Using the PowerOptions screening tool, we developed a set of screening parameters to find these potential opportunities. When these parameters were applied to our historical database, we were able to discover the opportunities as outlined in the article. However, these selections were not isolated, as there were other stocks that also met the screening criteria. Some of these stock selections were also very successful. In our screening efforts there were also some selections that were unsuccessful, similar to those mentioned in the Whitfield article. Whitfield did not specifically mention an exit strategy or a stop loss strategy. IBD often supports the idea of exiting if a stock drops in price by 8% from the initial purchase price of an investment. This is one way to limit losses and another way that we favor is to exit if the stock price falls below the 25 or 50 day moving average of the stock price.

The screening parameters used in our analysis were for the purchase of long calls using some of the key parameters mentioned in the Whitfield article:

% Stock Price > 10% (large price change in one day)

% Stock Volume > 200% (price change supported by large volume)

% Option Volume > 200% (option volume also increased)

Stock price > 20 Day Moving Average (stock in an uptrend)

% Earnings per share growth > 10%

Calls with expirations between 60 and 245 days out in time

Delta between .4 and .8 (calls at or slightly in the money)

Implied Volatility > .3

This screen found the stocks mentioned in the article and resulted in some very nice back testing gains of 40%+ as outlined by Whitfield. In our analysis PowerOptions proved to be a very powerful tool for finding the kinds of opportunities as outlined by Whitfield.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

Free stock option newsletter » return goal > 2% / month » works in any market

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: IBD, Paul Whitfield, Option Volume, Delta, Implied Volatility

The Double Diagonal is a neutral stock options strategy. The Double Diagonal strategy is similar to an Iron Condor and can be considered a combination of a Calendar Call spread and a Calendar Put spread.

The Calendar Put spread portion of the Double Diagonal is entered by selling an out-of-the-money put option and purchasing a further out-of-the-money put option having an option expiration further out in time.

The Calendar Call spread portion of the Double Diagonal is entered by selling an out-of-the-money call option and purchasing a further out-of-the-money call option having an expiration further out in time.

Another way to look at a Double Diagonal is an Iron Condor which has been “diagonalized”.

Advantages of a Double Diagonal over an Iron Condor:

• Potentially lower brokerage fees and commissions
• Increase in volatility increases attractiveness of position
• Increased profit potential at short put option and call option strike
• Less risk/smaller potential losses with wider breakeven range

Similar NDX Iron Condor and Double Diagonal positions will be analyzed in order to illustrate the differences between the two strategies.

The NDX Iron Condor position selected to be analyzed is shown below:

Buy 10 contracts of $NDX 2010 MAR 1,600.00 PUT @ $4.20 $4,200.00

Sell 10 contracts of $NDX 2010 MAR 1,625.00 PUT @ $4.90 ($4,900.00)

Sell 10 contracts of $NDX 2010 MAR 1,950.00 CALL @ $1.45 ($1,450.00)

Buy 10 contracts of $NDX 2010 MAR 1,975.00 CALL @ $1.00 $1,000.00

The NDX Double Diagonal position selected to be analyzed is shown below:

Buy 1 contract of $NDX 2010 APR 1,475.00 PUT @ $4.10 $410.00

Sell 1 contract of $NDX 2010 MAR 1,625.00 PUT @ $4.90 ($490.00)

Sell 1 contract of $NDX 2010 MAR 1,950.00 CALL @ $1.45 ($145.00)

Buy 1 contract of $NDX 2010 APR 2,050.00 CALL @ $0.70 $70.00

The short put options and short call options are identical for the two positions with the long options having different months of expiration. The long options for the Iron Condor position have a month of expiration of March and the month of option expiration for the Double Diagonal long options are in April.

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Brokerage Fees & Commissions

For this example, the Iron Condor position was entered with 10 contracts, whereas a similar Double Diagonal position was entered with only 1 contract. An investor may be able to realize reduced brokerage fees and commissions when investing with the Double Diagonal over the Iron Condor.

Volatility

The long options for the Double Diagonal being further out in time than for the Iron Condor presents a nice advantage for the Double Diagonal over the Iron Condor with respect to an increase in volatility. An increase in volatility will have a larger impact on the long options for the Double Diagonal than for the long options for the Iron Condor. An increase in volatility will cause the value of the long options for the Double Diagonal to increase more than the respective long options for the Iron Condor resulting in increased profitability for the Double Diagonal. Additionally, the increased sensitivity of the Double Diagonal to volatility spikes results in smaller losses for the Double Diagonal when exiting a position due to a stop-loss.

