Option Trade Of The Day – 03/08/10
Mar 7, 2010 Options, Technical Analysis, Trading Idea
Monsanto - 03/05/10
Shares of fertilizer producer Monsanto (MON) have severely lagged the overall market the past two months. On Friday, with the broader indices all gaining over one percent, the stock lost 2.23%.
However, we are now looking for the stock to hold above $72 and rebound a little, creating an opportunity for some quick profits. Should we see some further drop, we should hold above $70, with a break below there, creating some shorting opportunities.
With the stock due for a short-term bounce, we are recommending buying call options on Monsanto. Buy the March 2010 75 calls, which closed on Friday at $0.55 by $0.57.
With the stock in a downtrend, we want to enter into this trade ONLY if the stock is moving to the upside. If MON starts an upward move, then initiate the trade. We also want to take quick profits, as these are the March options, which expire on the 19th and again, the stock is in a downtrend. When the options are up at least 15% after entry, exit.
RISK PROFILE:
Assuming we enter only when MON is moving to the upside, this is a low risk trade that should pay big. However, do not get greedy. Once up about 15%, do not hold the trade overnight beyond that point.
The stock market had a great week last week and as such, some profit taking this week would not be unexpected. Keep that in mind. Take early profits and once again, enter into trade only if Monsanto is moving to the upside. We will follow up on this trade here on the blog, so check back often and or subscribe to our RSS feed here.
Buy Big Lots Options On Upcoming Earnings
Feb 26, 2010 Earnings, Options, Trading Idea
The following is the latest trade from our Options Capitalist service.
Closeout retailer Big Lots (BIG) reports its latest earnings news on Monday. There is a very good likelihood the company beats estimates, which should send the shares higher.
Buy the Big Lots March 2010 32.50 calls. They are now trading at $1.90 by $2.05. Enter to $2.40. There is a fifteen cents spread between bid and ask, which is larger than what we prefer, but with a beat, we should see a $2-$3 pop in the stock.
The Options Capitalist is a subscriptions-based options trading recommendation service. More information about the service can be found here.
Option Strategy of the Day – Covered Calls
Feb 24, 2010 Options
Covered calls are call options that are sold by an investor/trader who already owns the underlying stock, hence the writing or selling of the calls, are covered. Keeping in mind that for each option contract sold, the option writer is obligated to sell 100 shares of the underlying stock if the stock is called away, to write a covered call, you have to own a hundred shares of a stock, for every option contract that you write or sell.
In simpler terms, if for example XYZ stock is trading at $50 and you own 500 shares, you could sell 5 of the $55 March 2010 calls, which for the sake of conversation, we’ll say are trading at $1.50. So for selling five contracts, you collect ($1.50*100)*5 or $750.
The options expire on the third Friday of the month or March 19 in this case. If by March 19, XYZ is trading under $55, the stock won’t get called away and your profit is the entire $750 premium that you collected.
If by March 19, XYZ has traded above $55, say $60, then the option buyer will exercise the options, enabling her to purchase a $60 stock for $55 plus the $750 premium. Factoring the premium, her total price for the stock is $56.50. So she can purchase the stock and instantly turn around and sell the shares for a $3.50 per share profit.
Covered calls, is a low risk trade for the option writer. The worst that can happen is the stock makes a major move to the upside, and you lose out on the potential profit. For example, XYZ could run up to $95 and you lose out on all that profit because you have to give up the stock at $60 per share. However, while you’ve lost out on some potential profits, there is no actual loss to your portfolio.
Another benefit of the covered call is that it provides some downside protection to a stock holding. If XYZ drops to $45, ordinarily, you would have lost $5 * 500 shares, or $2,500. However, because you sold the calls and received the $750 premium, you limited your losses to $1,750.
Why Put On a Covered Call Trade:
You already own XYZ stock that you don’t want to sell now, but you don’t think the stock will be moving to the upside in the near-term.
You want to gain some extra profits from your stock holdings.
You want to hold on to the stock, but are worried the stock could move to the downside.
In summation, covered calls are a low risk options trade that you could use to generate regular monthly income. With 80% of all options expiring worthless, this is a trade that puts the odds in your favor.
Tags: covered calls, Options, options strategy
Selling First Solar Calls – Easy Money In The Bank
Feb 23, 2010 Options, Trading Idea, Uncategorized
Trade Update II
On Thursday February 11, we sent out a recommendation to subscribers of our Navivest Options Writer service, that they sell the First Solar (FSRL) March 150 calls.
Our recommendation was premised on the fact that the stock would have to climb about 35 points before the March 19 expiration and beyond that, our analysis of First Solar, revealed that there was too much negative overhang on the company, making it unlikely that the company would rally that much in so short a time period.
While the stock did rally a few points after we got in, its been sold off drastically since last Friday, February 18 and the March 150 calls, which we got $0.92 for, are now bidding just $0.06!
March 19 is still a ways off, and the stock could see some upside move, but there is now a better than 95% chance that even if we hold on through expiration, the stock stays below $150. Alternatively, we can actually close out the position now and we realize a profit of 93.47%.
Buying calls and puts provide a great opportunity for traders to realize incredible profits in a very short period of time. However, this should be done only with the utmost care and after conducting a very thorough analysis of the underlying stock to see if it has a good likelihood of moving in the direction you expect it to, as well as analyzing the options, including looking at the options’ greeks, to make sure its not priced in a manner that stacks the odds against you to begin with, as we do when selecting options trading candidates for our Options Capitalist service.
