GMCR Straddle....Certainly Not a Winner

As discussed here,  in late November CCI placed a straddle on the Green Mountain Coffee Rosters (GMCR) prior to earnings.  To be a winner the stock needed to stay in the range of $20 and $36 after earnings.  Unfortunately for CCI, GMCR reported good earnings and its price blew past the $36 upper end options strike, the $37 break even point and over $40.  As the stock dipped back below $40 this week, CCI bailed on this loosing trade.

Overall the upper end of the trade lost about $2.40 per contract and the lower end of the trade made a modest $.30 per contract gain.  Combined that was a bad, $2.10 contract loss.  Fortunately, as originally discussed this trade was done for a very small amount as a purely speculative activity. 

 But still......certainly not a winner.

A Market Neutral Iron Condor in Apple

Market neutral positions that will profit in a sideways market can provide another aspect of diversification to a portfolio. With last weeks drop in the price of Apple (AAPL), some pundits have suggested this is a buying opportunity for this stock. Another alternative is to use this drop in price as a trigger to establish a market neutral position in Apple. The type of a position that will generate income in a sideways/neutral market, and hence nicely augment a larger portfolio.

With Apple trading around $535 last week one such trade was to

• Sell the Jan $495 put
• Buy the Jan $490 put
• Sell the Jan $580 call
• Buy the Jan $585 call

After commissions this iron condor trade would generate about a $240 credit per contract. That is the maximum gain on the trade, while the maximum loss is $260 per contract. That pricing indicates that conceptually there is just a little less than a 50/50 chance that the stock will be trading between essentially $493 and $582 by January expiration. Potential outcomes if held until expiration are:

• Worse case - the stock falls below $493 and the trade loses $260/contract. Basically, the hope is that buyers might be increasingly motivated to come in if the stock were to fall to below the $500 support level. Hence, the $495 strike is potentially a reasonable level at which to risk losing money.
• Second worse case - the stock rises over $582 and the trade loses $260/contract. The stocks 50 and 200 day moving average will likely be around this level in January. This will potentially provide resistance to the stock rising through this level, and make this a reasonable price at which to risk losing. Further, given its huge weight in the markets, if Apple was to rise this much, it is very likely other more traditional portions of a portfolio will be up as well. Hence losing this trade to the upside can be rationalized as kind of a portfolio hedge.
• Best case - the Apple bulls and bears keep an equilibrium on the stock, and it trades sideways ( in the $85 range between $495 and $580). This would result in a $240/contract winner!

Of course, this trade does not need to be held until expiration. If at some point time, (i.e. early Jan) the stock price happens to vacillate back near the $535 level there will likely be an opportunity to close this position before expiration for a smaller gain. This scenario increases the overall probability of success with this trade.

A Speculative Earnings Play on GMCR

CCI does not usually "play" earnings, but decided to take a speculative flyer today....uh....I meant to say made a highly uncorrelated options trade.

Green Mountain Coffee Roasters (GMCR) is a much discussed and often traded provider of specialty coffee and coffee makers.  Earnings were planned for release after the bell today.  Traders had driven the implied volatility on weekly options (expiring in three days) well over 200%.   CCI was tempted to sell some premium at those levels, but instead decided to sell premium in the Dec options.  The implied volatility in these options was still significant (around 100%), and it seemed that the extra duration might provide a better chance for the stock to settle into a wide range.

With GMCR trading around $29 this afternoon.   CCI sold both the Dec. $20 put and Dec $36 call. This  straddle was sold for a combined credit of just under $1. That is the max return for the trade.  This also  means the trade does not start loosing unless the stock is below $19 or over $37 at expiration.  (about 35% down and 28% up).   Beynd those levels, the position loses dollar for dollar with the stock move. Of course, those are the results if held until expiration.  After the earnings announcement, this high implied volatility also means there is a high probability that the trade will be tested on one boundary or the other.  As the stock gyrates around after earnings,  CCI will be looking for opportunities to either harvest a profit or spread off some of the risk of the trade.  Obviously this is a speculative, risky, and "uncorrelated to anything" trade.   CCI did this trade in very small quantity.  That means the outcome of this trade will not materially move the needle on the overall portfolio.  However, It might represent a good opportunity for readers to monitor how a high implied volatility type of options play might be used as an alternative way to generate income.

