Tuesday, January 31, 2012

22.7 % possible profit trade : UCO

Here is a trade I thought that has a potential for 22.77% returns in next 12 months.
Please look at the option prices for UCO. Today it closed at 40.28. The strike I like most is at money i.e 40$. I buy a covered call with january 13 40 strike option, I will have a debit of 40.28-7.7 = 32.58. If by next january 13, UCO is above 40, you will make 40-32.58=7.42. So percentage returns=7.42/32.58=22.77%. If it is below 40, UCO is yours to keep to sell more options as well as premium received. Also you are protected till 32.58.

Though word of caution, UCO is leveraged ETF, 2X bullish on crude oil. So if crude oil tanks because of economic concerns or our green brothers come up with some means to to get rid of oil you are screwed 2X. But if you are bullish on oil, this is a good trade for you.

Tuesday, January 24, 2012

Dividend Arbitrage

This was something I wanted to share for a while. This term is not coined by myself but found some one using it and I liked it a lot. More over it truly can be called as arbitrage with asterisk and not purely arbitrage :)

I don't have to write what arbitrage is in financial market. Instead of writing all complicated financial jargon we can call arbitrage as 'making profit with zero risks'.

Since this strategy involves reasonable downside protection upto certain extent I call it arbitrage with asterisk. The real arbitrages (no loss what so ever) are really really short lived and usual investors cannot identify and make profits.

This strategy involves buying covered call with deep in the money calls for healthy dividend paying GOOD stocks. You short deep in money options where time value gives you certain percentage of protection below the strike price you are selling. I prefer at least 4-5 % protection below strike price. This is additional gains for you. More the better.

Here I am showing an example of Verizon (VZ ). VZ pays a healthy dividend of roughly 5 % per annum and with good fundamentals, I am comfortable having a position for extended duration without loosing sleep at night. If I hold VZ for extended duration I can get 5 % returns with no question asked. But we want more. This is where you go short on call options.

Please look @ images below that shows the closing price of VZ along with call option prices for various strikes for Jan 13. It shows percentage returns and downside protections for those strikes. Strikes 30,35 are in the money, 37 ...well can be called at the money and rest out of money.

The details of table are plotted in figures below highlighting time value and percentage protection with respect to strike price.

As you go deep in money the protection offered increases along with reduced initial investment (effective buying price) but at the cost of lost time value. More over as the time value decreases with deep in money calls the possibility of you getting called increases as buyers of those calls have motivation to exercise options if the dividend received is more than time value paid.

Time value is the money you will earn along with additional dividend. The most time value you earn is at the money (strike 37). As you go away from 37 in either direction you loose time value.

As you go out of money and if options are exercised that means the stock price is greater than strike the percentage return increases due to growth in the stock price but for VZ I doubt it will go to 40 till next year.

Based on current market conditions it makes sense to sell at the money calls and get total returns 10+ %. This returns can be further extended couple of percentage points by keeping a keen watch on market. As the stock prices decreases with it usual up and down market movements, the options sold will be in profit. When the price drops a lot, and if you are sure VZ will bounce back to its current level, you can book the profit on options sold and wait for bounce back. Once the price bounces back, you can again sell the options. Also if the stock prices don't change and time goes by, the options sold will still be in profit ( time value loss), you can close the options and sell new options with higher time value.

This strategy can easily deliver 14 - 15 % return on annual basis if done properly along with reasonable downside protection.

This will not give returns like 1200% you can get with the speculative options trading. But that involves huge risk. May be some time later will write on it too. As that is also one of my trading strategies.

I like to put my money where my mouth is. :) This article is based on my own personal trading strategy with VZ , TOT , AGNC etc.

Saturday, October 29, 2011

Things my iphone cant do.....

I am not a brand fanatic like most. Used both types of phones viz Iphone 3gs, samsung captivate, HTC inpsire and currently using iphone 4.

Had good and bad experiences with both, but i am some how inclined towards android. Even though iphones are built beautifully and elegantly, but man it cannot do simple things my android did. May not be beautifully and elegantly but just easily.

Here are my few picks which i am not able to do in my iphone which i did easily on androids.

1. Updating the dictionary: I like to use dictionary while typing emails / tweets but when I am communicating with my friends using my language i loved the way android in which I could update the phone's dictionary and it would auto correct next time i am using those 'non English' words typed in English.

2. Using phone GPS without using data plan: Haven't the folks at mighty Apple figured it out that unlimited data plan only exists with Sprint which no one wants to use. Not me for sure.

3. Setting up a ring tone without connecting to computer: why should be it so difficult?

4. Using phone as USB hard drive: I am carrying a 16 GB phone with me but I cannot use it as a USB hard drive to transfer files. Why ?

5. Attaching files while replying to an email: This was something I realized recently that when I am replying to an email, I cannot attach a file (like *.doc or *.pdf) from phone to the email and send.

6. FM Radio without using dataplan: How about giving users a free FM radio which do not consume data plan ?

7. Reject call list: Hopefully iphone users don't have angry wives or friends or colleagues. Because if they have, one thing they cannot do is put some callers to reject list.