Capital Requirement and Special Margin

The capital requirement for both positions is about $24,000 with potential returns in the 4.5% to 4.8% range. The Iron Condor position can take advantage of special margin since the difference between the put spread and call spread is the same (25) and the month of expiration for all of the options is the same (March). Since the Iron Condor can only suffer a loss for either the put spread or the call spread, some brokers allow for special margin for Iron Condors if the months of expiration for all the options the same and the put and call spread differentials are identical. Conversely, the Double Diagonal position does not qualify for special margin since the month of option expiration for all options is not the same. For the Double Diagonal, the month of expiration for the short options is March and the month of expiration for the long options is April.

The profit and loss charts for a similar NDX Iron Condor and NDX Double Diagonal position for expiration in March of 2010 are shown below:

Breakeven - Iron Condor vs. Double Diagonal

The lower break-even price of $1,612 for the Double Diagonal is smaller and more advantageous than the larger break-even price of $1,624 for the Iron Condor. Similarly, the upper break-even price of $1,957 for the Double Diagonal is higher and more advantageous than the break-even price of $1,951 for the Iron Condor.

Loss of Capital

Since the Iron Condor position takes advantage of special margin, the position can realize a total loss of capital if the price of NDX closes below the short put strike of 1,600 or above the long call strike of 1,975 at option expiration. In contrast, the Double Diagonal does not qualify for special margin and the largest loss the Double Diagonal can suffer is about 50% which occurs if the price of NDX closes below $1,475 or above $2,050 at option expiration.

The break-even prices for the Double Diagonal are more advantageous than for the Iron Condor, but the difference is really pretty small, less than 1%. However, the differences for the prices of maximum capital loss are significantly better for the Double Diagonal than the Iron Condor, on the order of 4% to 8%.

Advantages Summarized

To summarize, the Double Diagonal position has a similar return as the Iron Condor with less risk. At this point, the Double Diagonal appears to a better strategy than the Iron Condor, however, the Double Diagonal does have some disadvantages when compared to the Iron Condor.

Disadvantages of a Double Diagonal compared to an Iron Condor:

• Special margin not available
• Decreased profit potential near midway point between option short strikes
• Return calculation is not straightforward
• May require significant capital for implementing with indexes

Double Diagonal - No Special Margin

As discussed earlier, the Double Diagonal cannot take advantage of special margin as in the case of the Iron Condor. The Iron Condor can basically generate twice the return of the Double Diagonal for a given amount of capital invested.

Iron Condor Profitability Region

As can be observed from the profit/loss charts, the Iron Condor has a very uniform profitability region between the short option strike prices with a very sudden drop off in profitability (or loss) with underlying prices lower than the short put strike price or higher than the short call strike price.

Double Diagonal Profitability Region

In contract, the Double Diagonal experiences the most profit when the price of the underlying is near one of the short option strike prices at expiration. Additionally, and in contrast to the Iron Condor, the profitability of the Double Diagonal is not uniform between the short option strike prices and dips or drops near the midway point between the short options.

Straightforward Potential Return Calculation

For the Iron Condor, the potential return calculation assumes all of the Iron Condor options will expire worthless, so the calculation is very straightforward. However, since the short options for the Double Diagonal have a shorter timeframe for expiration, the potential return calculation is more complicated, as the price of the long options have to be calculated or estimated in some manner. This calculation is generally performed using the Black-Scholes option pricing model which is somewhat complicated and will not be discussed in this article.

Capital Requirement and Tax Advantages

For the example NDX positions selected, the minimum amount (one contract) that could be invested with the Double Diagonal was about $25,000, whereas the Iron Condor could be entered with a capital requirement (one contract) of about $2,500. Alternatively, a similar Double Diagonal position with a smaller capital requirement could have been entered for the QQQQ ETF. However, a Double Diagonal for an ETF would not be subject to some of the tax advantages available for a Double Diagonal position with an index as the underlying. More information is available for the tax advantages of Broad-based Index Options at this website: Tax Advantage.

Summary

The Double Diagonal strategy is a very powerful and flexible stock options strategy. The strategy is a neutral strategy with the potential to work in low volatile markets while providing an attractive risk/reward profile.

To learn more about the Double Diagonal stock options strategy check out this link: Double Diagonal.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: Double Diagonal, Iron Condor, Calendar Put, option expiration, Calendar Call, spread, out-of-the-money, brokerage fees, volatility, strike, NDX, expiration, strike price

Transocean’s (RIG) stock option volume was off-the-chart yesterday. Transocean is in the offshore oil and gas service business. Transocean operates deepwater rigs for drilling oil and gas wells.

Transocean is the big dog in its market segment and its competitors include Noble (NE), Diamond Offshore (DO), Nabors International (NBR) and Pride International (PDE).

