One of the pairs of options I am trading in my account is RIG. The company is actually named Transocean Ltd. It's a oil rig company, and, as you can guess, with all the publicity around the gulf and oil rigs, this stock has been pretty crazy. Earlier this year it was trading around 90-95, and recently dropped well down into the
40's. Right now it's hovering around 53 and it has been consistently in the above-40 price stock list on the volatile stocks site I told you about in the last post.
So, I decided to go for it. I put on a trade consisting of a Sept. 60 call and a Sept. 50 put. The stock's chart showed that it had peaked up close to 60 and has been making lower tops and bottoms since then. If I think the stock is headed a certain direction, I try to spend a little more on the option that is betting on that direction. If I have no idea, I try to buy them as even-priced as possible. On this particular trade, I was a little bit affected by the NFLX trade that went up so high, so a also bought a call that was really out of the money. Might be an ok idea for a future trade that I think the stock might go crazy, but not so much on this guy. Besides, the stock was tending down, so why would I bet more that is will go up?
I have to admit, writing this stuff down has an ulterior motive for me. It straightens my mind out when it comes to these trades. Because I do have a tendency to 'get in my own way,' as my other blog so blatantly points out. Sometimes I just over think stuff. This trading method has fairly simple rules, but if they aren't followed, like any other trading method, it probably won't work.
So, anyway, the stock went pretty far down - under 50, but didn't continue. It's back up around where it started now, but it is still showing signs of weakness. At least I learned my lesson and bought the spread with a month left before expiration. I was taking the Animal Crossing reference a little to much to heart. (There, you do only have a week before your turnips go rotten and worthless, no matter what.) I was buying these things with two weeks left and figuring it would be okay. That works with Netflix, but these smaller stocks have a tendency to go flat for a little while, and two weeks isn't enough time to wait through those periods.
Hopefully, by next week this thing will have taken off one way or another. I only need it to go a buck or two beyond the strike, and I can get the funds back from the trade, then see what happens with the other side.
Saturday, August 28, 2010
Saturday, August 21, 2010
How This Started
I did write a little about this fun little off-shoot way of trading my extra cash in my other blog - Hey Me, get Outta My Way!. It also bridges another blog of mine, AIM For Dogs, which explains how to use long-term volatility to make the best of buyin and holding stocks in a retirment account for the long-term.
Now, this is going off of the ground rules of the AIM for Dogs a bit. Generally, you want to preserve the cash part of your AIM account, so when the portfolio goes down, you'll have cash to buy more stock at the lows.
I tend to be a little impatient when it comes to investing. I get tired of waiting for things to happen. So, I thought of something to do with the cash in the account that is 'relatively' safe while I am waiting for the market to move. What I am going to do is an experiment using options on volatile stocks, and explaing what my thinking is, so you can decide if this might be something you would like to look at as well. A warning, though - I would let me put at least a few weeks, if not a few months of this blog out there and see what my results are before taking off on your own trading. I'll put down all my thoughts, and see how it comes out. The theory is good, I know - I just am, once again, going to be your guinea pig.
The way I'm working it is, I find a stock that has been consistently volatile for quite awhile, and when it appears to be at an extreme of it's range, I buy a put and a call on it. Since it is a volatile stock, I buy the put with the strike that is as close as I can above the current stock price, and the call that is as close as I can below the current stock price. By 'as close as I can,' I mean I look at the prices of the options and see how much the stock would have to move so it would double the price of the option. It's not too hard to guess - you can see the other options and notice what prices they are in relation to the current price of the stock. So, I don't want to buy too low-priced of an option if I am having to go too far away from 'the money,' as it's called. The 'at-the-money' option is the one closest to the current price of the stock. A few things go into determining the prices of these options. One is how much the stock generally moves, another is how much it's moving now, another is how close to expiration it is, another is how much the stock is, etc.
I know this could get confusing to someone who hasn't traded these before, because there is so much involved. It's like learning a whole new, very complicated language. But if you look at these a while, and see how they react when the associated stock moves, it will make more sense to you. It's just a great way of making some extra money when you don't have that much money to invest.
I'm going to explain some of the trades I've had over the last few weeks, and also some I am in right now. This entry will by far be the longest one, as I intend to keep you up to date on my current trades with it.
