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.

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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.

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.

Bought ORCL

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

November 2009 options expirations

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

Closed puts written on ANF

I paid $0.40 per share to close the Feb 27 ANF puts I sold in October for $2.16 per share. My original hypothesis--that ANF is badly overvalued, and will drop below $30 by February--may not play out. The stock is healthy, even if the company is not. I'm pleased to make a little money by closing the sold puts early. Ignoring the puts I bought, I've made $1.76 per share or 6.5% of the $27 share price in forty days. Including the puts I bought, however, I'm still at a loss my ANF position.

Bought EBIX, closed WAT puts

I bought more EBIX at $56, completing my 6% target allocation in this stock.

I closed my OTM Nov $50 puts on WAT for $0.10/share; I also have a long position in this stock.

Bought RIG, Synthetic Long on SH

Yesterday I bought two Nov $57 calls for $1.15. Today I sold two Nov $56 puts for $1.10, completing the synthetic long. SH is the ProShares Short S&P fund, so my calls will increase in value if the S&P drops, and decrease if it rises. This is strictly a short-term hedge.

Today I put 3% of my portfolio into Transocean (RIG) at $85. RIG reported lower revenues and earnings before the market open. I still like the company's position and balance sheet, so I bought it on the dip.

I also like ATW, a smaller company in the same business. I may put another 2% into that company (it reports on Nov 23rd) or buy more RIG, or put that in NE (Noble). There are many great companies in this segment, and they're at great prices right now.