* * * Results  ** *

FYI, GMCR reported  earnings after the bell.  The headlines appear to be positive and the stock has moved up near the $36 leveling after hours trading.  Hence, as expected it certainly appears this position will be tested on the top end tomorrow.  We will have to monitor the situation closely and potentially adjust the position.

Covered Calls on Corning (GLW)

Readers will recall that CCI has sold puts on Corning (GLW)  many times in the past.  The main rational for this trade has been GLW's $14 book value, single digit p/e, and technology core competencies.

Frankly, CCI has done this so many times that I've lost count.  Usually the puts have expired  or a small profit from option premiums have been taken.  However, the July $13 puts ended up being assigned.  A scenario for which  a put seller always needs to be prepared.  With the credit for this put sale the stock was acquired at an effective price of $12.51 at July expiration. 

With GLW trading back over $13, CCI now switched the strategy and sold the $13 Oct calls against this position for $.40.   Three scenarios

• The stock falls back well  below $13 fairly soon  - Oops, not good, but CCI will harvest a great deal of the option premium and re-evaluate next steps.
• The stock will hover just below $13 - The option will be held until October and expire. The effective cost basis for the holding will be down to $12.11, and CCI will likely look for opportunities to sell calls again.
• The stock will stay above $13 through October - The stock will be called away.  CCI will take the 7+% over three months gain ($13.40 - 12.51) and redeploy the capital.

Should have resisted the 200% volatility in Netflix

As discussed here,  CCI couldn't resist trying to skim some profits from the 200% implied volatility in Netflix weekly options.We should have.

Despite less than disastrous earnings, the stock fell below the lower end of the range of  iron condor. I guess based on lower expectations. .

This speculative trade on weekly options was a loser.
Fortunately not a big trade/loss, but a loss never feels good.

Can't resist speculating on the 200% implied volatility in Netflix

Netflix (nflx) is announcing earnings after the bell today.  Of course, netflix has a very volatile history.  I won't try to summarize that history here as I assume many investors are familiar with their story.

What caught my eye today was the over 200% implied volatility in the weekly options.  That makes options very expensive.  Hence CCI took a speculative flyer on the 60/65 - 85/90 iron condor for a credit  of $2.25.
At the marco level this is a 45/55 wager (win $2.25 or lose $2.75 per contract) that Netflix will end the week between $65 and $85.  A $20 range.

More fine tuned, CCI is hoping that whatever the earnings news is today

• there will be enough of a tug of war between the netflix bulls and bears to have the stock trade in that range sometime in the next few days
• the volatility should be sucked out of these options after the news is out today

If/when those events happen, hopefully we will be able to buy back this spread for substantially less than the $2.25for which it was sold.

Yes, this is a speculative trade.  It was done as a very small trade in the portfolio which will not really impact overall results for the year...but ..I could not resist taking a chance on the 200+% volatility of the "rational market".

Apple - Lets Call it a Tie

As discussed here, CCI had established the July, Apple $495-$500, $610-$615 iron condor for a $2/contract credit. In essence, this was a bet that Apple would trade in a  $110 range between $500 and $610 for a month

With Apple (AAPL) recently trading well over $600, the trade has been at risk of losing money on its upper end for awhile. With only 8 days until expiration the risk/reward (risk $3 to make $2) on a position that essentially has a 50/50 chance of going up or down was no longer appealing.  CCI took advantage of a small pull back in Apple today to closed this trade.  Overall the trade made a relatively immaterial credit of $.09/contract (i.e. a tie).

Closing Facebook Position

As discussed here, CCI had sold the Facebook (FB) July $25/27 - $33/35 iron condor for $1.00/contract.  This was in essence a 50/50 bet that the noise over Facebook's IPO would die down and the stock would settle somewhere in the $6 range between $27 and $33 in July.  That seems to have happened!

With FB trading around $31.50 today, CCI covered the position for $.25/contract.  That is a $.75/contract gain or a 75% return on the $1.00/contract of risk capital.  While that seems impressive, these type of trades have either a big gain or loss.  Big gains are better...lol

At a more macro level, this trade and a few other FB trades have now generated enough profits to more than  cover the loss in the small amount of shares I was allocated at the IPO price of $38. So we will take our modest overall profit in Facebook and move to the sidelines on this stock for awhile. 