Share Repurchase

A majority of yesterday’s stock option volume is most likely related to Transocean’s recent announcement that the company’s board of directors approved a significant stock repurchase and is also seeking to provide a dividend on the order of $3 per share. The dividend will require shareholder approval.

The share repurchase, potential dividend and attractive P/E (Price-to-Earnings) ratio should act to provide support for the company’s stock price.

Stock Price

Transocean’s stock price has been in a trading range from $80 to $95 over the last several months and is currently near the lower end of the trading range and also near its lower Bollinger Band. The company’s stock price is well off of its two-year high around $160.

Transocean’s revenue and earnings have held up fairly well considering the current economic environment, but a large reason for this is Transocean’s benefiting from lucrative contracts negotiated prior to the economic malaise. On a postive note, Transocean has been awarded contracts for ultra-deepwater drilling over the last several months.

Covered Call

With Transocean’s share repurchase, a recovering global economy and its strong competitive position, the company looks attractive. A covered call investing position looks attractive and writing a covered calls position for the March 85 call option has a potential return of 3.5%. A profit/loss graph for this position is shown below:

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To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: DO, Diamond Offshore Drilling Inc., NBR, Nabors Indus. Inc., NE, Noble Drilling Corp., PDE, Pride Intl. Inc., RIG, Transocean Offshore Inc.

The U.S. GDP (Gross Domestic Product) was announced as 5.7% for the fourth quarter of 2009 and the stock market immediately celebrated the good news by jumping up and then back down.

A GDP of 5.7% sounds real good, but in reality, the increase in the GDP was more a result of an inventory build-up, than the economy taking off. A more realistic GDP is probably around 2% which is OK, but no reason for high-fives.

Stock Market…

The stock market has been in a real foul mood lately, which is what we’ve been expecting for a couple of months and why we’ve been posting collar positions to PowerOptionsApplied’s Palladium TradeFolio^TM. So far the indexes have remained above their previous support levels and as long as this is the case, it would be expected to see the market recover over the next couple of weeks. But, if the previous support levels are breached, then there will probably be some more downside action.

Bare Escentuals…

In a recent email and also highlighted in one of our blog articles, Spike in Bare Escentuals Call Option Volume, we analyzed Bare Excentuals (BARE) and its high call option volume. Turns out Bare Escentuals is going to be acquired by Shiseido. Shiseido is Japan’s largest cosmetic company and announced their plan to acquire Bare Escentuals on January 14, 2010, almost exactly one month after the large spike in call option volume occurred. In the article, we recommended a covered call which made a nice return, but for investors seeking to take a long position, Bare Escentuals closed at $12.31 on December 15, 2009 and at $18.07 on January 15, 2010 and resulted in a nice return of 47%.

With the beaten down U.S. dollar and stock prices of U.S. companies, it would not be surprising to see a few more acquisitions of U.S. companies, like Bare Escentuals, by foreign companies, as U.S. companies are valued at quite a discount from what they were a few years ago.

Short Squeeze…

In a previous couple of articles, Short Squeeze and Stock Options and Short Squeeze and Stock Options part II, we discussed the topic of short squeezes and a couple of companies which appeared to be in a short squeeze. One correction, in the articles, it was mentioned that the quantity of short positions for stocks are updated monthly, but for a year or so now, short position are actually updated twice a month.

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On October 29th, 2009, we discussed Bank of the Ozarks (OZRK) and its apparent short squeeze situation. Bank of the Ozarks stock price is up about 30% since we highlighted the company.

On November 10th, 2009 we analyzed Stratasys (SSYS) and that company’s short squeeze situation. Stratasys’s stock price is up about 50% since we published the article. But, a large part of Stratasys’s stock increase is a result of an agreement with Hewlett Packard (HPQ) for Stratasys to manufacture HP’s 3D printers. You’ll notice a large spike in Stratasys’s stock price at the time of the HP/SSYS announcement and then a subsequent drop in price. Well I’m guessing the big spike was the shorts losing their shorts after receiving their margin calls and having to cover.

This month we used PowerOptions powerful search tool to find companies which are potentially in a short squeeze. The company that popped up on the radar this month was United Bankshares (UBSI). United Bankshares provides banking services in West Virginia, Virginia, Maryland, Ohio and Washington D.C. United Bankshares # Days of Short Interest is at 30.1 and its % Short Interest is at 21.7%. That’s a heap of short interest. At current market volumes, it would take the shorts 30 days to close their positions.

I don’t think United Bankshares deserves all of this short interest attention, they just hiked their dividend and their %dividend yield is very nice at around 5% or so. The company has banking retail centers in some prime locations and has faired rather well considering the economic climate.

