Writing Puts, Or Just Pretending To.

Which color do you like better? Green or brown? I’m partial to the green curve myself. That green curve comes from writing puts…sort of. Writing puts can be a lower volatility play that makes you money in choppy or flat markets, falls more softly in down markets, and seriously under-performs when the market goes on a tear upward.

Continue reading Writing Puts, Or Just Pretending To.

The Advice of Others

TLT-options-tradeFor those of you who are familiar with the iShares 20+ Year Treasury Bond ETF (TLT), you’re probably looking at that chart and thinking: “no friggin’ way did TLT jump 24% in a day.” And you’d be right. But none the less, I made 24%+ after commissions on a TLT trade that I exited this afternoon.

The secret behind this of course: options. And the reason I took this trade in the first place is because of a seasonal trend in bonds that often happens around the same time of every month.

There are a lot of finance blogs out there, and many bad ones (including this one? 🙂 ). There are a few people I really respect though, and one of them is Jay Kaeppel. His ‘hobby’ is discovering seasonal trends in the markets, and I’ve read his book on the subject, and enjoy his blog posts about seasonal and recurring patterns in trading. One pattern that sounded very interesting was a bump in bond prices at the end of many months (you can read about it here).

But how to play it? I’m not going to invest directly in bond futures, and in fact my brokerage doesn’t offer that. I can however buy an ETF that tracks bond futures. But TLT is a pretty low-volatility ETF. It actually has too little volatility to justify a swing trade with the position size I was envisioning. Even a winning trade might generate a loss after commissions. I could however trade options on stocks and ETFs with my brokerage. This allowed me to bring more risk/reward to the transaction. So that’s what I did.

I wanted to risk about $200 or so in hopes of making the same amount or more. I’ve learned (from Jay’s site and books I’ve read) that a good way to trade stock options on the long side is this:

• Pick an expiration date that is at least a month beyond what you think your exit date will be. This reduces the amount you lose in time premium as the expiration date gets closer.

• Pick a strike price that is firmly “in the money”. TLT opened on Friday around $120, so I bought a call with a strike price of $118. Ideally, I’d pick an option with a strike price that was close to where I’d place my stop loss. Sometimes that’s not practical.

Options with these attributes have a higher delta, and will track the underlying stock/etf price more accurately than would an out of the money option, or one with a nearer expiration date. If the price were to move the wrong way, the option will still have plenty of value and it will be easy to offload at a respectable price. No one wants an out-of-the-money option that expires in five days!

The downside is that these long-expiration, in-the-money options are more expensive. A single contract was priced at $410, and I bought two of them. If I lost $100 per contract, that was my sign to get out.

With options, the upside can be big, but so can the downside. If TLT had lost 2%, I would have lost several hundred dollars. Just because you need less money to enter a position does NOT mean you can ignore your downside risk. I’ve entered into some option trades being fully prepared to lose the entire thing. You must keep your position sizes polite and demure.

Fortunately, this trade went the other way, and I made $103 x 2 before commissions. Nice!

Now if you’ve actually read Jay’s post, you’ll see it says to hold for more than two days. I got out early, and I have no regrets. I made the money I’d hoped, and I have a sneaking suspicion that today’s bump won’t last. So I’ll take my profits while I can.

Bonus: this makes up for (and then some) the bad trade I had in gold, which stopped out this morning. Win some, lose some, and hopefully win more than ya lose!

Put Option Sold For Over 36% In 14 Days


I totally realize that’s a completely disingenuous post title, but it’s true as far as it goes, and it’s fun to write. makes up for the thrashing I took in the markets on Friday….a little.

You may recall I dipped my toe into the options water for the first time here, with what I thought was a brilliant earnings-surprise options put play. Turns out the surprise was on me, because the earnings report was poor and yet nothing much happened to the stock price. While I don’t live on Patience Street, I know how to find it on a map, so I held on figuring I had little to lose.