My original idea came from the fact that I had a pretty good idea that Netflix, or NFLX, was a pretty wild stock. The recent range has been from like in the 40s to over 120 in the last few months, and I noticed it wasn't unusual for it to move 5 dollars a day. I used to do this with Google, and it worked pretty well, but the prices of the options on that stock are a little over my head now.
NFLX's prices are a little high too, and I can't really use it in my IRA account, since I only have a few hundred to work with, so I had to go searching for other stocks that are still very volatile, but not quite so high.
I did a search for 'volatile stocks' and found a site that seemed to have what I was looking for - http://www.optionistics.com/f/volatility. I checked out some of the stocks on this list, and I felt like a kid in a candy store. Half of the fun doing this for me is finding the ideal stock that this method will work for and trying it out. Just through looking at different time-frame charts, I figure out if the timing is right, or if the stock moves the right way for the way I want to trade it, and then if the options are set up in a good way. Meaning, you want options that are moving, and a lot of traders are trading them, so you can get into, and more importantly, out of them, easily. I know, more stuff to think about! Don't worry - you'll get used to it.
Now, I was able to trade NFLX's options using my wife's account. She has a little more capital to work with. I bought the pair when the stock had just dropped to around 95. It promptly went up enough that I sold the call and retrieved all the money (plus like $20) from the trade. I figured if it went back down at all, I could decide when to sell the put for whatever additional profit! What a way to trade! Well, little did I know that the stock would never look back. I proceeded to go up and up until it hit like 140! The put expired worthless this weekend, put I still made a little profit on the call. What I have to forget about is that if I had help the damn call, it was, at one time worth over $4,000 more than I pair for it! Oh, well - that's why you always need to establish a plan, and stick with it, and be satisfied that you did that. Ever heard the statement, "you can't go broke taking a profit?" I think a better one is, "You can't go broke sticking with your plan."
I did the same thing again in my wife's account after I had sold the call from the first one, and this time, I put a stop on the put. That way if it kept going down, I could decide at what point I would not want to lose any more of my profit, and it would automatically give it to me. I made like $100 on that trade. It may not sound like a lot, but compared to the $1 a quarter I was making of that cash, it's great!
Now the only bad thing that can happen is if the stock decides to quit moving once you've put the trade on. That's already happened to me, too. The stock's been going nuts for weeks, and then I put on one of these and it goes dead. That's got to be part of the plan as well - how long do I hang on to these? Unlike stocks, which you can hold forever (Warren Buffet's favorite holding period), options expire, and lose value at an accelerating rate. You must keep this in mind when you are in one of these trades. (Don't let it be too much of a point of panick - that can affect your decisions and cause you to goof up - just let it be part of your plan.) If a stock does this, I've decided I can adjust my plan a little and use the current range to get out of the pair. Sell the put at the low of the range, and the call at the high. Of course, if the stock then decides to break out of the range, the wrong way, you need to be ok with taking the loss. It doesn't happen that often, and the losses aren't really that huge, since the initial investment should be relatively small.
I've just learned to be observant of the stock's movement, and not take it personally if it doesn't do what you want it to. I know that's sometimes easier said than done.
I haven't had quite the good results with stocks I've tried in my account. I'm still learning how to deal with the smaller-priced stocks. They really don't move as nice as NFLX. But I need to get good at it, since my capital supply is smaller. I've decided to trade less, and to make sure there is sufficient time before the options expire. Makes for many more 'options.' (hee hee)
I'll go into some of those trades next week. Later!
Now, this is going off of the ground rules of the AIM for Dogs a bit. Generally, you want to preserve the cash part of your AIM account, so when the portfolio goes down, you'll have cash to buy more stock at the lows.
I tend to be a little impatient when it comes to investing. I get tired of waiting for things to happen. So, I thought of something to do with the cash in the account that is 'relatively' safe while I am waiting for the market to move. What I am going to do is an experiment using options on volatile stocks, and explaing what my thinking is, so you can decide if this might be something you would like to look at as well. A warning, though - I would let me put at least a few weeks, if not a few months of this blog out there and see what my results are before taking off on your own trading. I'll put down all my thoughts, and see how it comes out. The theory is good, I know - I just am, once again, going to be your guinea pig.