United Bankshares stock price has also performed fairly well over the last couple of months.

Unfortunately, there aren’t any attractive covered calls or collars for United Bankshares, but there is a pretty nice naked put position for March with a potential return of 3.7% with a time frame of 47 days for potentially realizing the return. The naked put position is entered by selling a put option. The naked put trade has the same risk/reward as a comparable covered call. The put option of interest to sell would be the March 25.

Optium Stop-Loss…

We experienced a stop-loss for one of PowerOptionsApplied’s Optium positions today. It’s been about 15 months since we experienced a stop-loss for Optium. We really appreciate when customers call in and let us know how much money they’ve made over the last year or so by trading our recommendations. Not sure if any customers actually experienced today’s stop-loss, as we never were able to enter the position for the amount of net credit we were seeking. But, even when we are not able to execute a trade, we continue to manage a position. There’s still three other positions currently open for Optium, so Optium might still end up being profitable this month.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: GDP, Gross Domestic Product, Shiseido, U.S. dollar, acquisitions, OZRK, Bank of the Ozarks, BARE, Bare Escentuals Inc., HPQ, Hewlett Packard, SSYS, Stratasys Inc., UBSI, United Bankshares Inc.

Answer:

The Iron Condor trades are posted with a net credit amount. This amount represents the total positive cash flow from entering the position. A short put option is sold, say for example a $1, and a long put is purchased, say for $0.50. The net credit or positive cash flow for this trade is $1-$0.50 for a net credit of $0.50. Likewise, a long call option is sold, say for $2, and a long call option is purchased, say for $1.20. The net credit for this transaction is $2-$1.20 or $0.80. The total net credit would be $1.30, the sum of the put spread credit of $0.50 and the call spread net credit of $0.80. So, the trade is executed if the minimum net credit can be achieved, if the minimum net credit cannot be achieved, then the trade is not executed.

After posting the initial trade, if the trade does not execute, we may post a revised net credit in order to facilitate the execution of the trade, which is what the “revised credit of .55″ was referring to.

Question #2: What does roll mean?

Answer:

Positions for the Chromium Iron Condor TradeFolio are rolled after being in the trade for a number of days in order to realize additional potential income. The direction of the roll depends upon the direction the market moves. If the market moves up, then the bull-put credit spread portion of the Iron Condor is rolled, and if the market moves down, then the bear-call spread portion of the Iron Condor is rolled. Rolling entails replacing a stock option or stock options with a different stock option or stock options.

Additionally, covered call and collar (Titanium & Pallasium) positions may be rolled if the underlying stock increases or decreases after entry. If the underlying stock increases in price, then the short call option may be rolled to a higher strike price in order to realize more potential profit. If the stock decreases in price, then the short call option may be rolled to a lower strike price in order to recoup or recover from a loss.

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Question #3:

Your Titanium service prior to 2009 was lackluster to say the least. Have you been using the exact trding strategy now as you were before 2009? Thanks for you indulgence.

Answer:

No, we have modified Titanium’s strategy. For example, we introduced rolling of positions and we also have modified the selection criteria.

Question #4 & #5:

I am currently enrolled in Autotrade for the Chromium program and have a $5k trade limit set. I would like to increase that limit. Is there any particular time of the month I should do that or can it safely be done at any time?

I would also like to start the Palladium program in another account. Again, must this initial setup be done at a particular time of the month, or is anytime ok?

Answer:

You can change the trade limit at anytime, but you may end with one trade with $5K and one trade that is larger or smaller, depending upon how you change the limit. This is ok, but not optimal. The best time to change the trade limit would the week of stock options expiration when we don’t add new trades and do very few trade updates. The next week of stock options expiration is from Feb 15-19.

The initial setup can be performed at anytime, as the new trades will all have the same allocation.

Question #6:

I subscribed to PowerOptionsApplied, but I’m not receiving any of the emails?

Answer:

At some point previous, you unsubscribed from receiving emails from our service. We use a third party email provider which abides by the CAN-SPAM act, and as a result, we cannot resubscribe you for receiving our emails. In order to receive our emails, you will need to select an email which was sent from us by the third party email provider (iContact) and resubscribe. After finding and opening the email you will want to look for the link “Manage your subsription” located at the very bottom of the email. You can manage your email options by selecting this link.

Question #7:

My husband and I are both wanting to autotrade your TradeFolios, do we need two subscriptions?

Answer:

No, you and your husband may both subscribe to autotrade our TradeFolios with one subscription, but you will need to have one email address which is the same across both accounts with your broker.