Sure enough, the price of the underlying stock crept downward slowly. However the options on Questar (STR) are so thinly traded that the bid/ask price (not to mention the last or closing price) didn’t change for most of the time I was in this trade! That’s a little disconcerting.

I decided I’d use a ‘soft’ trailing stop for this based on the underlying stock price, and sell if the stop got hit. After Friday’s big sell-off though, I figured I needed a win and ought to take some profit while I can.

This morning the spread was a $2.15/$2.45 bid/ask, although amusingly the “last” price was my purchase of $1.60. Had no one traded this option since I did? I put in a sell-limit order of $2.30 just for yucks, and it was hit within about an hour or so. That yielded a profit of 36.70% after commissions.

But with options, that’s not as exciting as it sounds. It’s just as easy to lose 100% as it is to gain 36%. Treat an option like you would treat your risk money, not your capital. If you were willing to invest $2000 in a stock and willing to risk $200 in that move, then don’t buy $2000 worth of options. Buy $200 worth of options! If you’re ‘long’ a stock and it moves the wrong way, you can sell and get some of your money back. But it’s easy for an option to move quickly to the point where you get NONE of your money back. My Comcast call option  lost 11% in just a few days when it moved the wrong way, so I sold it.

Did I mention STR options are thinly traded? 🙂 It was funny to look at the bid/ask spread later on and to see the volume as “1”. Hey that’s my contract I sold!

Options Trading Off To An Ignominious Start


Ignominious“…such a fun word, yes? Except if it’s used to self-describe.

My recent foray into stock-options trading has been ignominious to say the least. First there was my earnings bet on Questar (STR). The stock was in a downtrend and the earnings report missed expectations, and yet I didn’t get the drop I’d hoped for with my put option (discussed here). The price is slowly going down, but the put option price remains unchanged so far.

Then I bought a put option on Comcast (CMCSA) based on chart technicals. The stock was bouncing back and forth in a channel and it looked like it was time to head ‘south’ again. I don’t recall if I’d actually checked or not, but their earnings report came out and was mildly positive. So the stock of course headed upward and I sold my option for a loss. A 41% loss to be precise, but that was only $70 since it was one option contract.

Since when do I trade using channels and support/resistance??! That’s not my style, so shame on me.

And then yesterday as I was screening for stocks, LKQ Corporation came up on my radar as a breakout play. In my defense, I was using backtested strategies to come up with this trade, not some off-the-cuff rationale like the other trades.

Rather than buy the stock outright, I thought I’d give options a try (this time by buying a call). The buy/ask spread was 1.30/1.60 if I recall correctly, so I put in a limit order of $1.40 last night. Yes, just one contract again.

This morning I got a trade confirmation for the option order. “Huh, that’s weird…$0.50? I thought the price was higher than that.” Then I saw the carnage when I went online.

LKQ had released an earnings report this morning that ‘failed to meet expectations’, shall we say. The stock closed at $27.85 yesterday, and opened today at $24.10.


The good news is that I only spent $50 on my option instead of $140. The bad news is that I bought it at all! I went from an in-the-money momentum play to an out-of-the-money hope-it-doesn’t-expire-worthless play.

On the bright side, at least I didn’t buy this yesterday! And at least I didn’t buy the actual shares. The stock did move up 2.8% today, so maybe it’ll move higher. More likely I threw away “dinner for two” money.

The odd thing is that I wasn’t planning on the earnings report. I *did* check this information beforehand (I’ve checked my browser history to make sure). I seem to have gotten confused about the earnings report date, and thought yesterday’s bump was due to the report having just been released.

Lesson learned: just because options are less expensive than the underlying stock doesn’t mean you should treat them casually. I spent about an hour researching a different long-play stock last night, and about five minutes on LKQ. Good thing my experiments have been tiny.


My First Option Purchase

Questar Corp as of the closing bell on 02/16/15.



