≡ Menu

The next Gold move?

The last time I commented on Gold was 4 years ago. On April 16, 2013 I wrote Gold Recovery? Don’t Bet on it. In that article, I claimed that gold would not rise much by Jan 2015, and sure enough, GLD fell from $132 to $123, no move up. Before that, in fact, before I started here,  in 2009, I wrote Will Gold Break $1250 by 2011? The result was “yes”, it did, and the option play I described was up by a factor of 4. A $2500 bet returned $10,000.

Now, we are, as they say, in interesting times. Jesse Felder of TradingView.com suggests that we are due for a breakout. (Click on the image for the better view)

Now, GLD, the gold ETF, is trading at $122.60, and we are looking at the January ’18 options at different strikes. Let me describe the logistics of the call spread. We can buy the $120 strike and sell the $130 strike. This would cost a net $4.45. And if GLD rose to $130, we’d see a return of $10 for the $4.45 bet. 2.25X our money (A 125% profit) for a 6% move in GLD. This is the amazing thing about trading options, in my opinion.

If we bought the spread from $130 to $140, the cost would be $2.18, and we’d look for a 14% move up to give us a 358% return (i.e 4.58X our bet).

The $140/$150 spread would cost $1.06 and result in an 843% (9.4X) return on a 22% move.

I don’t know what move Jesse is expecting, but at $160, the $150/$160 spread offers an amazing 18X return on a 30% move in GLD.

Let me stop here. Keep in mind, I am not a fan of gold for long term investing, but history showed that when gold breaks out, the potential move of 22% isn’t out of the question. In fact, this 1 year move occurred 3 years of 4, in 2007, 2009, and 2010. The careful use of options would have resulted in spectacular returns.


Lulu 2018 Call Spread

Lululemon Athletica has been an interesting stock to follow. It tends to tank on bad news, yet always seems to recover nicely. This becomes an opportunity to trade a call spread. From a high of $80 just 8 months ago, it’s dropped to $55, risen past $65, then below $50 on bad new guidance. On April 3, 2017, this was the trade I was considering.

The price of the shares was $49.75. The Jan $50 calls were $6.35, the Jan $60 calls, $2.75. The call spread profit potential is illustrated above. At expiration, I need Lulu to be at or above, $53.60 to breakeven, and I have a maximum gain of $6400 if it trades at $60 or above. The potential is not quite a triple, it’s 2.78X times the money bet. Below is the fill that I got.

Note: The P/L snapshot was taken seconds after my trade filled, so it would reflect my numbers. You can see the tremendous leverage this option spread offers. It returns -100% for a flat stock price, but as much as +178% for a 20% move from the current price. You can also see that if Lulu were to get back to its recent high of $80, the value of this spread would get well above $9000, and I’d probably close it out early. Look at the Lulu chart, and recent news, and tell me if you don’t agree this trade may have been a good one. Last, I wrote A LULU of a deal nearly 3 years ago, a similar trade, call spread, only I was hoping the move would be twice as far, it would need a 50% move for me to make a 500% return. The stock didn’t hit $60, it closed at expiration at $55.71, and my $1700 ‘bet’ returned $5650. Not bad for a failed trade.


Apple 2018 call spread

Today, Apple is trading at $99. Coming back from prices not seen for 2 years. Here’s the chart I’m looking at.


With the pullback we saw, this is a good time to look at a call spread. Specifically, this one –

I am looking to go out 20 months to January 2018. And I found that the spread from $140 to $150 can be had for $1 net. Let’s recap how this math works and how to enter this trade. The $140 strike is bought for $2.52 and the $150 strike sold for $1.52. This results in a 10X return for a 50% move in Apple over the next 20 months. What if we just bought the $140 strike? The 10X return is still possible, but it would require Apple to hit $165. Only an extra 15%, so possible, and if Apple rose well beyond that, I’d be a bit sad at the gains I passed up, but I’ve had success keep my risk/reward in the range of this trade.

There are a few warnings here. I don’t claim this is ‘investing.’ It’s a gamble, but one where I believe the odds are actually in my favor. To be clear, this is a bet that a stock will rise 50%, and the market is saying, “We think you are wrong and will give you 10 to 1 odds this won’t happen.” I think the odds are far better, perhaps a 1 in 3 chance, 4 tops, certainly not 10. Long term, I’m happy to lose 3 out of 4 times on these, given the high return.

Keep in mind, if the market, and Apple with it, average 10%/yr, or 20% over 2 years, it would take brief bursts of higher returns to average out the down years. Apple can return 10% over a 20 year period , and still provide these high return opportunities every few years.


