Kev's Gettin' Nekked, Join In!

[Keventerprises]

Alright, let's see what we can do with this. Let's discuss Naked Options. After this introduction I will try to keep it short and current as to thinking and trades. Please add your thoughts, knowledge, experience, and wisdom. To those who already know this, my admiration, to those who do not, my information.

Observations:
#1. It is better to be a seller in advance, than a buyer later.

#2. Something you rarely hear on the news (lately) is that, "There was a steep Incline in the Stock Market today!"

So the importance of Defensive Strategies, is very important. Sometimes it's best to get Bear Nekked.

As others have shared with me the importance of the VIX Volatility indicator, so shall I with you. Sell Naked 19 Puts on the VIX any chance you get,then you own them at 17.80 and if you get those assigned to you you're lucky, and that would only happen because the rest of the market went way up too. Aiki paved the way for this insight.

Recent Options Thinking:
When I knew SWC was going to go down (Public Information in Montana), I applied for Naked Options. Then I wasn't trapped into the shares as they went down, after I had already sold Oct 17.50 CC's for 3.50 (on a $16 channeling stock). The PPS was 15.98 on May 22, and I sold SWCJC 17.50 Calls for 3.50. That's 21.902377%.

Right now I find it easier to see things that AREN'T going to happen.

Good Moves:
Covered Calls:
SWCJC Oct 17.50 $3.50 (PPS 15.9
PALIU Sep 7.50 $1.00
TRAFI Jun 45 $2.20

Stocks that went ITM:
BNIFA Jun 105. Sold CC's for 5.20. Went straight past Go and keeps going. Worth owning.
JRCC Jun 45 2.50 (PPS 39.00 on 6/2)
ANRFQ Jun 85, Sold for 4.80/85.42 and 7.10/88.78

Naked Options:
Calls:
ANR Jun 85 ANRFQ 7.10/PPS 89.249 (Should have bought more shares to cover on this Runner when it passed the Strike Price. Duh.
VIXFX Jun 22.50 (Peaked at 24.12, Pucker Up). Didn't get exercised because of the uncertainty of going down, and Premium paid by them adding to their cost. Lucked out on that one. Sold Jun 22.50 Calls for 2.20 so I was O.K. until 24.70. Should have read Aikis post earlier.

Puts:
DRYS Jun 85 Puts DQRRQ 3.30

Edge of the seat Naked Options:
Sold VIXFX Jun 22.50 Calls for 2.10, Aiki warned us about being careful here, but I had already done it when I thought the market bottomed on Friday, and then VIX went past the 23.50 as he said could happen. 25 is fairly extreme, and I was nervous but didn't get exercised at a VIX high of 24.21, so they didn't want to take the possession, or risk of it dropping plus their Premium.

Liked Today:
VIX Jun 19 Puts for $.25, and if it gets exercised you own VIX at <18.75 and your other stocks are up too. We need a good drop in the VIX! lol

It is my sole intention to bring together all of our thoughts and minds, and exchange knowledge on this. Hopefully I can be a Catalyst, and Scout.

[netwrangler]

Great start on a thread, Kev. I'm looking forward to following the 'action', and even contributing when it slows down to my speed.

One question so far, are you long or short the DRYS puts?

I figure you are short, because we are talking about getting nekked here.
If so, there's one to watch today.

Anyway, great thread!

[Keventerprises]

Originally Posted by netwrangler

Great start on a thread, Kev. I'm looking forward to following the 'action', and even contributing when it slows down to my speed.

One question so far, are you long or short the DRYS puts?

I figure you are short, because we are talking about getting nekked here.
If so, there's one to watch today.

Anyway, great thread!

Yes, I sold Jun 85 Puts on DRYS, which brings up the very important subject we need to talk about with Options. When selling Calls near the top or Puts near the bottom, what do we do when the stock exceeds our expectations and goes In The Money? This depends upon how strongly we feel about the stock and our original decision. In the case of Naked Puts such as DRYS, I wouldn't mind too much having DRYS put to me because my Cost is the Strike Price of $85 minus the Premium received of 3.30= 81.70, which probably won't be exercised voluntarily unless it hits a PPS of close to $80.00, or at expiration automatically. So, if this was a Call I had sold and it went into the money, if I felt it was going to keep going, I would buy shares to cover near the Strike Price. Since it's a Put, I could:

1) Sell more Naked Puts.
A) ITM Puts: The 85 Puts I sold for 3.30 are now worth 4.70. This approach would require more money and confidence than I have. There is still some excess value in the Premium because the PPS is only ITM by 1.38 but the Premium is 4.70! I could keep doubling down and then write you letters from the homeless shelter.

