I'm way out on the ice

This post may also be read at: http://www.cboeoptionshub.com/2015/10/02/im-way-out-on-the-ice/

Let me get right down to numbers, since there will be a lot of numbers amongst the words.

In the last post I detailed a bunch of long calls, and an update on those is overdue.  In review:  I had allocated a large (to me) (when it is a risky proposition) amount of money toward seven of the December SVXY calls at the 40 strike, paying about $12.30 each for them (translated to real cost:  $1,230.00 each or $8,610 in total - I'm rounding and ignoring commissions here) when SVXY was about 47.

Just about a week later, I sold them for a modest (but not nearly what I had set out to make) profit and later replaced them with different calls.  Here depicts the disposition of the original calls:

 
SVXY was in the 50+ range on September 15th, and I got scared out and sold the contracts. This was one of my more painful misses.  Later that day and over the next few days, SVXY ripped up to 62.  I recall being in a very bad mood over these particular days.  At least I got a small profit, but I didn't open the trade to make just a small profit.  I had loftier goals in mind.  I shouldn't have done this, but I computed what I would have made (a mentally ill trading behavior) had I held for a few more days, and I don't want to talk about it.  I'm trying to block it out of my mind.

I will not type here how much I might have made. Believe me, I calculated it and made myself sick.  On the other hand, had I been the one to dump these options this afternoon at $9.90, I would have lost $2.40 per contract, or $1,680, so I'll be glad for the similar profit I booked instead.  Moving out of the world of "what could have happened" and back into "what actually did happen," let's continue.

On the 16th, in the throes of the above-mentioned bad mood, I took the proceeds gleaned from the long option closing and bought 240 shares of SVXY at the price of $56.44 per share.  This looked like an ace move for about one day while SVXY shot up to nearly 63.  After it didn't look so ace anymore, on the 18th and 21st, I sold 140 of those shares for the average price of 52.77, booking red ink in the amount of $535  (thus the reference to persistent bad moods.)  I didn't do it because I thought the purchase had been a mistake - in fact, I'm loathe to book any loss and it was like pulling out splinters to do it, but I did it to raise cash for the below:

With $535 loss in hand, I set out to do "long calls, part II."  On September 21st, with SVXY trading for $53-ish still, I decided to change my risky bet... ahem, I mean, long call strategy just a little this time around. In the previous incarnation, I had kept 800 shares of SVXY and added seven long calls on as a sidecar.  This time I kept 900 shares (remember how I bought 240 shares, bringing my total up to 1,040, and then liquidated 140?  So I had 100 more remaining in the account this time.)  The other changes were:  Fewer calls, a higher strike, a farther-out expiration, and less premium paid (because of the strike being higher and the expiration farther into the future.)

On September 21st I bought six of the SVXY $55 calls (this time a few dollars out-of-the-money instead of in-the-money as previously done) for $8.50 each, expiring January 15th.  The total cost was about $5,100.  At expiration, SVXY will have to rise to at least $63.50 just to get my money back out of these.  By contrast, had I simply held the stock (which I sold for $52.77, so let's use that as a comparison point)  I could have 96 shares of SVXY instead of the expensive out-of-the-money calls I bought.   I'm comparing 96 shares, not 140, to the long calls, because I did something else (another story for another day) with the rest of the proceeds of the 140 shares, and 96 shares at 52.77 equals $5,066, which is essentially the same total as the purchase price of the abovementioned options.  96 shares would appreciate by $1,030 on the climb from $52.77 to the hoped-for $63.50, and by comparison, SVXY at 63.50 would bring me merely to flat with the calls I saddled myself with now.

Above the expiration day price of about $65.50, I'd start to make more profit by holding the calls vs. the alternate reality world where I might have opted not to do this maneuver and just kept shares instead.  Let's dream big for a minute and fantasize about SVXY being $80 on January 15th.  (I lie awake at night thinking about these things.)  I would stand to make $2,614 on the 96 shares (which I don't have anymore) but I could sell the calls on expiration day for about $25 each, which is a total sale price of $15,000, with my cost being $5,100 (remember, I paid $8.50 each), for a profit of $9,900.  This is why I bought calls:  To try to bring in more profit from the sale of the calls than I would on simply holding appreciating shares.

As of this writing (September 29th), those calls have most recently traded for $4.64, which is 45% lower than my purchase price, and the shares most recently traded for 45.68 (after hours), which is 13% lower than the comparison price of $52.77.  Good thing I'm not booking anything today, but the shares never expire, and the options expire in January, so I'm on thin ice. We'll see if the ice thickens up by mid-winter.

I don't usually trade long options, but when I do...

This post may also be read at: http://www.cboeoptionshub.com/2015/09/16/i-dont-usually-trade-long-options-but-when-i-do/

Who buys calls?  Who buys puts?  I often wonder this, as I am usually the one selling them to others.  Do buyers really think they're going to profit from them?  Is a real person buying them?  Is it a bank, or a "market maker" (they are people, right?  I admit I'm confused about those mythical creatures.)