Apple at 9 to 2 recap

It’s 2 years since I wrote Betting on Apple at 9 to 2. My bet was that Apple would recover past $600, and in fact, $742 was the close at the options’ expiration. Looking at the trade I made, it couldn’t have gone much better.


Let’s look and see if I might have chosen a better payoff. In this case, $2200 turned into $10000. Had I just bought the calls, the $500 strike for $46.50, the strike would have closed at a value of $242, a gain of 420% vs the 354% gain I saw. The position I entered needed a 35% rise in Apple to get this gain vs 66% gain required to get that 420% return on just buying the $500 strike.

In hindsight, this is one of those rare trades where the only thing I might have done differently was to place a larger position. Most other option trading I do does not yield these results. To be really clear, I am in my 50s and this will go down as one of my top ten option trades, both from a risk/reward standpoint as well as absolute dollars returned.


My bet on Oil

As you may have noticed, the price of oil has dropped recently. If you don’t follow oil in the business section or listen to CNBC, at least you’ve seen the price of gasoline come down. Has it bottomed out? I don’t know. I just look at the chart and stare –

USO chartI see that after it bottoms, it tends to bounce back. I also see that in the last five years, the oil ETF, ticker symbol USO, has been over $31.66 95% of the time. I’ll tell you why that’s important in a minute. I looked to see what option trade made sense given the way USO has always snapped back over $30, and decided that the spread between $30 and $35 was worth a look.

USO options

The spread would cost me $1.66. Even though I tried for $1.60, it didn’t fill, so I bumped to $1.66 and it filled fast. To be clear, I bought 10 contracts of the $30 strike call and sold 10 contracts of the $35 call for a total cost to me of $1660. If USO trades above $35 at the close in January of ’17, this will close at $5000 less commission. A 3 to 1 return. A bet, not an investment. A bet that this ETF will rise just 25% in 2 years to give me back a 200% gain. The $31.66 is where I break even, that’s why I looked at how long it traded above that level. If oil shoots up, and USO trades above, say, $50, in a year’s time, the spread will widen enough that I’d get most of that $5000 out and close the deal early. $4700 in a year would be fine by me.

Disclaimer – this is a high risk trade, a Vegas-style bet that offers a 3 to 1 return, but you can lose the entire bet. This type of options trade multiplies a small move in a stock or index on the downside as well as the upside. This is for information only, and if you enter this trade, you should only do it with your gambling money.

Let me know what you think. Has oil reached a permanently low plateau? Or do you think that’s nonsense just as I do. More important, do you have the patience for bets that last 2 years? I do.


A LULU of a deal

Lululemon, maker of fine athletic ware recently fell on hard times, and I’ve watched it stock fall from a high of $82 to just under $40 a share. This reminded me of the Netflix blunder, when I watched the shares tumble even though the general business was doing fine. Here, it seems the CEO made a disparaging remark about overweight people.


You can see that LULU traded above $60 for the entire year in 2013. And in my opinion, it’s oversold, likely to recover to the $60s. For this trade, I looked at the Jan, 2016 strikes, $50 and $60. This was what the trade looked like earlier this week:

LULU trade

This chart shows the potential profit or loss on this call spread. You can see, my intention was to buy the $50 strike, and sell the $60. The difference between the two was just under $2, so if I traded 10 contracts, I’d be risking $2000. In 17 months, if LULU traded at or below $50, it would be a loss. Like rolling snake eyes in Vegas. But at $60, I’d have $10000, jackpot. You’ll note the high bid/ask spread. It looks like I’d expect to pay $2.50, but that wasn’t the case.

LULU fill

I entered a limit order at at $2, but it filled at $1.70. So the spread cost me $1700, a bit better than the image for P/L shows. Just under a 6 to 1 return if the stock moves up 50%. Leverage? Yes. Disclaimer – I don’t call this investing. It’s a gamble. The question remains, is this stock down on fundamentals, or due to a short term publicity black eye? Is the chance for a 50% recovery from this low really 6 to 1? We’ll see. Stay tuned.


Gold Recovery? Don’t Bet on it.

Today, gold dropped, quiet a bit. The GLD ETF was down over 8% when I wrote this.

GLD Options13-04-15

This is an image of the current quote and a peek at two options that expire Jan, 2015. I then looked to see how this would look if executed as a spread trade, i.e. to buy the lower priced call, and sell the higher, same number of contracts for each one.

GLD Options213-04-15

The prices had already changed slightly, but the chart is a great way to look at this. The $170 call is bought for $4.75, and the $180 call sold for $3.15. Net cost, $1.60. Since a contract is for 100 shares of GLD, 10 contract spreads will cost $1600 plus commission.