B) OTM Puts: DRYS Jun 80 Puts pay 2.50. The idea is that the Stock should not hit it's Strike Price, or at least not stay there, and expires in 10 days. I didn't feel the stock would go this low, so where do we draw the line? (Open Interest) 7,409 people paid 2.50 for Jun 80 Puts, so they believe DRYS will go below 77.50. I do not.

For the record, for defensive safety my favorite thing about selling options is usually selling Calls, except for the beauty of selling Puts on the VIX. With bad news being more common than good, if the market goes down, VIX goes up and your Put expires. $1.20 on a $19 commodity is 6.3157893%, and for the VIX to have gotten that low, the rest of the market just had a good rally.

What do we do at the opposite end of the spectrum when the market is already bad? I sold VIX 22.50 Calls for 2.20, but this doesn't have the safety of selling VIX Puts, because the VIX can go up more, but it would be unlikely to suddenly drop below 17. We could buy VIXRT Jun 19 Puts for $.25. It could easily go to .75+, but I'd prefer to be a seller in this market! Sell OTM VIX Calls at a higher Strike Price? Not for me.

So, What are our Options? When something is down is not the time to sell Calls, such as on DRYS. Yet going farther out to Dec 20 I can sell 80 Calls for 18.40. I have an extra 100 shares uncovered, but it will go up even more when the stock goes up. Even if I did not have them covered, didn't I just in effect sell my shares for $100? I hope they take them right away at that price. Isn't that a built-in sale? Why would someone pay 20% up front now instead of just buying the shares for $83? Afraid of a drop to $65? They need a tax deduction?

In the same way on VIX, now is not the time to sell Puts, they will bring more as VIX goes down. I will accumulate VIX anywhere near 18-19 to sell CC's on later. As Aiki said, "I would sell VIX 15 Puts all day long, but they're not moving." If the VIX hits 15 we'll all be rich! I found them Aiki: November 15 VIX Puts with Bids of $.10 VIXWC. To bring in $10,000.00 you must sell 1000 contracts, but Pigs will be flying by if the VIX hits 15, and we'll all be rich, and at worst you own VIX at 14.90! Interesting that 15's are only selling during the election month!!! Keep that in mind, there should be a good rally in November, and when the VIX goes down here soon, those VIXWC's may be selling for $.20+.

[netwrangler]

Originally Posted by Keventerprises

Yes, I sold Jun 85 Puts on DRYS, which brings up the very important subject we need to talk about with Options. When selling Calls near the top or Puts near the bottom, what do we do when the stock exceeds our expectations and goes In The Money?

I knew this would be a good thread!

The question you raise goes beyond positions in calls or puts.
The general question is:

What do I do if the trade I was planning on isn't working?

I'll come back to your specific alternatives in a later post.
Before doing that I wanted to highlight two points:

• All well-conceived trades make money if the market performs as expected.
• The true measure of a trader is how the trader performs when the market does not perform as expected.

Let's see how that happens.

[Keventerprises]

Originally Posted by netwrangler

I knew this would be a good thread!

The question you raise goes beyond positions in calls or puts.
The general question is:

What do I do if the trade I was planning on isn't working?

I'll come back to your specific alternatives in a later post.
Before doing that I wanted to highlight two points:

• All well-conceived trades make money if the market performs as expected.
• The true measure of a trader is how the trader performs when the market does not perform as expected.

Let's see how that happens.

Gold Puts are climbing much faster than Calls are dropping, by 2.4 to 1. GLD 87 Puts went up 130% today, and Calls only fell 56%. Went well below support, not finished dropping yet. Granted, they went into the money, but more decline is still yet to come for Metals. I should have sold Calls last Friday or Monday on GLD for 2.70.

[Keventerprises]

Originally Posted by Keventerprises

Gold Puts are climbing much faster than Calls are dropping, by 2.4 to 1. GLD 87 Puts went up 130% today, and Calls only fell 56%. Went well below support, not finished dropping yet. Granted, they went into the money, but more decline is still yet to come for Metals. I should have sold Calls last Friday or Monday on GLD for 2.70.

O.K., the decline of Metals accelerated faster than expected and has reached 'A' buy point, and will dip again on Friday. I'm in on Silver at 16.62, missed it at 16.50. I bought 1000 oz., which is 1/2 what I wanted, to average in, because there should be another dip on Friday the 13th! Get this, Gann had some Astrological influences and Friday the 13th is ALSO the exact 2 year anniversary of Gold's extreme Low in 2006! 16.50 or better is good for Silver.

Steward, Fetch my Gold Shorts...

