Hello Options Action faithful... time for a belated update on last week's trades:
Buying protection is great and good, but truth be told, spending money for protection that ultimately proves worthless is akin to lighting money on fire. A put that expires out-of-the money may buy you a piece of mind, but it will ultimately cost you tons of dough. The alternatives to buying puts: the collar, which would have capped your upside a long time ago. Perhaps the put spread? That might have saved you money, but in many cases, that strategy would be a loser too.
With that in mind, the members of the desk have been advocating trades that do not cap the upside, but will get you long the underlying stock at a lower price in exchange for costing next to nothing. Case in point: Stacey's Christmas tree on General Electric , the parent company of CNBC. Specifically, she bought one December 15-strike put for $0.75, and then to offset the cost, sold one December 14-strike put for $0.50 and then another December 13-strike put for $0.30, putting the trade on for a credit of five cents. If GE falls below $13, she could have the stock put to her, but she doesn't begin to lose money until $11.95, which is a far cry from where GE finished today.
In our Make the Call segment, Dan suggested the risk reversal on RIMM , where he sold the December 70-strike put for $3.10 and used that money to buy the December 100-strike call for $3.10. If RIMM settles between those two strikes by expiration, he losses nothing but the cost of the trade. But he can make or lose money in the interim depending on what RIMM stock does. So far, this trade is working out, with the put that he sold going for less, and the call that he bought increasing in value as RIMM stock has traded higher this week.. What's interesting to note here is despite everyone's apprehension about selling naked puts, Dan's trade poses no additional risk than simply buying the stock. In fact, with RIMM at $85 bucks, it would have to tumble more than $15 dollars before the stock gets put to him. So in effect, by selling that put, Dan is saying he is willing to get long the stock at $70 bucks. And that's a pretty big discount from where the stock is now.
In the award-winning (in my mind maybe) Put up or Shut Up, Dan and Mike duked it out over XLF . With nearly half the components in the XLF reporting before October expiration, Dan wanted protection - so he simply bought the XLF October 15/14 put spread, spending a total of thirty cents to make a potential dollar. Mike took a more aggressive stance; he bought the XLF December 15/13 one-by-two put spread. Specifically, he bought the December 15-strike put for $1.06 and then sold two of the December 13-strike puts for a total of $0.76 cents. In effect he spent the same amount of money Dan did, but can make more money (max gain $1.70) and have protection for a longer period of time. The tradeoff: if the XLF falls below the $13 bucks, Mike could end up having to buy 100 shares of the XLF at $13 bucks. But he won't actually lose money until the XLF hits $11.30.
One direction, two trades and an abundance of logic.
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