OK gang. This is the official next trade for the model portfolio. My foray into EPD this last Monday was my own stupidity. Always look for the word "official" and the "allocation amount" to continue these ultra conservative trades that should place us across the finish line on 12/31/12 with a 200% gain on the original 25K portfolio.
The trade is Line , as you probably guessed. I hate Line. I can't stand the stupid posters on the message board. I hate their management with stupid timing on SPO's. I hate that I have never made any money on this MLP. I hate MLP paper work. Those posters who are so arrogant with their inside knowledge while not willing to share their supposed brilliance with the lesser mortals(academics...yes, you know who you are(line people)) I call them "Children of the Mourn"..no spelling error there...;-) I mourn every time I make the mistake of reading one of their insipid posts.
If I had more time I would tell you what I really think...;-)...but I need to share this ultra conservative trade that should have better than a 90% chance of success. Swing Low...♫♫♫....sweet Charrrriooottt..♫♫♫...
The trade was brought B4 me by none other than our own dear AlanD ..AKA fourdint..
I was thinking Alan that we could make a nice Spread out of your proposed purchase. You see your Ap37Call has to travel beyond 37.90 B4 April OPEX to finish ITM. Of course as the PPS recovers from this SPO you could sell your 37 prior to OPEX for some moolah...and it does only cost you $90/contract.
So, I definitely think it has merit. But in case it happens to become a Fire works dud like our beloved AGNC after the last SPO that lamed around for a month B4 it got off its but and only because of imminent EX and knowing that an EX for Line is coming hard on this SPO and that MLP's don't often recover well, and then knowing that MLP's wimp out often after EX's, makes me want to err on the side of EXTREME caution.
Therefore THE trade:
Long Apr34Calls/ Short Apr35Calls @ .80. Fidelity is messed up right now but I think that is ask. Try to get them for .70-.80. Should be able to @ .80 if PPS doesn't get away.
Spend $8,000 of our $32,500 pot. That's 100 Spreads. Maximum loss $8,000. Maximum gain $2000 plus commission. Commissions are killing me at Fido, so I'll have to say 200% this year outside of commissions. I have a call to make to my 401K attorney tomorrow to see if I can divert some funds over to OptionsHouse so I won't keep getting clobbered.
Anyways, that's 25% gain on the $8000 by April OPEX(April 20th...a week B4 May EX). You invest what you want but the trade is pretty solid IMO. Your BE is 34.80. Something pretty awful will have to happen for us to be there(<35.00) at the April run-up to May EX. Money is anywhere above 34.80 at OPEX.
Good Luck Everyone!!
EPD will probably hit 48+-50. I just didn't want to hang in there for it. My gut said, out. The chart looks good except on the oversold part:
I just get leery on stocks trading at their life time highs:
Let me know at what price you exit..I am wishing 60 for you!!
Love the spread concept, but who'd have thought AGNC'd be wandering in the $28.10-$28.40 wilderness for 40 days like it has been? I'm too uncertain about the economy (here and abroad) to want to thread the needle on your 27/28 spread, as something unforeseen might just cause a close below 28 by March, but that 26/27 post-SPO is another beast altogether. I'll be keeping an eye out for that opportunity....
Meanwhile, I see elsewhere you got out of EPD 45 calls - you decided not to hold for $48+? I'm sitting on some myself so interested on your perspective.
Thanks as always,
No problem 5x,
I really like spreads. You know what, right now, will make you 23,000 on AGNC for a 75,000 pretty safe bet. Don't have to wait for any SPO or Greek default?
Spread the Mar27/28Calls. 1000 Spreads should be able to get the bid @ .75. Same as the EPD spread back on our first trade on "Crumbs".
Premium $75,000. PPS at 28 or higher @ Mar OPEX and boom ...pocket $25,000 less commission. Now here is the sweet part ...wait for SPO and get the 26/27 for the same price. PPS only has to reach 27 by OPEX, close to BV, to reap the 25k.
What do you think? My finger is itching....;-)
Thanks for taking the time to explain this, Doc - I get it! What had me confused was the direction, since these are puts and I am used to working with calls. I see it now (and I see the merit of Ephort's approach as well... if I can't get the spread for close to even I like the long calls as an alternative).