I don’t make it a habit of talking about trades that I still have active positions in, so I’m writing the first half of this post ahead of time.

I don’t currently have the ability to short a stock. While I have the funds necessary to open a margin account, they are currently spread across three brokers. First there was the “I need an IRA” broker, followed by the “Hey everyone else uses them!” broker, and most recently the “Can you believe we pay $10 per trade for that other broker?!” broker. Yes it’s a mess, I agree. But the end result is no shorting. The best I can do is inverse ETFs, which is hardly a precision instrument.

But of course there’s an alternative to shorting stock: buying put options.

As of this writing I have read six – yes, six! – books on options and futures. And the weirder trade combinations (“Iron Condor” anyone?) still bend my brain into n-dimensional shapes. But I get the basics. Unfortunately, these books are good at telling you the “what” but not the “why” or “how”.

I don’t give a put what a Long Put Butterfly is. Just tell me where to put my put and how to make money at it!

But slowly it’s coming together. Here’s what I’ve learned (and tell me if I’m wrong!):

– Buying simple puts and calls limit your risk. All you can lose is what you paid for them.

– The numbers move faster. A couple of dollars on the underlying stock movement can double your investment. Or render it worthless.

– Don’t spend more on a call or put than you would normally risk in a stock trade. If you’re willing to risk $300 on a stock trade with an investment of $3000, then don’t buy $3000 worth of call contracts. Buy $300 worth of contracts.

– In-the-money strike prices are more expensive (because they have intrinsic value already). But they more closely track the underlying stock price than an out-of-the-money strike. There’s no waiting around for your price to get hit before seeing any action.

– Options enter a time warp when they’ve got less than 30 days to expiration. You experience time decay, which is like tooth decay except your teeth don’t expire worthless. And no amount of brushing will make your OTM put profitable. So when buying a simple call or put option, pick longer expiration dates (which are also more expensive than shorter expirations).

So with much hand-wringing and double-checking and chart-gazing, I purchased a put option this morning. Yes, I risked a whopping $160, fully prepared to lose it all for the experience. A day at Six Flags Magic Mountain would have been cheaper and possibly more thrilling, but I can’t do that sitting in front of my computer screen.

I bought a single put contract (“aw isn’t that cute! One contract!” you’re thinking) on Questar Corporation (STR). Here’s my shorting logic: the utilities sector is currently the worst-performing sector. Questar has had a string of down days. And – bonus! – they’ll be reporting earnings tomorrow after the closing bell. So this is a fundamentals/technicals/earnings-surprise play.

Total crap-shoot in other words, but with a certain logic to it.

My trade has an in-the-money strike price of $25, and the previous day’s close was $24.09. It opened down at $23.98. My breakeven point on the underlying stock price is roughly $23.77 (I had to fudge the charts a little to figure it out), and my investment doubles (again, roughly) if the stock falls to $21.70. I have a trailing stop of roughly 2 x ATR above the low, but this really only comes into play if I’m profitable and the stock starts heading back upward (remember I’m shorting with a put). If STR doesn’t have a sucky earnings report, then the trailing stop won’t matter. Also, I have calendared a date just before the 30-day expiration date to sell the puppy if it’s in-the-money.

Stay tuned…


Yesterday Questar announced their earnings: they missed their EPS estimates by $0.03, and also missed revenue estimates. Yet the stock is actually UP from where I bought the put option. WTF? Probably because the day before their earnings announcement, they also announced an increase in their dividend by $0.02. Yesterday was a sizable up day and today is a down day. So there’s hope that the stock is heading in the right direction (downward). But it certainly wasn’t the dramatic movement I’d hoped for. Perhaps the takeaway from this is don’t buy put options on stocks that pay dividends.


P.S. Amazing what a little research can show you, once you’ve figured out the right question to ask. This article points out that stocks that pay dividends usually see their price fall as they get closer to the payout date, and so the premiums on put options get more expensive. But that’s good for me! I’ll report back later.