The way I'm working it is, I find a stock that has been consistently volatile for quite awhile, and when it appears to be at an extreme of it's range, I buy a put and a call on it. Since it is a volatile stock, I buy the put with the strike that is as close as I can above the current stock price, and the call that is as close as I can below the current stock price. By 'as close as I can,' I mean I look at the prices of the options and see how much the stock would have to move so it would double the price of the option. It's not too hard to guess - you can see the other options and notice what prices they are in relation to the current price of the stock. So, I don't want to buy too low-priced of an option if I am having to go too far away from 'the money,' as it's called. The 'at-the-money' option is the one closest to the current price of the stock. A few things go into determining the prices of these options. One is how much the stock generally moves, another is how much it's moving now, another is how close to expiration it is, another is how much the stock is, etc.
I know this could get confusing to someone who hasn't traded these before, because there is so much involved. It's like learning a whole new, very complicated language. But if you look at these a while, and see how they react when the associated stock moves, it will make more sense to you. It's just a great way of making some extra money when you don't have that much money to invest.
I'm going to explain some of the trades I've had over the last few weeks, and also some I am in right now. This entry will by far be the longest one, as I intend to keep you up to date on my current trades with it.
My original idea came from the fact that I had a pretty good idea that Netflix, or NFLX, was a pretty wild stock. The recent range has been from like in the 40s to over 120 in the last few months, and I noticed it wasn't unusual for it to move 5 dollars a day. I used to do this with Google, and it worked pretty well, but the prices of the options on that stock are a little over my head now.
NFLX's prices are a little high too, and I can't really use it in my IRA account, since I only have a few hundred to work with, so I had to go searching for other stocks that are still very volatile, but not quite so high.
I did a search for 'volatile stocks' and found a site that seemed to have what I was looking for - http://www.optionistics.com/f/volatility. I checked out some of the stocks on this list, and I felt like a kid in a candy store. Half of the fun doing this for me is finding the ideal stock that this method will work for and trying it out. Just through looking at different time-frame charts, I figure out if the timing is right, or if the stock moves the right way for the way I want to trade it, and then if the options are set up in a good way. Meaning, you want options that are moving, and a lot of traders are trading them, so you can get into, and more importantly, out of them, easily. I know, more stuff to think about! Don't worry - you'll get used to it.
Now, I was able to trade NFLX's options using my wife's account. She has a little more capital to work with. I bought the pair when the stock had just dropped to around 95. It promptly went up enough that I sold the call and retrieved all the money (plus like $20) from the trade. I figured if it went back down at all, I could decide when to sell the put for whatever additional profit! What a way to trade! Well, little did I know that the stock would never look back. I proceeded to go up and up until it hit like 140! The put expired worthless this weekend, put I still made a little profit on the call. What I have to forget about is that if I had help the damn call, it was, at one time worth over $4,000 more than I pair for it! Oh, well - that's why you always need to establish a plan, and stick with it, and be satisfied that you did that. Ever heard the statement, "you can't go broke taking a profit?" I think a better one is, "You can't go broke sticking with your plan."
I did the same thing again in my wife's account after I had sold the call from the first one, and this time, I put a stop on the put. That way if it kept going down, I could decide at what point I would not want to lose any more of my profit, and it would automatically give it to me. I made like $100 on that trade. It may not sound like a lot, but compared to the $1 a quarter I was making of that cash, it's great!
Now the only bad thing that can happen is if the stock decides to quit moving once you've put the trade on. That's already happened to me, too. The stock's been going nuts for weeks, and then I put on one of these and it goes dead. That's got to be part of the plan as well - how long do I hang on to these? Unlike stocks, which you can hold forever (Warren Buffet's favorite holding period), options expire, and lose value at an accelerating rate. You must keep this in mind when you are in one of these trades. (Don't let it be too much of a point of panick - that can affect your decisions and cause you to goof up - just let it be part of your plan.) If a stock does this, I've decided I can adjust my plan a little and use the current range to get out of the pair. Sell the put at the low of the range, and the call at the high. Of course, if the stock then decides to break out of the range, the wrong way, you need to be ok with taking the loss. It doesn't happen that often, and the losses aren't really that huge, since the initial investment should be relatively small.
I've just learned to be observant of the stock's movement, and not take it personally if it doesn't do what you want it to. I know that's sometimes easier said than done.
I haven't had quite the good results with stocks I've tried in my account. I'm still learning how to deal with the smaller-priced stocks. They really don't move as nice as NFLX. But I need to get good at it, since my capital supply is smaller. I've decided to trade less, and to make sure there is sufficient time before the options expire. Makes for many more 'options.' (hee hee)
I'll go into some of those trades next week. Later!
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