Question #8:

How do I maintain a reserve in my account for rolling positions and for stop-losses?

Answer:

We recommend that when the reserve amount of capital in an account approaches 10%, the amount allocated for the next trade be set to zero. This will stop the broker from executing new trades. We recommend the box “Next New Trade” remain checked, as this will allow the broker to execute any managment trades that we post to existing positions.

Additionally, if the account reserve drops below 7%, we recommend closing a position or positions, preferably profitable positions, in order to maintain an acount reserve of 10%.

Question #9:

I’m trying to set up OptionsXpress for Palladium and am unclear about how to set up Trade Amount given the large/variable number of trades. I have set it up for Optium because there are always going to be four contracts. But how should I set up OptionsXpress for Palladium? Specifically, if I wanted to invest $100K, what would the values for Amount Type and Trade Amount be?

Answer:

1.We recommend you not use # of contracts for Optium, as you will have different amounts invested between the four positions. Optium’s spreads (difference between short and long stock option) can vary from 5 to 25. Four contracts of a 5 spread will be an investment of $2000 and four contracts of a 25 spread will be an investment of $10,000. We recommend the amount invested be set to a specific dollar amount or % of account, but not # contracts.

2.Palladium will usually have about 10 positions, so $9,000 per position would be good which would be about $90,000 on average, leaving a reserve of $10,000 (10%) for rolling positions.

3.To maintain a reserve, but continue to participate in position rolls, you can change the trade amount to 0 when you have reached your reserve limit. You would also leave “Next New Trade” checked in order to participate in rolls.

Question #10:

BTW, do you publish any additional information on strategies for Palladium? The approach for Optium seems pretty straightforward but it’s not clear how positions get chosen for Palladium. How do you determine whether to trade covered call or collars? How does market trend (up/down) influence the trades, etc.? I’m really interested in understanding the overlap in risk between Optium and Palladium.

Answers:

Positions for Palladium are selected from Exchange Traded Funds (ETFs). Positions are selected for ETFs which are in an uptrend, which we think will continue in an uptrend and for which we can receive a reasonable potential return (greater than 2% in a month).

The decision to trade covered calls or collars for Palladium is based on whether we consider the market to be in a situation where it might reverse course. If the market appears to be primed for a reversal, then we will post collars, if not, then we will post covered calls. We’ve posted collars for the last two months and so far the market has not reversed, but we think the market will eventually have a short term pull-back and that we are just a little early.

In general, as long as the market continues in the same direction, up or down, Palladium will be profitable. If the market is in an uptrend we will place positions based on standard ETFs. If the market is in a downtrend, then we will post positions for inverse ETFs. Inverse ETFs move counter to the movement of the market.

Optium does not perform well for large market movements, up or down, over one month. Palladium does not perform well when a market switches from bullish to bearish or vice-versa.

Optium performs well in relatively quiet markets. Palladium performs well when the market continues in the same direction, up or down.

So for a market in an uptrend which has been in an uptrend, a large movement up may cause a loss for Optium, but a nice profit for Palladium. A large movement down in the same market may cause a loss for Optium and also for Palladium.

Also, a market which were to switch “calmly” from bearish to bullish might be profitable for Optium with Palladium experiencing losses.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags:

Old vs. New…
The old stock options symbols were contained in 3-to-5 characters. The new symbols will be generated with 9-to-22 characters.

The old stock options symbol format consisted of:

• Option Root - One to three characters representing underlying stock
• Month of Expiration & Call/Put - One character representing month of expiration & call/put
• Strike Price - One character representing the strike price

For example, a 2010 call option for Intel (INTC) with a month of expiration of January and a strike price of $17.5, the option would be represented as:

The call option symbol would be entered, traded and listed as NQAW.

New Format…
The new stock options symbol contains the following components:

• Symbol - One to six symbol for the underlying security (e.g. INTC)
• Year of Expiration - Two characters representing expiration year
• Month of Expiration - Two characters representing expiration month
• Day of Expiration - Two characters for the expiration day
• Call/Put Indicator - One character for Call[C] or Put[P]
• Strike Price - One to nine characters for the strike price, including a decimal character if needed

For Intel example as discussed above, the new symbol structure would look like:

New Symbol Structure…

The option symbol using the new format would be:

INTC100116C17.5

If you would like to learn more detailed information related to the new stock options symbol format, you can check out this link: New Option Symbol Format.

Complicated - Not Really…
Wow, the new stock options symbols seem a lot more complicated than the old symbols, but PowerOptions is changing its tools to make using the new symbols very easy.

