Weekly Update: February 7, 2013
Weekly Update: February 7, 2013
What To Watch
Bearish news out of Europe has added a bit more volatility to the market this week. Overall though, the major indices have held up nicely and are still positive over the last week.
For this update, for a change of pace, I’m going to address a few common questions I’ve been getting from readers.
Regarding buy prices, when I say buy at a certain price or better, it means at that price or lower. That’s true for both calls and puts. Selling is just the opposite. For both calls and puts, you’ll want to sell at the suggested price or higher.
When it comes to allocation, I really only have one rule. You should never allocate more than 10% to any position. While, we typically won’t hold more than five positions at any time, I don’t believe in risking more than 10% of capital on any one trade. By limiting your allocations to no more than 10% per position, you have a very easy way to control your risk.
Finally, I don’t believe in using a stop loss when it comes to option trading. Option prices simply move too quickly. While you may occasionally prevent a bigger loss by using a stop loss, more often than not, your potential winning trades will be cut too soon.
I hope this clarifies some of the questions I’ve been getting. Please continue to send questions and feedback to customer service. Next week, we’ll get back to our normal update.
Portfolio Recap
Position #1: Freeport McMoRan (FCX) February 2013 $34 Calls
Price Paid: $1.41
PriceSold: $1.83
It took a little longer than what was ideal, but we were able to close FCX for a 30% gain. As I mentioned a couple times, the earnings were too strong for the stock to remain depressed. Our patience paid off and we were able to cash in for reasonable gains.
Position #2: Intel (INTC) February 2013 $22 Calls
Price Paid: $0.53
Current Price: $0.02
Time Until Expiration: 8 Days
There were a couple times that INTC almost looked like it would break through. But alas, our options haven’t been able to climb to a reasonable selling price. The forces of time decay are a powerful foe.
This position is a case where I made a bet on earnings and it didn’t work out. That’s okay. We’re not always going to be right. But, if you don’t take chances like this, you’ll never have any good winners either.
Plan for these options to expire worthless.
Position #3: Eli Lilly (LLY) March 2013 $52.50 Puts
Price Paid: $0.85
Current Price: $0.85
Time Until Expiration: 36 Days
Our LLY puts got off to a hot start with the stock (and the overall market) selling off first thing this morning. With the market rebounding to some extent this afternoon, the options have returned to our buying level.
It won’t take much of a down move for our puts to gain quickly in value. If the European bearish news sticks around, these options could be winners in the near future. As always, stay tuned.
Category: OTW Weekly Updates
