Tuesday, August 9, 2011

Downgrade Portfolio

After S&P announced its US downgrade Friday it seemed highly probably that the markets would be volatile early this week.  I guess down 6.6 % on Monday up 4.7% on Tues can be described as "volatile" (rational would not be a word I would use).  During the relative calm of Sunday night CCI took the time to identify a few positions that might be worthwhile to trade in the upcoming volatility.  The rationale for four potential trades were documented at an article posted here at "options for downgrade monday" at seeking alpha.

Positions in these four relatively diverse selections were established in the last two days and are will be followed here on this blog under the tag of downgrade portfolio.

Ford (F) - Bought a lot of stock at $10.18 on Monday. As the stock rebounded this morning and volatility stayed high sold the $11 Oct calls against the position for $.68.   The stock closed Tuesday at $10.96.  Being fortunate enough to buy at $10.18 means there was already lots of opportunity to make money,  However, as it sits now, CCI is long the position at a break even point of about $9.50 (down 13+% from here) and the stock has a reasonable chance of being called away at an effective price of $11.68 (gain of 14+%).  CCI will look for good risk/reward points to exit the trade if/when option volatility falls.

Bank of New York (BK) - Bought at $22.77.  Closed Tuesday still down at $21.11.  Will be looking to write a covered call against the position if it moves up.

Waste Management (WM) - Sold Aug $30 puts for $.70.  Closed Tuesday at $29.40.   Would not be upset if this stock is put to us at a break even point of $29.30.  Would collect the 4.5% dividend and wait for awhile.

Health Care ETF (XLV) - Sold Jan 12 $29 puts for $1.73 based on the high volatility on Monday. Worse case we are long blue chip heath companies at about $27.27.  That is about 13% less than Tuesday's close of $31.28. The specific options were down to $1.24.  If/when volatility comes down,  we will be looking for an opportunity to add more legs to the trade possibly by using the proceeds of this put sale to buy an upside call.


No comments:

Post a Comment