Weekly Update: March 7, 2013

| March 7, 2013

Weekly Update:  March 7, 2013


What To Watch

The markets have been cooperating lately with the major indices up over 1.5% for the week.  Meanwhile, the Dow Industrials are in record high territory.  Politics and Europe could derail the rally, but the economic news is solid.  As always, stay tuned.

Now I’d like to address a question from subscriber Steve Z.  Steve writes:

Please help me understand the trading philosophy of keeping options to the bitter end and expiring worthless.”

That’s an excellent question and a fair point.  It’s true, that we’ve recently had some of our positions expire worthless or are close to it.  However, over the last six months, holding our positions for longer has generally paid off.  We had 3 or 4 winners for every option expiring worthless.  And, it’s a fact that several of those winners wouldn’t have worked out had we sold on the first move against us.

Essentially, I like to give my theories a chance to work.  Sometimes that means holding an option too long, but often times it means bigger returns.  Could we hold our positions for shorter and cut losses?  Definitely.  But then I believe we’ll miss out on some of the best opportunities.

All that being said, things have changed a bit this last month.  Until this week, the market has been choppier than in previous weeks.  It has resulted in our options getting eaten alive by time decay while no clear direction has been established.

You may notice that my last two buy recommendations are for slightly longer-term options.  Seeing conditions change, and our short-term positions not working out as well, we’ll be trading the second month or possibility the third month out for the time being.  It will mean more expensive options, but it will also give my theories more time to develop.

Of course, my strategies will change as conditions change.  In the meantime, hang tight.  We’ve had several big winners and more will be coming.  Let’s give our positions more time to develop and profit.


Portfolio Recap

Position #1:  Eli Lilly (LLY) March 2013 $52.50 Puts

Price Paid: $0.85

Current Price: $0.05

Time Until Expiration: 8 Days

LLY has rallied along with the overall market.  Keep in mind, I wanted to hold LLY puts for downside protection as it’s the only put position in our portfolio.  While these options are most likely going to expire worthless, I’m happy to see the market climbing.  When we have a call-heavy portfolio, it’s helpful to have at least one put position on for peace of mind.


Position #2:  Apache (APA) March 2013 $80 Calls

Price Paid: $1.13

Current Price: $0.10

Time Until Expiration: 8 Days

APA waited a bit longer than I hoped to rally.  It’s still possible we could get some value out of these options, but we need another big move in the stock like we saw today, before mid-next week.

This is a perfect example of why I’ll be using slightly longer-term options in the coming weeks.  I still believe APA will hit our strike price, but we needed to buy more time.  I went with March options because April calls happened to be too expensive when I made the buy recommendation.

Let’s see what develops with APA.  But for now, on future trades, we’ll pay up a little to buy extra time.  To keep prices reasonable, I may go a bit further out of the money, as with the FFIV position we did today.


Position #3:  Freeport-McMoRan (FCX) April 2013 $34 Calls

Price Paid: $0.72

Current Price: $0.78

Time Until Expiration: 43 Days

It’s nice to see FCX breakout higher the last couple days.  Our options are now in the black.

The stock hit the 20-day moving average today.  The next stop is the 50-day average which is right at our strike price.  In fact, the share price is within a dollar of our strike.  Our calls will gain significant value as the price approaches $34.

We have plenty of time on these options by design, so let’s sit back and give our position time to gain value.


Position #4:  F5 Networks (FFIV) April 2013$105 Calls

Price Paid: $0.92

Current Price: $0.92

Time Until Expiration: 43 Days

We just made this trade towards the end of the day, so it hasn’t moved.  If you didn’t get in on this one today, definitely buy the options up to $1.00 tomorrow morning.  Like FCX, we’re buying plenty of time on these calls to give the stock lots of time to bounce back.


Category: OTW Weekly Updates

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.