Going forward, I suspect that even "if" FB posts good earnings results this stock will have a lot of trouble getting to $40 for quite awhile. This is because I suspect many early buyers will be looking to selling if/when they get back to near break even.  "If"  the stock were to move up to about $36, it might be a good candidate to sell something like a $37-$39 call spread.  I've set an alert if it goes over $36 to evaluate this strategy at that time.

Every blogger "needs" to have a position on in FB and APPL

These days it seems like everyone in the financial press has some opinion about Facebook (FB) and Apple(AAPL).   Hence CCI felt "the pressure" to join the club and have a trade for these two stocks.

CCI's view for these two stocks is that there will likely be a very public tug of war between people who are  bullish and bearish in these stocks over the summer.  Everyone talking their book. That mean perhaps these stocks will trade sideways this summer.  If this is true the best trading strategy for these two stock is to try to generate some income from option premiums.  Further, this strategy will likely drive results that are somewhat uncorrelated to stock market returns which is another key goal of many CCI positions.

Specifically, CCI established two July iron condors this week. (Selling both a put spread and call spread)
- Apple $495-$500, $610-$615 for a $2/contract credit
- Facebook $25-$27, $33-$35 for a $1/contract credit (more details on this trade are documented in this Seeking Alpha article entitled Using Options to Profit From the Facebook Tug of War)


Each trade has a defined risk/reward that makes it somewhat different that traditional investments.   I'm reluctant to describe it in "gambling" terms...but
- The Facebook trade:  Risks $1 to make $1 trade (i.e. 50/50 odds)  that the stock trades between $26 an $34 (a 26% range) by July expiration.
- The Apple trade: Risks $3 to make $2 trade (i.e. 40/60 odds) that the stock trades between $498 and $612 (a 21% range) by July expiration.

Of course, neither trade needs to be held until the expiration date.  If at some point in time between now and the expiration date the stock gyrates to a price near the midpoint of the iron condor range, it will be "in the money" and  gains can be harvested at that time.  Hence these trade actually have much better odds of being profitable than the static odds of maximum gain at expiration.

 In full disclosure, these are not huge positions in CCI's overall portfolio, but are more intended as an  illustration of  an alternative way to try to generate income in today's go nowhere marketplace.

Plus now CCI has officially joined the crazy world of the financial press and can talk "my book" on these stocks like every other blogger and tv interview ...lol.

3 April Option Plays to Generate Income

Tuesday's market pullback and increase in volatility created an opportunity to generate some income from the sale of puts. Click  here to read about 3 April put sales in AKAM, IWM, and GLW that generate a credit as they are placed, and seem to take reasonable risks.

Thinking Retail has Hit a Short-Term Peak.

Retail stocks have had a great run the past two months.   CCI is willing to take a small position that that trend will slow down soon.   On Friday, CCI sold the March $59 -$60 call spread in XRT (an etf of retailers) for a credit of $43/contract after commission.

Basically this position will profit  if this sector pulls back in the next month. In this case it will act as a hedge by providing some income to balance the likely overall losses to the full portfolio.   If the retails  sector continues to soar, the max loss on this trade is $57/contract.

Strangling eBay

ebay (ebay) is a cornerstone of the Internet age.  Currently eBay is comprised of two key businesses

• Marketplaces - such as ebay.com, stubhub.com, etc
• Payment Processing - primarily Paypal

From a long-term investor perspective, these two businesses provide both some synergy and diversification. From a stock market perspective it appears as if this diversification might keep it trading within a range.
Read my article here  that describes how selling a $27 - $35 strangle can be a low risk way to generate a 3% cash return in the short. term.

More Market Neutral Option Plays

CCI continues to add option positions that will profit if the market goes sideways.

 Click here   to read my article at seeking alpha about recent trades in Amazon(amzn) and Starbucks (sbux)
Immediate after Amazon earnings, CCI was able to close that trade for a gain of  $113.51/contract.  The Starbuck trade is slightly in the money  ($.18/contract) and we are still holding that.