Regarding entry point for EVEP Feb65Calls. I was reviewing the highs and pull back lows this past week and the high was 72.81 on Jan 10th and the pull back low, so far was on Jan 12th at 67.82, a $4.99(6.8%) retreat.
This is comparable to two of the pull backs this past year. My concern then is whether we see further retrenchment or not. Here is a calc. link:
If you plug in EVEP and set 65 for the strike and Feb of the month you will see fair value at 4.59 currently and 3.78 at PPS of 68.00. A 4.00 limit bid on the 65 would make your BE at 69.00. Given a potential 72.81 or above by OPEX that is a 3.81 profit.
So I am going to re-set my orders on those Feb65's for $4000(10 contracts) at 4.00, $3500(10 contracts) @ 3.50, and $3000(10 contracts @ limit 3.00). So $10,500..Yes, "official" Model Portfolio....;-)
Good luck to all!
>>If you were put 1500 shares, do you not either have to pony up the cash (via margin) or exercise 15 of your 25 long 40 puts to offset?>>
Most Brokerages see the nature of your trade-in this case the Butterfly- which has, by design, the 38's "covered" by your 40's. So even though you are assigned the 38's you are not required to carry additional margin.
Aside: I don't know if you followed the thread when I was placing a trade to buy the AGNC 27/29/30Call ratio in a 1000/3000/2000 spread for .66 or $66,000 premium. Those 3000 29's could be assigned and I would be short 300,000 shares at 29 or $8,700,000 short. Pretty impressive!! Yet I confirmed with my broker that my margin requirement was the premium only of $66,000. That is leverage for all you lurkers out there...;-)
Getting back 5x...If you wanted to leave things even, you would exercise 7 and 1/2 or 7 since you only need 1/2 the 40's as the 38's to stay even. Again, seeing Ephort's post above you can see that the assigned shares are actually a bonus as the PPS might rise above 38 and hence, more money.
Bottom line, just let everything ride to OPEX, EVERYTHING is washed at that time since you cannot hold both Long and Short shares in the same account. The 40's get assigned to you as short shares, those short shares wash the assigned Longs(38's) and the 36's expire worthless.
Likewise if we end up at 35 at OPEX, both the 40's and 36's are assigned short and they wash (one to one<<<5 from 40's + 1 from 36's = 6>>>3 from each 38 makes 6 ) the value of the Long 5000 shares from 38. Just work out some possible scenarios ,5x, and you will see the beauty of the Butterfly.
Now, get the Butterfly for EVEN or zero cost and a sweeter trade is rarely found..
Hope that helps,
On the observations:
1) You are correct above 38 the long shares grow in value. Thank you for that correction. They grow at twice the rate as the 40's decline. If we are assigned on all, which I expect, and we hit 40 by Friday, not likely, the profit is $10,000-$750= $9250 profit.
2) I was trying for an EVEN entry and I chased it. That would have been the trade. You are correct again that the straight Calls would have been the same trade with less commission with the exception>>but they would keep on giving more for all pps above 38>>..as mentioned above
I used to go to the movies with my Grandma every Sunday when I was about 8-10. We took the bus across town in Seattle and it was fun.
On rare occasions I went with this knockout, Julie, a year older who lived across the street. She was everything a 10 year old could ask for ...very exciting and memorable to this day.
The Butterfly is Julie...Grandma ..the Calls...both got the movie watched...
Hi Doc -
Can you elaborate a little on this?
If you were put 1500 shares, do you not either have to pony up the cash (via margin) or exercise 15 of your 25 long 40 puts to offset?
And if all 50 of the short 38s are assigned, is your real bet that you can use up all 25 of your long 40s and then sell the remaining 2500 shares (assigned via the 38s) at a PPS of 38 or higher as the price increases to OPEX - is that correct?
Many thanks for the lesson. I really want to understand the logic, not just the mechanics.
Doc, if I get this correctly the butterfly is on LINE, yes?
If so, two observations:
1. You are better off being assigned on the 38s, as the expiration profit/loss profile improves above 38.
2. Are you sure the butterfly is better than just buying the Jan 36 calls (for .30 at Friday's close)? 25 of those calls would give you the same p/l from 36 to 38, but they would keep on giving more for all pps above 38. Fewer commissions, too.
Saying the above after a few glasses of wine, so I may have gotten something wrong. (I try to avoid TUI -- trading under the influence...)