Example…
We’ll illustrate entering a covered call position into PowerOptions’ portfolio tool to show you how easy it is. A user would select the “My Portfolio” tab, the portfolio of interest and the strategy in the usual manner. We’ll enter a covered call position for the Intel example discussed above.

The covered call entry page shown below is then displayed to the user:

After entering the stock symbol, INTC for this example, and choosing “Select Option”, the user is prompted with the following pop-up shown below:

A user seeking an option with a February expiration would click “Feb 20, 2010 (37 Days)”, as shown below, for example.

For our Intel example, we want a covered call with an expiration month of January and a strike price of $17.50, so we would select 17.50 from the available choices as shown below:

The entered stock symbol and the selected option are now displayed as shown above.

A user would enter the # of shares, # of contracts, commissions/fees and then select “Submit”, after which the following would be displayed:

The format for the portfolio display is very similar to the old format, but you will notice the column previously labeled as “Issue Symbol” has been renamed “Security” and an option symbol is not displayed as was displayed previously.

We hope the change from the old option symbols to the new entry format is easy and painless for you. The stock option brokers are also transitioning to the new entry format and revising their tools as needed. Hopefully, we can all click our heels together like Dorothy during the symbol changeover and everything will work smoothly.

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Technorati Tags: symbol, brokers, INTC, Intel Corp.

Simple Tech is in the business of designing, developing, manufacturing and marketing custom memory products. The bulwark of its product offerings involves the Solid State Drive [SSD], memory using flash memory and dynamic memory. SSD’s are slowly replacing legacy Hard Disk Drive [HDD] technology.

Simple Tech is in a new and growing market segment, but does it have enough pizzazz to weather the course? Simple Tech has some very large competitors including Micron Technology (MU), SanDisk (SNDK) and Samsung Electronics (private).

The root cause of Simple Tech’s volatile stock price is its small number of customers which make up the bulk of its revenue. Simple Tech’s ten largest customer account for 84% of its revenue and one customer accounts for 38% of its revenue. So if one of Simple Tech’s largest customers has a poor earnings report or reports bad news, Simple Tech’s stock price takes a hit. Conversely, if one of Simple Tech’s largest customers has good news, then its stock goes ballistic.

In the long run, another company will probably acquire Simple Tech, it just doesn’t have the momentum to go the distance. But in the short term, Simple Tech makes for a great trading vehicle, with the right approach.

Simple Tech’s stock price and stock option volume went through the roof today. Significant call option and put option volume were especially heavy in January and February. A lot of this action is a result of analysts publishing upgrades for the company.

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A good stock options play for a company like Simple Tech is often a option collars investing position, a covered call investing position combined with a protective put option. Finding the right option collars investing position for a stock investment can be daunting, as there are literally thousands of alternatives. However, using PowerOptions search tool, it is pretty easy. For example, a search using PowerOptions search tool revealed the following three potential positions for Simple Tech:

The first two positions use out-of-the-money put options and the third position uses an in-the-money put option. The third position requires a significantly larger capital investment as the price of the in-the-money put option is much larger than the price of the out-of-the-money put options.

For this search, the out-of-the-money put option choice is less attractive as it has less potential return, requires a larger capital investment and offers no advantage as far as the maximum potential loss. This situation is not always the case, as the out-of-the-money put option can be an attractive investment.

The first two positions have the standard trade-off of more return with more risk, or less return with less risk. In this case we’ll consider the second option collars investing choice with a %if assigned potential return of 8.3% and a %if unchanged return of 3.8%. This position has a maximum potential loss of 13.3%, which is nice, because STEC could easily drop more than 13% over the course of the timeframe for this investment which is 46 days. A potential for generating an 8.3% return in only 46 days is not too bad.

The profit and loss graph for this position for one contract is shown below:

To enter the collar position an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option and one put option contract for each 100 shares of stock purchased for their personal stock portfolio.

When investing with volatile companies, it is a good idea to bound the investment with a put option, just in case the company’s stock price takes a nose dive.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: Solid State Drive, SSD, Hard Disk Drive, HDD, Samsung Electronics, out-of-the-money, MU, Micron Technology Inc., SNDK, SanDisk Corp.

Individual or Group?

We will examine whether it is better to insure stocks individually or as a group. In an article published several years ago, we explained how to insure a group stocks with index stock options: Portfolio Management: Stock Insurance.

Covered Call

Today we will look at a portfolio covered call positions which are all members of the S&P500 index and consider how to insure the positions. A covered call position is entered by selling a call option against a purchased stock. The covered call positions examined in this article were all posted by PowerOptionsApplied’s Titanium TradeFolio^TM and closed in December of 2009. The profit/loss diagram for a covered call investing position is shown below:

Uninsured covered calls have limited upside potential returns and exposure to significant downside losses. A covered call strategy is analogous to purchasing a house and leasing the house with an option to buy. For covered calls a stock is purchased and then “leased out” to an option buyer. The option buyer has the option of purchasing the stock at a predetermined price known as the strike price and with termination of the contract at a predetermined point in time known as options expiration.