Anyway, it's a rare happenstance that I think a call or put is worth buying.  One thing that makes an option attractive to me is its structure of being deep in the money.  That way, unless the stock moves opposite the direction I'm thinking it will, I'm mostly just paying for what has already happened.  It's a little like buying stock.  I'm paying for the intrinsic value, and what could be more fair than that? (Beyond just buying stock, of course.)  Anything above the intrinsic is a risk I'm taking (actually, the intrinsic is a risk, too, and it's more of a risk than simply buying stock, which is also a risk, but we're talking about gradations of risk, here.)  So, here is what I did and why I did it:

I had 200 shares of SVXY.  Actually I had many more, and still have them, but I selected 200 prime cuts of fine flank SVXY and wrapped it up for sale.  $9,250.77 later, I went shopping in the aisles of the supermarket called "Options Chains" and rang up some expensive purchases.  At first I got into October but later traded out; those details aren't important to this story (no, wait!  Details are important as I made a small profit doing that).  The profit was negligible in the grand scheme of things, so let me get to the conclusion of this story.

Of course, the story is not over and will not be until as late as December.  Here's what has happened so far, though:

I replaced 200 shares' worth of SVXY (trading at $46.29 on the day I liquidated them) with 7 calls for SVXY $40 strike at the December 18th expiration, paying $12.30 for each option.  That's $8,610 worth of betting that SVXY will be at least $52.10 by expiration.  This assumes that if SVXY is trading at $52 on the day of expiration, $40 calls would be worth $12.00, or about what I paid.

In the meantime, though, SVXY is not approaching $52; it's still about $47 as of this writing (remember, it was about dollar lower when I "converted" shares to calls), and right now the calls are fetching about $13.00.  I could sell right now and get a few dollars in profit.

My hope, however, is that hanging onto the calls will allow me to benefit from the rise in share price more than I would have, had I simply held onto the 200 shares.  Example scenario:  Near expiration, SVXY may trade at something like (this is a hypothetical number) $62.  This is a full ten dollars over the price needed for me to break even on my calls.  In this example, the $40 calls would be trading for $22 each.  Remember, I only paid about $12 each for them.  Let's compare my benefit on the calls vs. simply holding the stock, with no calls bought:

Calls bought in September for $12.30 each, 7 of them:  Purchase price $8,610.  Sale price near expiration:  $15,400, which represents a gain of $6,790.

Shares held from September (at the price and date I executed this little plan) through the date the calls I would not have bought would expire:  200 times $46.29 = $9,250.77 and the fantasy price quoted above on expiration date of $62 times 200 = $12,400 which represents a gain of $3,149.23.  You can see that the calls would net about twice as much profit as just the shares would.

Note that I did not use all of the cash generated from the sale of shares to purchase calls; I still had some left over, but I did not include that in the comparison.

What I've basically done is attempted to use the gain I had previously hoped to get from my former lot of 200 shares of stock and increase the profit, above a certain price point in SVXY, to the gain I'd get from having 500 additional shares of stock (700 total)  instead of just 200, with some premium paid for the privilege, of course.  At a share price of about $54.70, I'd start to make more from the options versus just holding the shares and saving myself the stress and risk.  Of course I'm hoping for an all-out party in which the calculations break the calculator.  But before that happens, let's just hope I'm not holding a pile of public-restroom paper towels for which I paid enough money that I could have bought a serviceable used car instead.

Wrap-up of an unprofitable month

August, in my estimation, could have been worse for my account. I say that because, although the total was negative in terms of actual account performance (which is calculated by taking the value of stock holdings on a given day, like the last day of the month, and accounting for booked gains and losses), I am more concerned with booked gains and losses than I am in value of holdings. Why? Because I wouldn't be holding my holdings if I didn't expect them to bring my account value up eventually, for one thing. For another thing, the purpose of my account is to be able to withdraw cash from it on a regular basis, that cash being generated from my booked gains (more so than by booked losses - those aren't great for building up cash.  And my "account value" is not important to me, as long as I have something with which to make something, and keep my ATM running smoothly.)

While I did book more losses than gains during August, due only to ONE unfortunately run-over position (I take the blame, just like I take the credit when things go right - it cuts both ways - it's never "The Market" helping nor hurting me, although to be fair, it really is, in both cases), things could have been a lot worse. The horror story was detailed two posts back, so let's not go over it again. It's healthy to move on and live in the present.

I do want to add something to my record of booked gains and losses for the month of August, and that is the cash generated by the sold puts that resulted in shares being assigned to me. If the shares are going to be part of my family, you can bet that I'm not going to just throw away the money that came in as a stipend toward the care and maintenance of those new cars in the driveway. The brokerage seems to like to calculate cost basis by taking the premium received and setting it against the cost to purchase the put-to shares, but I like to keep things more honest: The stock cost a certain amount - let's just call the purchase price what it is - and I got a certain amount of cash in the account as compensation for my time and trouble; they are two different types of currency, in my mind.

Let's append with the following:

So, officially, my booked gains/losses for August were -$3,060 , but since I like to take the cash received into account, I consider the booked gains/losses more realistically to be -$1,156.11 . Either way, I am sitting on stock that cost way more than the current market value, putting my "account value" and "account performance" down in the dumps month-over-month. Even taking the current value of my put-upon stocks into the big picture and calculating YTD gain/loss as I do every month, I am up well over 50% YTD (fluctuating a few points day by day); how is "the market" doing YTD?