Alternatively, instead of just buying and calls and puts, traders should look to sell options as well, to put the odds when trading options, in their favor. Selling options also helps offset risks inherent in the portfolio, from just buying calls.
Eighty percent of all options expire worthless, which means that when you buy a call or put, there is a good chance that it will be a losing proposition.
Using our above trade as an example, while our subscribers where selling the FSLR March 150 calls, others out there were taking the other side of that trade, buying the calls in the hopes that First Solar either climbs to over $150, so that they can exercise the option and buy the stock at a lower price, or sell the calls at a profit if there is some rise in the stock. But as aforementioned, we sold those calls at $0.92 and they are now bidding $0.06, meaning anyone buying those calls on February 11 and holding on through today, has lost $.86 cents on each call they bought, or 93%.
For more information on Navivest’s subscription based trading advisory service, visit out website at http://www.navivest.com
Tags: calls, calls options, first solar, options writer, sell options
The Options Capitalist – SII March 37 Calls Exit Alert
Feb 22, 2010 Options, Trading Idea
The Smith International calls we entered into on Friday, are up about 125%. They are now bidding $4.10, but with the wide spread between bid and ask, we are up 95%. Exit trade.
Navivest
Tags: call options, navivest, options capitalist, smith international
Trade Advisory – 02/19/20
Feb 19, 2010 Mergers & Acquisition, Options, Stocks, Trading Idea
The following is from the latest issue of The Options Capitalist, our subscription based trading advisory service for options traders.
The Options Capitalist
Smith International
02/19/2010
Shares of oilfield services company Smith International (SII), are up $4.53 on a report in the Wall Street Journal, that the company is in advanced talks with Schlumberger (SLB)on being acquired, with an announcement possibly coming next week.
The move in the stock today represents a better than 13% move, but we are hoping that if a deal is announced, Schlumberger’s offer will be higher than the current $37.88 price of the stock.
On December 14, 2009, Exxon Mobil (XOM) announced a $41 billion offer for XTO Energy (XTO). Although this was a slightly different field, XTO is an energy producer, the premium was 25% and hopefully an offer from SLB would be at least similar.
Buy the Smith International (SII) March 37 calls. The current price is $1.95 by $2.10, indicating a $0.15 spread, which will cost us a whopping $15 for each contract plus commission. However, if an offer for the company comes in higher than the current price of the stock, that would put us in a very nice position profit wise.
The Options Capitalist
http://www.navivest.com
Tags: exxon mobil, navivest, options capitalist, smith international, xto energy
Generate Options Income Selling Calls
Feb 19, 2010 Options
On February 11, we recommended that subscribers to our Navivest Options Writer service, sell calls on solar panel maker First Solar (FSLR). Our rational was that we expected the stock to drop, as European countries such as Germany and Spain, were going to be cutting the subsidies they currently provide to their citizens for installing solar power.
The generous subsidies offered by Germany has made that country the leader among all countries in solar usage. With the planned cuts in subsidy, demand will be lowered and solar pricing, which has taken a hit over the past couple years, will continue to deteriorate. This obviously will impact First Solar’s profits.
When we sent out the recommendation, First Solar was trading at $114. 45. We sold the March 150 calls on the premise that it would be very unlikely the stock would climb that high by March 19, 2010, when the March options expired.The stock actually rallied a bit this week, but today, the stock is down on disappointing earnings news released yesterday and two downgrades, bolstering our contention that the stock will not hit $150 before the March expiration. If the stock holds below 150 and thus is not called away on us, our profit on the trade is 100%, in a month!
Writing options should be a part of every options trader’s portfolio. 80% of all options expire worthless, meaning that for those writing options, they have the opportunity to be right 80% of the time, making a very strong case for why traders should make selling calls a part of their repertoire. With the right stock picking strategy underlying their call writing/options selling strategy, option traders can consistently generate options profit every month.
For more information on our service, visit our website at http://www.navivest.com/services.htm.
Tags: calls, first solar, Options, options writing, selling calls
HPQ Earnings Options Play Trade Follow Up
Feb 18, 2010 Earnings, Options, Stocks, Trading Idea
Hewlett Packard (HPQ) reported Q1 earnings of $1.10, beating estimates of $1.06. The company further upped the ante, by raising its full year outlook to between $121.5 billion and $122.5 billion, up from the company’s prior estimate of $118.0 billion to $119.0 billion. The stock however, was not much of a mover on the news, climbing just $0.69 to $50.81.
We recommended buying 3 HPQ March 50 calls and for every 3 calls, buy 1 March 50 puts yesterday, in anticipation of the news. Maintain the position. We will be looking to exit the trade next week.
Navivest
http://www.navivest.com
Hewlett Packard Earnings Options Play
Feb 17, 2010 Earnings, Options, Stocks, Trading Idea
Hewlett Packard (HPQ) reports Q1 2010 after the bell today. Analysts are looking for the company to report earnings of $1.06 per share for the quarter. There is a good likelihood the company will beat earnings and we are buying calls to profit if the company does beat estimates and the stock moves higher. We are also purchasing some puts to hedge against a downside move in the stock, in the event the news is disappointing.
The Trade:
Buy the Hewlett Packard March 50 calls. The current ask is $1.62
For every three calls you purchase, buy 1 Hewlett Packard March 50 puts, which are currently asking $1.52.
We will post a follow up on this trade tomorrow Thursday February 18, 2010.
Navivest is a trading advisory services firm offering subscription-based trade recommendation services. For more information on our services, visit our website at http://www.navivest.com
Tags: Earnings, hewlett packard, Options