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Put Insurance

A covered call or a stock can be insured by purchasing put options. Purchasing a put option is similar to purchasing auto or home insurance. A put option can provide insurance for a covered call in the event the price of the underlying stock decreases significantly. The price of the put option moves inversely to the price of the stock, i.e., if the stock price decreases, then the put option increases and vice-versa.

Real World Example

The following analysis will be performed assuming the positions are to be insured on December 7, 2009. The table shown below indicates the underlying stock/call option for each covered call investing position and a corresponding put option for insuring the covered call positions against a 10% drop in the value of the underlying stock. Each covered call position has downside protection, generally about 3%, so the covered call positions are actually being insured for a maximum loss of about 7%. The number of shares for each covered call position was chosen in order to position each investment as close to $10,000 as possible. The put insurance is calculated as the price of the option multiplied by the number of shares of stock.

At $295, the cost of insuring the portfolio of covered calls positions is very expensive and would have taken a big bite out of the $2,255 of profit.

Insuring with Put Options

Instead of insuring each individual covered call investing position, it is possible to insure the investments as a whole or a group with index put options or ETF (Exchange Trade Fund) put options. Since this porfolio of covered calls positions are all components of the S&P500 index we will examine using S&P500 Index options ($SPX), S&P 500 Index ETF options (SPY) and the S&P 100 index options ($OEX) as insurance.

Insuring with $SPX Put Options

The number of contracts needed to insure a portfolio can be calculated by dividing the total value of the investment by the price of the underlying index or ETF multiplied by 100. For example, to use $SPX index options for insurance on 12/7/2009, the total investment value of $45,779 would be divided by 100 multiplied times the value of the $SPX index which was $1103.25.

$45,779/($1103.25*100) = 0.41 contracts

Performing this calculation results in a number of contracts of 0.41. In this case we would simply round up to the nearest contact which would be one. To insure against a 10% drop in price of the stocks in the portfolio, a put option with a strike price which is 10% less than the value of the index can be selected. The index put option of interested would have been the $SPX December 990 with a price of $0.70 per share or $70 per contract. Since the number of contracts was rounded up, this is more insurance than actually needed, but would be sufficient if there were no better candidates and is much less than the $295 cost for insuring each individual position.

Insuring with SPY Put Options

Another candidate for put option insurance to consider for the portfolio of S&P500 covered call positions is the SPY. The value of the SPY on 12/7/2009 was $110.84 so the calculation to determine the number of contracts is:

$45,779/($110.84*100) = 4.1 contracts

For this case, the number of contracts is 4.1 or rounded down to 4. The SPY put option of interest is the December 100 as it is down 10% from the current price of SPY. The price of the December 100 put option on 12/7/2009 was $0.10. So the cost for the December 100 put option insurance is the price of the put option multiplied by the number of contracts times 100 shares per contract or $0.10 * 4 * 100 or $40. The cost of the SPY put insurance is less than the $SPX insurance and is more close to the level of insurance that we are seeking and also costs much less than insuring each individual covered call investing position.

Insuring with $OEX Put Options

If all of the stocks in the portfolio were components of the S&P100, then we could have evaulated using the $OEX index put options for insurance. For example, the price of $OEX on 12/7/2009 was $512.45, so the amount of contracts needed would have been caculated as:

$45,779/($512.45 * 100) = 0.89 contracts

To insure with $OEX put options would require 0.89 contracts, which would be rounded up to one contract. The put option of interest would be the December 460 with a price of $0.40. The cost of $OEX put insurance would have been $0.40 * 1 * 100 or $40, the same cost as for the SPY put option. However, the bid/ask spread for this option was $0.10, so using a limit order we might have been able to purchase the insurance for $0.35 per share or $35, slightly less than using SPY put options.

Testing the Strategy

It is always a good idea to test a strategy to see how it would perform. For example, assume after purchasing the put option insurance, the aggregate stock market were to drop 20%. We’ll assume the underlying stocks for the covered call positions also drop 20% and result in a stock-component loss of $9,156, however each of the covered call positions had downside protection of 3%, so the actual loss of the covered call portfolio would have been 17% or about $7,782.