Based on some readers comments, we decided to continue pursuing a weekly option trade.  Specifically today we added a 40/45 - 60/65 iron condor in the highly speculative and volatile green mountain coffee (GMCR).  Weekly option volatility was over 250% so we could not resist looking to sell some premium at those levels.  The stock is up 20% after hours on strong earnings so this might not have been the best play, but hopefully we can salvage some of this trade in tomorrow market.

Rolling Over Option Sales for More Income

With one week until Jan options expiration, CCI closed out the $370/$375 - $430/$435 iron condor in Apple that was established a few weeks ago as documented here.   The portfolio made $88/contract. That is just over 50% of the max gain for the trade and a 26.7% return on the max risk on the trade.   This trade would perform best if the stock had stayed closer to $400 over the past two weeks.  However, the stock flirted with the $430 upper-wing of the trade for the past week.  With the stock back near $420, much of the margin of safety in the trade is gone.  Since 50% of the max gain was obtained,  the risk/reward balance seemed less attractive and hence it was time to take the profits and run.



This portfolio continues to search for ways to make money if the market goes sideways, so CCI re-allocated the capital from the trade above to two new iron condors in CREE and LVS are described in this article.

Trying to saving some money with a Costco iron condor

In CCI's continuing attempt to generate income via options, an iron condor in Costco (COST) was established.

Readers relatively new to option strategies might recall that  an Iron Condor will make money if the stock trades in a range. In general an iron condor is the combination of a put and call spread.  The specific transactions in this case are:
Sell Feb  $ 80.00   Put     Sell Feb $87.50 Call
Buy Feb  $ 77.50  Put      Buy Feb $90.00 Call
Costco is trading around $84.50.  The options were sold for a credit of $79/contract after commissions.
The $80 level is about the 200dma support level, and the $87.5 is near the recent high resistance. This trade is basically a bet that the stock stays within that 10% range.  

The trade is not anticipated to be held to expiration date, but If held to expiration:

• Worse case the stock hits new highs over $87.50% or pulls back below $80 and the portfolio will lose $171 per contract.  ($2.50spread -.79 credit)
• Best case the stock stays anywhere between $80 and $87.5, and the portfolio keeps the $79 premium. gains $164. That range is a little tighter than CCI would normally like to see in an iron condor, but I think this stock has become a leading provider of "staples" that is more likely to stay stable than most of the market.
• Realistic Case - Around Feb. 1 CCI would anticipate looking to exit this trade.  This is after the Jan options expire and are rolled towards Feb, and initial q4 earnings will have been released. 

If all that "option speak" is too much for you,  just think of it as a "bet" that Costco stays between $80 and $87.5 with 1:2 odds.   You can take either side of the position.  However, CCI is looking to hold some positions that make money if the market continues to go sideways.  This is situation where we believe that can happen.

Apple Options - Iron Condor

In CCI's continuing attempt to have some positions that generate income via options, an iron condor in AAPL was established.

Iron Condor....that sure sounds "wild and crazy"  but basically it is a belief  that Apple will trade relatively flat (within a $55 or 13% range) over the next few weeks (or less).  

In general an iron condor is the combination of a put and call spread.  The specific transactions in this case are:
Sell Jan $375 Put     Sell Jan $430 Call
Buy Jan $370 Put     Buy  Jan $435 Call
Apple is trading around $405.
These options were sold for a credit of $164

If held to expiration (which is unlikely)

• Worse case the stock hits new highs over $435 or pulls back below $370 in the next two weeks.  In this case, the portfolio will lose $336 per contract.
• Best case the stock stays anywhere between $375 and $430, and the portfolio gains $164. CCI thinks this is probably because there are enough Apple bulls to prevent the stock from falling too far before Jan earnings. Conversely,  many competitors are now shooting at Apple, they have unfortunately lost their leader, and at some point the momentum money may stop moving towards Apple.
• Realistic Case - If Apple bounces around the $400 mark for a shorter period of time this trade will gain money daily and can be taken off for less gain but well before expiration.

If all that "option speak" is too much for you,  just think of it as a "bet" that Apple stays between $375 and $430 with 1:2 odds.   You can take either side of the position.  However, CCI is looking to hold some positions that make money if the market continues to go sideways.  This is situation where we believe that can happen.