If GLD closes at or above $180 by January, 2015, this trade will return $10,000. Put another way, the market is offering you a 6 to 1 bet against gold returning to its all time high in the next year and a half. I know the market has no personality, no emotion, but it seems to be answering the question, “will gold hit its old highs?” with a strong answer, “not bloody likely.”


Betting on Apple at 9 to 2

Apple reached its all time high of just over $700 this past September, but has recently dipped below $440. They say that the price of a stock has no memory, it is what it is based on today, it recent earning, and its projected earnings. That said, there are opportunities to place a bet that can get you many times your initial money if the stock recovers even just part way.

Disclaimer – The post title is Betting on Apple. With Odds of 9-2 (or 4.5 to 1). These are gambling terms and this article is not about investing, it’s about gambling. Buying a stock and selling covered calls is a bit less risky than just owning the stock, as you’ve shifted your risk down the curve a bit. Just buying options is a time constrained wager. The bet I will share is that I believe Apple will recover to $600 by January of 2015. The payoff for $2200 is $10000 if this happens. Let’s look at the details:


This chart was produced last Friday, Jan 25th. The stock was trading at $445.91. To enter this trade, I looked at the price to buy the Jan $500 calls, and they were Ask – 46.50, which meant that at $600, I’d get back $100 for a bit over a 2 to 1 return. But, it would take $700 before I saw 4 to 1. So I looked at the price to sell the $600 call, and it was Bid – $24.00. The profit/loss chart appears above. You can see that at $500, the bet is lost, but each dollar above $500 is $100 returned. So, it’s $522 to break even and at $600, the $2200 returns $10,000.


Above, you can see the trade as it was executed. I entered it as a spread order, which meant that both trades had to go through and only if the difference was the $22 I bid. $600 is a 35% rise over the next two years, $522 is just 17%. This is leverage at its best. Stock up 35%, my wager up 354%. Trades like this don’t work every time, but if you have a lucky streak, and only one in three do, you’re still making money. Personally, I view the chance of this hitting at about 50/50. On a final note, this is not my investment money. It’s money set aside to go to the casino. But since I don’t actually go to the casino, this is where I’ll wager.


A Play on Dell Takeover

News broke that Dell is in talks to arrange to be taken private.You’ll note that the present price is just below $13 with a takeover anticipated at $13.50 – $14.00.

Let’s look at the option trade on this stock. A covered call.

Buying the stock for $12.63 and selling the Jan ’14 call for $1.03 gives us an out of pocket cost of $11.60 (10% below the current price) and a return if called of 12%.

12% for a call that’s a year out isn’t the best return you’d expect. After all, you are taking on the risk of the deal falling through and the price dropping back to the recent lower sub-$10 levels. The bet here is that the deal will reach a conclusion in the next few months, and the time premium on the call will collapse to reflect the buyout price. In other words, a buyout agreement at $13.50 would push Dell to within a few cents of $13.50, and the $13 call wouldn’t trade for much over 50 cents.

Update – the deal closed and the shared were assigned on 9/26. 9 months, and a return of 12% or about 16% annualized. Not the kind of high returns options can bring us, but this trade was never intended to be that. This was a covered call for a stock that I was comfortable to own if it weren’t called.


Radio Shack Covered Call

Today, I’ll share a recent trade, another covered call. This time on Radio Shack. Let me show you the details and then I’ll walk you through how this trade might play out.

Radio Shack recently tumbled, from a 52 week high of $16.70 to a recent low of $7.15 due to a bad earnings report and weak consumer confidence. This short term drop presented a spike in volatility that may be a opportunity to use options. A Jan ’13 $7.50 call which is just out of the money was trading at nearly 20% of the stock price which is an unusually high premium. In comparison, options at the same expiration for McDonald’s will trade at less than 6% of the stock value. For the Radio Shack trade, I bought 1000 shares at $7.29 and sold 10 contracts against those shares for $1.24. My net out of pocket is $6.05 per share or $6050 for a stock currently worth $7290. In effect, I bought it at a 17% discount. On the other hand, my profit potential is severely limited. No matter how high the stock rises, I am obligated to let it go for $7.50 per share. If it trades above $7.00 or so, the call buyer may call it early to capture the 50 cent dividend which is scheduled for November. If that happens, this trade will show a 24% return in 10 month’s time.

As far as the fundamentals go, Radio Shack is not buried in debt, their cash and debt are nearly identical, and book value $8.01 per share. I don’t imagine a further crash and burn from here, but a potential takeover.

Update March 2015 – A bust. RSH went under, bankrupt. Lesson – Book value doesn’t mean everything, it’s not a guaranteed floor. On thr flip side, companies with negative book values have been known to grow, turn a profit and succeed.