[Keventerprises]

Abandon Ship! It's true. This is the 2 year anniversary of when in 2006 Gold bottomed after going down 30% in 3 weeks to a low of 56! I'm not worried about Gold so much as what it will do to the market on Friday the 13th!

GLD 3 year Chart.pdf

[Keventerprises]

Originally Posted by Keventerprises

Abandon Ship! It's true. This is the 2 year anniversary of when in 2006 Gold bottomed after going down 30% in 3 weeks to a low of 56! I'm not worried about Gold so much as what it will do to the market on Friday the 13th!

Attachment 3366

That's a low of $560 per ounce of Gold because GLD is 1/10 of one ounce.

[Keventerprises]

Now I remember that bad time that Gann refers to this being the 2 year anniversary of personally, not just statistically. Not because I was trading, because I was superstitious. It was 6/6/06! I knew last Friday was going to be bad too, but not that bad. It was 6/6 and the Dow dropped 400 points! This coming Friday is Friday the 13th.

I don't normally dwell on this, but be careful.

[Keventerprises]

The Iron Condor seems to be a rare species, though not too raskelly. What we need is ultimate safety, and I'm willing to sacrifice some gain in exchange for safety. Here is my understanding of the Iron Condor so far:

In this case I will use the extreme example of DRYS, which went well below anyone's expected low of 90. The Iron Condor is designed to protect us up or down. After the stock dropping, and then selling DRYS 80 Puts for 3.30 and it going down past that strike price, I would like to have had something going up! Enter the Iron Condor. If I had also Bought a cheap Put 1 Strike below my 80 at 75, it would have gone up to offset the decline of the 80 Put. Then I don't have to worry about buying back my 80 Put at a higher price. At the time of original purchase, or a little later if your bullish, I should have Sold a Call at the level of estimated Resistance and Bought a Call 1 Strike above that, let's say 100 and 105 or higher, depending on your risk tolerance. What would have happened with an Iron Condor when DRYS did not go our way by much more than expected?

Starting with an original PPS of 94.34 on 5/22, I sold Covered Jun 100 Calls for 5.50. Later, after DRYS had dropped to 86.82, I sold 80 Puts at 3.30.

What would have happened if I had done an Iron Condor? (adjustments will be discussed later).

Starting on 5/22, 1 month before Jun 21st expiration date.

• PPS 5/22 94.34
• Buy cheap Put 1 Strike Below Expected Low: Jun $85 Put (Cost) -$.40
• Sell Put at expected Support of 90: +$2.00 (Approximately, I was not tracking Puts then).
• Buy 110 Call at 1 Strike above expected high of 105: -$.40
• Sell Jun 100 Calls (Expected Conservative High/Resistance): +$5.50

Analysis:
Iron Condor Starting 5/22:
-94.34 PPS
-16.89 Drop in PPS to 77.45 Close on 6/11
-.40 Buy Jun 85 Put
+2.00 Sell Jun 90 Put
-.40 Buy Jun 105 Call
+5.50 Sell Jun 100 Call
=$84.15 Net (Gross) Share Cost as of 6/11 without Income from Options.
=Loss of 10.19, once again this is without changes in Values from the Options.

• The 85 Put is now worth $9.00!=+$9.00
• The 90 Put should have been bought back for $.90 on 6/9=-$.90
• The 105 Call bought is now worth $.05 and could be sold, but wouldn't pay for it's own commission (this was our insurance and served it's purpose. If the trade had went well and gone the other way, it would be the one that's worth $10.00+).=-$.35
• The Jun 100 Call sold is now worth $.10, so we keep the 5.50 Premium at no cost, unless the PPS goes up $22.55 to 100+ in 10 days. (Already accounted for above=0 here).

Outcome:
Net Loss using an Iron Condor on a very unexpected Drop of $16.89=$2.44, with only one adjustment of Buying Back the 90 Put on 6/9 for .90!

Standard Covered Call Position 5/22, adjusted once by selling 80 Put for 3.30:
(94.34 PPS 5/22)
-16.89 Drop in PPS as of 6/11
+5.50 Covered Call sold on 5/22
+3.30 Put sold
=Loss of $8.09

Whew, that was interesting! You still with me? I'm going to have to get a Pocket Protector next...

First time exploration. Please correct me if I'm wrong. I used a fairly extreme and familiar example to see if this is a valid technique or not. If this were set up in advance one time, I could have gone to the lake for a week knowing that I was covered 4 ways. I'm glad this came up. This may be what I've been looking for. Does anyone have experience with the Iron Condor? Please enlighten me. Keep in mind this is a trade gone wrong, the upside will be the topic next. Some gain is sacrificed for this protection, but that's fine with me.