A 20% drop in the price of the $SPX would translate into a price of $883. After the price drop for $SPX, the price of the $SPX December 990 put option would be worth around $107 ($990-$883) or $10,700 ($107*1*100) for one contract. As was indicated above the $SPX December 990 put option was more insurance than needed as we ended up with a profit of $2,918 ($10,700 - $7,782). But maybe having a little extra insurance is a good strategy, not bad for only $70 of insurance.

A 20% drop in the price of the SPY ETF would have resulted in a price of $88.67 for SPY, so the value of the December 100 put option would be worth about $11.33 ($100-$88.67) or $4,532 for 4 contracts ($11.33 * 4 * 100). In this case the loss for the covered call portfolio would be -$3,250 ($7,782-$4,532) or a loss of about -7% ($-3,250/$45,779). Pretty good insurance for only $40.

The previous example was for insuring a portfolio of covered calls for 12 days. The portfolio could have been insured for the entire month beginning on November 23, 2009 by purchasing the SPY December 100 put option for $0.29 or $116 ($0.29*4*100).

A similar portfolio could be insured in a like manner today for 18 days using the SPY January 102 put option with a price of $0.15 which would cost $60 ($0.15*4*100).

This type of insurance protects against general market downdrafts and does not protect against an individual position heading south. For a portfolio of covered calls with the potential to generate 3%, it is quite cost effective to insure the portfolio with index or ETF put options, much more cost effective than insuring each individual position.

Technorati Tags: health insurance, doctors, hospitals, Congress, $OEX, S&P 100 Index, $SPX, S&P 500 Index, SPY, S&P Depositary Receipts Trust ETF

If you’re looking to purchase a car or convert a car to operate on natural gas, then Fuel Systems is for you. Fuel Systems provides components for alternative energy in the transportation segment. Fuel Systems IMPCO subsidiary provides products in the industrial and power generation market segment and it’s BRC subsidiary provides products for the alternative fuels transportation market segment. Fuel Systems derives a large part of its revenues from selling its products in Italy. Italy provides a subsidy or support for natural gas through a reduced Value Added Tax [VAT].

Fuel System’s stock price has been very volatile of late with it spiking up around the first of November and experiencing a spike down yesterday. Fuel System’s stock price is up over 300% from its low in March of this year. The company’s stock prices is near a 52-week high and has also nearing is two-year price around $60. Yesterday’s spike down in price breached the lower Bollinger Band.

Yesterday’s unusual stock option volume for Fuel Systems was observed for both call options and put options with a majority of the action for the December and January at-the-money options.

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With the recent spike up/down in the price of its stock, a good play for Fuel Systems might be a collar, a covered call investing position with a put purchased for downside protection. A good candidate for this strategy might be selling the January 45 call option and purchasing the Jan 35 put option. The %if unchanged potential return is 5.5% with a %if assigned potential return of 7.6%. The maximum potential loss is 16.3%. The profit/loss chart for this collar is shown below:

To enter the collar an investor would purchase the stocks in multiples of 100 shares for their trading portfolio and sell one call option and purchase on put option for each 100 shares of stock purchased for their personal stock portfolio.

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: natural gas, transportation segment, IMPCO, power generation, BRC, alternative fuels, Italy, Value Added Tax, at-the-money, FSYS, Fuel Systems Solutions Inc.

Noble Drilling is in the business of providing drilling services for the oil and gas industry. Noble has over 60 offshore drilling rigs including semi-submersibles, drillships, jackups and submersibles.

Noble’s competitors include: Diamond Offshore Drilling (DO), Nabors Industries (NBR) and Transocean (RIG).

Nobel’s stock price is up about 100% from its low price in December of 2008 and well off of its two-year high price in the upper $60 range. Nobel’s current stock price is near its previous support level in the $40 range which occurred around the first of November 2009.

Noble’s November, December and January call option and put option volume has been significantly high today with higher volume for the put options. The November put option volume is interesting as the November stock options expire today and the November put options with high volume are in-the-money, so apparently somebody wants to acquire a large amount of Nobel’s stock by having it assigned to them via the put options.

Noble is a good company with great prospects now that the price of oil is over $70 a barrel. A covered call investing position for Noble for December is worth considering with a potential return of 5% and with a time frame for realizing the profit of only 29 days. The December 39 call option is of interest with a ticker symbol of NELN.

To enter the covered call investing position an investor would purchase the stock in multiples of 100 shares for their trading portfolio and sell one call option for each 100 shares of stock purchased for their personal stock portfolio.

Free stock option newsletter » return goal > 2% / month » works in any market

For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

Technorati Tags: oil and gas industry, semi-submersibles, drillships, jackups, submersibles, DO, Diamond Offshore Drilling Inc., NBR, Nabors Indus. Inc., NE, Noble Drilling Corp., RIG, Transocean Offshore Inc.