In an attempt to repair a bad trade, I did the following:
I had on 10 of the Msft June 24/26 bull spreads for 1.25. I sold these positions for .36 (.38/.02).
I then bought 20 of the Msft July 24/25 bull spreads for .39 (.65/.26) for a total of $780 before commission.
So the position will go to $2,000 if Msft is at least 25 at July expiration. I put in 1250 + 780 - 360 = 1670.
Commission was 49.15 today, 22.95 to put on the bull spread initially and assume at most 22.95 to close out in July.
That still allows for a profit of 230/1770 or 13% in 2 months, 78% annualized. Not bad for a trade that started out with the stock going down substantially. Of course, we're not there yet.
The important lessons for people who may be interested in bull spreads, though I'm not recommending anything:
1. They have tremendous potential profits
2. They are risky
3. There are various ways to trade them after they are put on, including but not limited to, taking early profits, rolling and taking out money, rolling to different strikes which is what I did here, among others.
For me at this point lowering the price needed to make a profit was one key. Instead of 25.25, now I only need about 24.85. Second, and probably more important, I have another 4 weeks to get there. The downside is that I added $420 plus commission to the trade.
While I don't usually post about my trades, since I did on this one I will continue to post future developments with this trade.
Don't be denigrating my 1,373 square foot mansion when it fetches six to eight times what your gas-stop hut commands.
As for income, how does 168K in year-to-date stock market profits sound for starters? When was the last time you had as much income even in a full year?
I use the term when it is appropriate but you think it's right to use it when it isn't.
Who's the one that's been braying this afternoon?
Who's the one today that has been unwilling to admit that he is wrong?
Your vocabulary word for today is HYPOCRITE.
There are only specialists on NYSE stocks.
On the Nasdaq and in options, they are indeed called MARKET MAKERS.
Now admit to me and this board that your post was just more useless BRAYING by you.
I closed out the 20 Msft July 24/25 bull spread for .92 this morning. There was a small net profit of about $50, 3% in about 1 1/2 months, counting all the msft bull spreads, June and July. Most important, the repair strategy resulted in more than a complete recovery of the losses for the initial 10 June 24/26 bull spreads.
The repair strategy happened to work THIS TIME because the smartphone news was well received and the overall market rallied massively. At the start of the week though, the strategy had you way down on the repair strategy after having lost 3/4 of the money on the original investment.
In accordance with RIGOROUS analysis, the kind you say you subject your strategy to, the method absolutely FAILS.
RIGOROUS analysis for me means just that - not relying on the market or luck to bail me out.
The repair strategy for you was to put on a 24/25 spread at a time when the stock was at $23.90. It fails RIGOROUS analysis because of this reason:
The stock absolutely had to go up and go up nicely for it to work. What happens to the investment if the stock just stayed where it was at the end of the expiration period. Or even went down a couple of percentage points? If you absolutely MUST have the stock go up in order to work, it's simply a Good-Time Charlie strategy that utterly fails in correcting markets or if there is slightly adverse company-specific news.
The other test which isn't even very rigorous that the near-term, near-the-money bull spreads absolutely fails is this:
For a typical one-month play with the stock at, say, $25.25 and a 24/25 bull spread put on, what happens to the investment if over a two-month period it loses just 5%? Such as a MSFT going from $25.25 to $24.60 the first month, you roll out to the next month for free but the stock consinued on down to just below $24.
That's hardly an unlikely scenario - just down 5% over a two-month period. After all, MSFT has gone down by TEN percent over a two-month period no fewer than FIVE times in the last 18 months (check out the charts).
But for your strategy, just a 5% dip over two months COMPLETELY WIPES OUT the investment. Imagine - just a 5% dip wiping out ONE HUNDRED PERCENT of the investment.
You have the nerve to talk about six to one leverage with "Maniacal Methods." Well, how about TWENTY to one leverage such as in a 5% dip wiping out 100% of the investment?
The issue isn't that you are just doing this for 0.1% of your overall holdings, etc. The point I'm making is that the METHODS are INFERIOR. Any time just a 5% dip is going to wipe out the investment, a sane investor would want no part of it.
As I said, this isn't even much of a rigorous test. With my methods, you bring up the spectre of once-in-a-lifetime crashes, 1987-type panics where I can't reach the broker, etc.
To debunk your methods, I don't need to invoke any of that. Just a mere 5% dip over two months will do.
As I said, I have the 12.50-strike naked puts with margin protection down to about $13.50 on the stock. If the fundamentals don't worsen materially but the stock continues to slide, I would roll down one more time to the 10-strikes for Jan. 2014 when those options start being offered in a little over three months. That would give me margin protection all the way down to about $10.75 and that's certainly a price I wouldn't expect to see.
This is the difference between my method and other stock or options methods - in the end, time works to my great advantage and I walk away with a nice positive return even with a stock price slump - as long as the slide isn't just a bottomless pit. And with a stock such as CSCO, I wouldn't expect a bottomsless pit.
So even if the stock slides to $12 or such, at the end of what would be a 33-month holding period, I'd walk away with a double-digit annualized return whereas those buying stock north of $18 which is where I first got involved would be staring at a hefty loss.
I do of course entail SHORT-term paper losses - there should be no mistake about that. No way can I avoid that when a stock tumbles from $18 to $14 or $15 in a relatively-short period of time.
But by rolling for no worse than free - first from the 15's to the 12.50's and then even the 10's if necessary, how can I possibly lose in the fullness of time as long as the stock price slide isn't just utterly ridiculous?
This is exactly the time when you should really be looking at it seriously - when nobody wants it but there isn't much wrong with the fundamentals.
Yes - earnings growth has slowed down but still the company is looking for $1.60 a share in its July 2011 fiscal year that has one quarter to go and $1.72 is seen for fiscal 2012.
This week is the first time EVER that CSCO has traded below ten times the current year's consensus earnings. EPS was considerably lower in 2009 when the stock bottomed out at $13.90.
Downside risk from current prices of around $15.30 should be VERY limited.
They don't ring bells on Wall Street other than at the opening and closing of trading each day. If you want a chance at bargains, you have to go for the falling knife. Because as a simple glance at a CSCO chart will readily show you, price stabilization and a rally still guarantees nothing. It just guarantees that you will be paying a higher price for the stock than if you had bought when the stock was slumping.
Just because the chart looks horrible doesn't mean that you should write off the opportunity to be buying at ALL-TIME LOW valuation levels relative to expected earnings.
These are just the kind of situations that I happen to like. In the fullness of time, I expect to make a nice profit on this stock which I got into via naked puts slightly above $18.
I have the 12.50-strike naked puts out to Jan. 2013. The stock never went below $13.90 even at the bottom of the crash and earnings are much better now.
If necessary, I'll roll once again to the 10-strikes expiring in Jan. 2014. Those options will be out in mid-September.