Tuesday, December 29, 2009

General guidelines

When buying a stock, I put no more than 5% of my portfolio into that position. If the investment grows beyond that percentage, I won't rebalance, but my initial commitment is limited to 5%.

The same goes for writing puts. If the put is exercised, I'll be buying the shares, so I limit the number of contracts I write on any stock to a 5% position. I calculate this by the amount of cash used to secure the put, since that's the cash that would be buying the stock.

When writing put contracts, I aim for a 1% return per month. I write puts only on stocks I would like to buy at that strike price.

Thursday, December 24, 2009

Sold KCI puts

Sold 4 $35 strike March KCI puts for $1.20 per share.

Monday, December 21, 2009

Closed MDT puts

I closed ("buy to close") my January MDT puts for $0.05 per share.

Sold NS RIG puts

NB: NS trades are not for beginners. Sit down with pencil and paper to work these out, or you can make an expensive mistake.

* * *

I sold 2 contracts of Jan $80 RIG puts for $17.05. The unusually large option premium (21%!) is because this is a non-standard (NS) option. An event occurred which resulted in these shares trading in an unusual package. Usually, one contract is a promise to buy or sell a package of 100 shares at the strike price. In this case, the package is "$2314.38 cash in lieu of shares, 47 shares of RIG." Non-standard options are indicated by NS in the Option Chain screen.

The discussion below uses just one contract as an example, for the sake of simplicity.

I have still put up $80 * 100 = $8000 per contract to secure the puts. The possible outcomes are:

a) RIG is trading above $80 on the January 2010 expiration date. I keep the $17.05 premium, and get the cash securing my put back, for a 21% gain in approximately a month.

b) RIG is trading at or below $80 on the expiration date. I purchase 47 shares of RIG at $80 a share, and "purchase" $2314.38 cash. That would mean I was trading $8000 for $6074; uh-oh.

However, the net picture is better than it appears for b).

Remember the option premium. I'm paid $17.05 per share or $1705 total for writing this put. The total value of the property I end up with varies depending on the value of the stock at expiration. I consider RIG to be one of my core holdings--I already have 2.5% of my portfolio in it, and plan to make that 5%. These two contracts, each conveying 47 shares of RIG, will do that if exercised.

The total value of b) is $1705 + (47 * RIG) + $2314.38. I'm paying $8000 for this package, so $1705 + (47 * RIG) + $2314.38 = $8000. Solve for x (in this case, RIG, the market value of the stock). I will break even on b) when RIG is trading for $84.69 or above.

Naturally, if RIG tanks, or even stagnates for a significant period of time, I'll stay in the red on possibility b). That's why this NS option is trading for such a high premium, but it's also the reward that makes this risk worth taking.

Sunday, December 20, 2009

Sold GSK puts, December options expirations

I sold 3 GSK Feb 42.50 puts for $2.15.

December options contracts I wrote on LNN, KCI, and MOS expired unexercised.

My portfolio is currently 73% in stocks, 20% in investable cash, and 7% in cash securing puts.

Monday, December 7, 2009

Bought ORCL

I bought more ORCL at $22.50, completing my 5% targeted allocation in this stock.

Thursday, December 3, 2009

November 2009 options expirations

My OI shares were called away in November. I was also put SH (S&P Short) shares, which I sold.