Dont take me wrong but hopefully Apple folks are working on their short comings. May be instead of Siri or suing every one else in smart phone business they should of given some efforts on making sure simpler things work well.

Thursday, October 20, 2011

One Covered call story

I am full time engineer part time trader who actively trades in US market with equities and options. Every now and then I try to come up with some or other strategy to minimize risk and maximize returns using either stocks or / and options. I have divided my portfolio in two parts. 75 % is based on low risk , high dividend stocks and rest is my high risk high return positions.

I would like to share an strategy that has been quite successful to me even in this down market. That is covered call strategy for a high dividend paying stock with reasonable volatility. I am going to share what I did with Total (TOT) and would like to know comments from readers, if I could have done something better.

Generally I follow this principle. The day before a high dividend paying stocks like TOT, ABT etc who have good average daily volume and volatility, I buy stocks and sell in the money calls for a current or next month. I always make sure I am getting a premium (in time value) is less than the dividend issued. So for example if TOT is issuing 1.42 $ dividend, and if I am selling a call for current month or next month which is 2-3 $ in the money I can easily get a time value premium of 0.5 to 0.8$. So if I am selling 4-5 options, I may get an easy premium of 200 to 300$. Since the option is in money and time value premium is less than total dividend, 9 out of 10 times I get called / assigned for the options sold. Since these transaction are settled mid night with my broker, Options House, I even don’t pay for any margin interest.

If I don’t get called then things get interesting. And this is the story of that. In July 2011 TOT was 59.XX and I bought covered call with Aug option Strike price of 55 and it cost me 54.XX $. I traded 4 spreads of these. Since the dividend was 1.42$, I was hoping I should get called in for the options and I would pocket easy 160 $ or so (before commission and assignment fees of 5$). Unfortunately I did not get called in and I was stuck with 400 TOT stocks. Good thing was that I received dividend of 1.4X$ per share resulting in dividend of 640$. On EX dividend date I rolled over August option to Jan 2012 options and received additional premium of 1.3$ per share pocketing 520$ more. (5.XX % effective annualized return without dividend)
As time was going by, and stock price was above 55, I was not so worried about anything. But then things started going south with S&P downgrading US followed by uncertainty associated with Greece and French banks. When it was hovering @ 52, I made another trade with covered call (assuming option will hedge me against further drop), I bought covered call with Jan 12 50 strike call options. I got this spread for 48.XX. (9 % return annualized basis).
But the down fall continued with TOT going 52 week low of 41.XX or so. Since I use options as hedge, I made another trade for one covered call spread with 42.5 strike which cost me 37.XX$. Luckily market rebound and I closed it @ 40 with profit of 250 $ in next two days. (10 % in two days , not bad).

Apart from that i bought 50 stocks couple of times and sold them at profit.

Following table shows my trades since July and my resulting price per share for current TOT positions with and without dividend.

Today TOT closed @ 50.94$ and my effective stock price of 50.83$ is well @ break even. TOT has huge potential of bouncing back to 60$ sometime soon. Most likely I will book good profit on them or will be selling options again.

Not to forget I received 1.42 X 400 + 0.8 X 600 = 1120$ in dividends so far and will be receiving more.

I am always in search of stocks with this kind of volatility with higher time premium with good dividend yield. With this strategy one can earn 10 to 12 % effective return combined with dividends.

Sunday, January 24, 2010

Why I would do my own taxes.

Yesterday I happened to go to 2 different tax professionals (????) from well known tax services and I was surprised by lack of knowledge of these so called experts. Of all the people working there only one was certified to represent you for IRS audit rest are those who have done some crash course in 'taxes 101' and following the software to fill up the forms.
My first professional shocked me with his first few words like "I did not prepare taxes for some years lately and I will need some time" and "I am not sure how first time home buyer credit works". I was suggested to efile today (and pay him) federal and later file an amendment (again pay them) for tax credit. And worst part he was expecting me to pay for that visit too even if I don't file anything. I was out of there.
Second professional was amazing too. I was his first client ever. Up till now he was doing some test cases. Obviously he had just graduated from 'taxes 101'. He was quite old (no offense to oldies) and was not able to read correctly. At one point he made me think that he has never filed taxes for himself. Forget about others. I myself had to punch in my W2 in his software. He was confused how to 'go back' or 'refresh'. He was not sure if I will qualify for certain deductions. After couple of hitches and glitches he was able to (some how) finish off the forms and tell me how much will I get refund. Again I made something up and got the 'F' out of there.
I am surprised how these people operate. Most surprising is the claim they make that will pay 5000$ if there is any mistake from their side. If I had used this guy I would have been 5000$ richer at expense of IRS audit.
Even couple of years back I had similar experience with another tax service. Ask these tax professional about form W7, procedure for ITIN for some one who doesn't have SSN (still legal residents), Procedure for POA for taxes, Partial taxes outside US where business calender year is not same as US, Expenses outside of US, how to claim dependents who satisfy residency criteria / test but no SSN (again legal guest (parents)). I am at a point where I am thinking I can give tax advices to others and make some money. :)