Ask Us Anything. (Well, Not Anything.)

by CC December 8, 2011 7:34 pm • Commentary

This is the third of an occasional series where we will post some Q&A with readers. We’ll also open up this post for comments for more questions and answers. Please keep the comments on point and remember that we are not registered investment advisers so will only try to answer questions on general option strategy, trading advice, etc. Risk Reversal is a trading diary and is intended to be used as an educational tool to help you in your own trading. We feel the Q&A is a good forum for that purpose.

(Questions and answers below have been edited for privacy, clarity, grammar and spelling, and specifics are sometimes left out because they don’t matter)


I have been a member  for last few months and I love your site. But when ever you send out email alerts on new ideas , you just send a preview and not the whole trade (any specific reason?) and I have to open/refresh the site to get the complete trade. I was wondering if you can send at least the complete structure of the trade if not the whole trade idea that would be great and also makes it easy when you dont have access to a pc/laptop and are using the smart phone. I would really appreciate if you can implement my idea. -MVR

This is something we’re wrestling with. We have that set-up so that only subscribers see the trades when they click through to the site. The emails are automated from the posts and even if we included the entire post in the email it would still be password protected as it is simply pulled from the site. This would obviously not be much of a problem if the markets weren’t so volatile at the moment. We’re working on ways to make this process more seamless for our subscribers in particular because of the issue you mention. Stay tuned for some changes in the new year. In the meantime, our Twitter is by far the fastest way to get notified of new trades and posts on the site.-CC


Hi Dan, how are you doing? I was reading through Andrew Rosen’s articles on Amgen’s dutch auction and my conclusion was that the calendar spread is doing fine. Can you explain to me why you decided to close the trade? If Amgen continues to slowly inch higher, it seems to me that the trade will work out. -EN

Good question and I messed up the trade…it has worked well and I should have given it more time, I guess i just wasn’t sure about how the stock would trade coming out of the tender and wanted to reduce risk.  In the future with Andrew’s trades I will let him dictate how he would trade it specifically tied to his analysis.  As a trader I make decisions all the time on the position level and the portfolio level based on my understanding of the individual stories or my market call, and often they dont jive with one another, in this situation I was not patient enough. -Dan


AMGN – What is “arbs?” -GY

The “arbs” in this case are the guys at banks and hedge funds who try to play the tender by setting up a trade around what they feel will be the result of the tender on the stock. -Dan


I bought 100K shares at $2.05.  It seemed prudent to sell Jan $2.50 calls @.15.  Well, as my good luck would have it, it closed today @ $2.50 and I’m stuck in call jail.  I know that the prudent option is to just let the trade play out but I’m wondering how you would play this? -TL

Good question and it sounds like you have your arms around your different prerogatives at the moment. I guess the main thing that I would worry about is that you dont sell shares and leave yourself naked short some calls, in a stock like this who knows how more positive news can affect the stock. I am not following the story very closely so I dont have an opinion on the recent news that drove the stock higher, but either way you have a good trade on your hands with an almost 25% gain. The call you sold at .15 is now .10 at .30 and doesn’t seem prudent to pay up to cover it, but if you were convinced the stock could go much higher that would make sense to do unless you were happy with your stock effectively being called away at 2.65 on Jan expiration for a .60 gain (.45 in stock plus .15 in call sale.) -Dan


So what happens if you own a Put in a stock and it gets nationalized? How much is it worth? Is it like the stock goes to zero? -JMMB

In most cases that I can think of you are fine. If the stock goes to 0 your put is worth full value, similar to a bankruptcy. Here’s an example of what happens to options in a bankruptcy in the U.S.: (sorry, PDF) But I assume there is a closing print on the stock that options are tied to, whether that’s 5 or 0 or whatever. -CC


For some reason I am having a difficult time getting my head around how a “Put Fly” works.. It looks like one is totally covered with no naked positions but.. So I initiated a simple put spread on TXN. Did the 30/28 for about .45 cents – not quite the payout of your Fly but.. Would a put spread be ok to initiate versus your put fly if I understand the payout may not be quite as good? -KP

Great question, and you are exactly right. Because I am looking to isolate an event (TXN mid qtr update) with less than 2 weeks to exp, I am using the fly because I have pinpointed a technical level where I think it can go and I want to use as little premium as possible and increase my chances of success. Also some times I use flys when I am less convicted in order to use less premium. -Dan


Since GOOG seems to pull back around Dec/Jan each of the past two years what do you think of a Jan 620/625 put spread paying about $2.? -PSF

Paying 2 to make 3 is not an ideal risk reward, but with strikes so tight at this point as the jan 625 put has about a 45 delta, basically you are risking 2 to make 3 on a coin flip….I would prob try to figure out how much more room the stock has to the upside betwn now an yr end if market keeps going and then where you think the stock could re-trace too, this is all a bit of guess work, but ultimately the risk reward equation is the most important thing as we have no certainty where it is going to go up or down….also I would look at when they are expected to report Q4 earnings, how the stock trades into it, and how it trades after it. -Dan

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