Gold Recovery? Don’t Bet on it.

by Joe on April 16, 2013

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.”

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Betting on Apple at 9 to 2

by Joe on January 31, 2013

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:

ApplePL

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.

Appletrade

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.

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A Play on Dell Takeover

January 16, 2013

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 [...]

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Radio Shack Covered Call

February 16, 2012

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 [...]

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Micron Technology Covered Call

September 15, 2011

Today, let’s look at another covered call trade. Micron Technology (MU) trades at $7.10. Here is the option table for January 2013: The $7.50 strike looks interesting to me. If you buy 1000 shares of the stock, and sell 10 of this call, your out of pocket is $5270. This is 26% below the current [...]

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Intel Covered Call Strategy

June 11, 2011

I recently fielded a question asking about a trade suggested by a Seeking Alpha article Intel: Dividend Champion in the Making. It’s a basic strategy called a “Covered Call.” You know what a Call is, a Covered Call is simply when you own the stock and sell the call (“sell to open”) indication that you [...]

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Dow 20000?

June 4, 2011

Today, I’ll talk about James Altucher‘s appearance on CNBC this week,  in which he made the case for Dow 20,000 within the next 12-18 months. I had two directions I could go with this, but for today, I’ll answer the first question I had – “If this is so, how can I use an options [...]

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Welcome to Stock Options Cafe

June 4, 2011

For some time I’ve been thinking of launching a site about options. The idea that one can make a small bet (I’ll explain why I alternate between the word ‘bet’ and ‘investment on this site.’) and if right, can get a large return has intrigued me for 30 years, I’ve been trading options for as [...]

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