equates to a return of 15.6% or 49.8% annual.

This trade demonstrates the power of put selling. When I entered this trade GDX was just below 50 which I incorrectly thought was a strong support level. At one point during this transaction GDX had fallen below 40. Weak hands were flushed but I stuck to my guns. Some would say I was foolish, however, there were so many strikes to roll out and down to I was not going to be a weak hand who bought high and sold low.

I'm not out of the woods on this trade yet, however, I am feeling like I'm in the driver's seat. I'm learning that when a stock tanks, the volatility and the premiums increase thereby creating opportunities for enhanced returns. It seems odd that some of my greatest returns are on trades that initially went against me. Many seasoned traders would have been "prudently" stopped out.

Note: Why didn't I hold the June puts to expiration and drain all the time value and take advantage of the great time decay in the last two weeks? Two reasons: 1) when the opportunity presented I wanted to roll down and out 2 strikes and get paid ~$100 to do it; and 2) I'm going to be on vacation options expiration week and I don't want to have any trading concerns on my mind. Silly reason? Obviously I don't think so. :)

I'm smelling opportunity in PG *sniff*

Proctor & Gamble is slowly sinking following an unexciting quarterly report. Today it is at 63 and change. There are the usual pundits out there calling for big trouble. My take? Like we just saw with Pepsico, one quarterly report does not a blue chip make. Like Pepsico I think that once PG consolidates and finds a bottom a great put selling opportunity will be in place. With the recent dividend rise PG's yield above 3.5% should buoy the stock. I'm waiting for the consolidation and then I'm looking at the 60's or if worthwhile the 57.5's. Strong support is at the 57.5 level. For you thrill seekers the 62.5's might be interesting. You can always roll down and out for a credit if you don't go out too far on the strike date.

On a side note the recent bribery allegations make Wal-Mart another interesting blue chip dividend stock to watch.

Profitable Trade: Intel (INTC) Covered Calls

 In a traditional IRA we were assigned our Intel covered calls. This trade went down as follows:

11/02/2011   Bought 200 INTC @ 23.8875                                                  -4,787.49

11/02/2011   STO 2 INTC Nov 19 2011 24.0 Call @ 0.42                                     72.47
11/14/2011   BTC 2 INTC Nov 19 2011 24 Calls @ .89                                     -189.52
11/14/2011   STO 2 INTC Jan 21 2012 24 Calls @ 1.70                                   +328.47
12/01/2011   Dividend                                                                                  +42.00
01/21/2012   Sold 200 INTC @ 24                                                                +4779.91

In this trade we made $245.84 in 81 days on an average of ~$4600 invested. This equates to a return of 5.3% or 23.88% annual. As always we include our commissions paid in the calculations. We allowed ourselves to get assigned because we didn't see any attractive opportunities to roll for a credit. I only roll options for a credit, no exceptions. We really like INTC and will probably write out of the money covered puts in this account to buy it back at a price of our choosing. Of course we will be paid for our efforts.