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Exelon Corporation Message Board

  • sapnetkram sapnetkram Mar 15, 2013 10:41 AM Flag

    Out of the money calls continue to trade cheap

    So the options market right now believes there is about a 17% chance that EXC hits $40 in January of 2017.

    Am I the only person out there who finds this crazy?

    -EXC has just broken out of its trading range.
    -The Obama administration has increased clout, including the ability to regulate greenhouse gases without help from Congress.
    -The nation's largest nuclear utility now has a stable dividend.
    -Inflation may be starting to kick up, and a nuclear reactor is probably one of the hardest assets out there.

    I'm not saying it's likely we will hit $40, but it's possible- it's probably more than the 17% chance the options market is predicting.

    I have finished my Jan '15 $37 strike call purchases. I still think they're a great buy. I still think the market makers are pricing EXC volatility like EXC is still stuck in the trading range. $40 calls also look cheap.

    WARNING: Most out of the money options go to $0. (But the ones that don't tend to pay off big.) Please please please treat an options contract as having the same risk as 50 shares of stock.

    If you are thinking about buying $10K worth of Exelon, you want to buy 3, maybe 5 at the most of these contracts, and stick the rest in cash. If you buy 100 of these contracts, you are sticking $10K in something that has a 60-70% chance of going to zero. If you buy 5 of these contracts and stick the rest in cash, you make as much money as a shareholder if EXC goes above ~$40 by January 2015, and you have a maximum loss of ~5% even if EXC goes bankrupt.

    Disclosure: Long $37 Jan '15 calls.

    Sentiment: Buy

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    • Hi all. Congrats to everyone who has stayed long the $37 calls. We bought around $0.95-$1.25 and now they're at $2.20. A double is not bad for a few weeks' return.

      As we approach the $37 strike, the time value of our options is maximized. That means that we get a lot of positive exposure to volatility (how much the stock price bounces around), but we also see more time decay. That is, each day, we lose a penny or two to the fact that the option's expiry is drawing closer.

      This is normally when I would recommend the average investor start thinking about exiting his options position. We've doubled our money; we're also losing a few pennies every day without putting on a delta hedge to collect our gamma; selling 1/3 of the position is a good strategy.

      Bear in mind, however, that you're selling into a very complacent options market. The VIX (a measure of options prices) currently stands at 12.5% which is incredibly low.

      But now is a good time to think about exiting this position and leaving upside for other buyers.

      DISCLOSURE: Still long my full position. But now thinking about reducing (not completely exiting).

      UPDATE: Will be working at a top 20 hedge fund this summer. As such I will not be able to post trade ideas over the summer.

      In general I think EXC remains undervalued and I am bullish on the IL and PA economy that EXC serves. The manufacturing jobs are finally starting to come back, and the Midwest is still filled with people who want to work if they can be paid a fair wage. However, I am concerned about a general pullback in the stock market with the VIX hovering at 12.5%.

      Sentiment: Hold

    • Congrats to everyone who went long at a $1.25 ask. We're now looking at a $1.50 bid.

      I think we have a real chance of touching $35-$36 in the next few months. I think that would be my first exit point for half of my position if I can sell at a decent volatility. After that, at least for now, I would hold out for $40 on the $37 Jan '15 calls and cash out in the money while I can still get some time premium for the volatility.

      For most investors, I would recommend selling calls for Exelon stock at these exit points. Psychologically, it's easier to exit an unhedged long call position into a long stock position where you're simply buying stock with your winnings. I do think that fundamentally Exelon is on the road to recovery even if we don't have any greenhouse gas or fracking regulation, but I've been wrong on my long-term calls in the past. Worst case, at $40, you're collecting a 4% dividend.

      PS: If anyone knows anyone looking to hire a developer and/or analyst at a systematic hedge fund, please get in touch with me. Current grad student at a top five finance program, former equity options sales and trading desk programmer at a major bank (you'd recognize the name if you've watched CNBC for at least a few hours in the past month). Working on a systematic options trading model that probably would have suggested this trade.

    • I think you've definintely got something there........

 
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