Opportunistic Covered Option Selling
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Opportunistic Covered Option Selling I am often reminded that one of the best opportunities to sell Covered Options is to sell after an event or news story causes a strong price move up or down on a stock that we already follow. If you do your own analysis on the story and are comfortable that the reaction in price is overdone, then this is a great opportunity to sell a Covered Option. You might sell Cash-Secured PUTs on strong price moves down and sell Covered CALLs on strong price moves up.
A COOL_Clubber recently shared with me just such a trade that they had not had time to write-up. Since they may or may not want credit for it, I will refer to them anonymously as "Trader Joe" or TJ.
TJ has owned and been following Intuitive Surgical (ISRG) for a while. In the middle of March a news story came out that is summed up by this headline: "Shares of robotic surgery system maker Intuitive Surgical Inc. fell Friday after the president of the American College of Obstetricians and Gynecologists discouraged the use of robotic systems in hysterectomies."
TJ studied the news report and did not feel that the story would cause any really direct hit to ISRG's current business. TJ realized that often when new technology moves into new areas that there will be "naysayers" or "Doubting Thomases" who will want to proclaim on high how the old ways are better and cheaper. In the beginning, they are often right, but technology has a way of continuing to chip away at both the quality and cost differences. New technology often has a way of winning these battles over time.
TJ knew that ISRG had already moved down in price ahead of this "news story" and that the additional push on this story just seemed way over done. TJ already owned some ISRG but felt like maybe this was an opportunity to purchase more at an attractive price.
On March 15th (the day the news hit), TJ decided to sell an April 20 $440 PUT for a premium of $8. Putting this through the COOL_Tool, the APR was slightly less than 20% but the Strike price was almost 10% below the current price of about $480. TJ could have gotten above a 20% APR by moving closer to the price but preferred being further out of the money. The other reason to be further out of the money was TJ was violating the golden rule of selling across earnings as ISRG earnings were due to come out just ahead of the April expiration. In this case TJ was comfortable that there was enough time ahead of expiration that there might be an opportunity to buy it back. In the worst case, if the price did continue to move down, adding shares at $432, over 25% below recent highs, seemed like a great opportunity.
As it turned out TJ was right that the reaction was overdone and the price over the next couple weeks moved up by about $20. Today, April 3, TJ elected to go ahead and buy back the option at $4.20. Again by COOL_Tool guidelines this was above a 10% threshold but TJ felt that going ahead and booking over $3.50 a share profit was worth not getting any closer to earnings.
TJ realized a two week profit of a little over $350 by recognizing that a news story was probably being over-hyped. The more you know about a company and its business the more obvious these sorts of things become. I would not recommend attempting to do this on a company if you are not familiar with its fundamentals way in advance of the news story or event.
Good Job TJ! Paul Madison Just want to let you know that I also sold a CSP for ISRG on March 15th. My approach was similar with the same reasoning but not wanting to cross the earnings date, I sold 450 weekly put (expired Mar 22) for $5.50. ISRG was back in the $490 range within the week and the put expired worthless. Ira Haas From: cool_club@bivio.com [mailto:cool_club@bivio.com] On Behalf Of Paul Madison I am often reminded that one of the best opportunities to sell Covered Options is to sell after an event or news story causes a strong price move up or down on a stock that we already follow. If you do your own analysis on the story and are comfortable that the reaction in price is overdone, then this is a great opportunity to sell a Covered Option. You might sell Cash-Secured PUTs on strong price moves down and sell Covered CALLs on strong price moves up. A COOL_Clubber recently shared with me just such a trade that they had not had time to write-up. Since they may or may not want credit for it, I will refer to them anonymously as “Trader Joe” or TJ. TJ has owned and been following Intuitive Surgical (ISRG) for a while. In the middle of March a news story came out that is summed up by this headline: “Shares of robotic surgery system maker Intuitive Surgical Inc. fell Friday after the president of the American College of Obstetricians and Gynecologists discouraged the use of robotic systems in hysterectomies.” TJ studied the news report and did not feel that the story would cause any really direct hit to ISRG’s current business. TJ realized that often when new technology moves into new areas that there will be “naysayers” or “Doubting Thomases” who will want to proclaim on high how the old ways are better and cheaper. In the beginning, they are often right, but technology has a way of continuing to chip away at both the quality and cost differences. New technology often has a way of winning these battles over time. TJ knew that ISRG had already moved down in price ahead of this “news story” and that the additional push on this story just seemed way over done. TJ already owned some ISRG but felt like maybe this was an opportunity to purchase more at an attractive price. On March 15th (the day the news hit), TJ decided to sell an April 20 $440 PUT for a premium of $8. Putting this through the COOL_Tool, the APR was slightly less than 20% but the Strike price was almost 10% below the current price of about $480. TJ could have gotten above a 20% APR by moving closer to the price but preferred being further out of the money. The other reason to be further out of the money was TJ was violating the golden rule of selling across earnings as ISRG earnings were due to come out just ahead of the April expiration. In this case TJ was comfortable that there was enough time ahead of expiration that there might be an opportunity to buy it back. In the worst case, if the price did continue to move down, adding shares at $432, over 25% below recent highs, seemed like a great opportunity. As it turned out TJ was right that the reaction was overdone and the price over the next couple weeks moved up by about $20. Today, April 3, TJ elected to go ahead and buy back the option at $4.20. Again by COOL_Tool guidelines this was above a 10% threshold but TJ felt that going ahead and booking over $3.50 a share profit was worth not getting any closer to earnings. TJ realized a two week profit of a little over $350 by recognizing that a news story was probably being over-hyped. The more you know about a company and its business the more obvious these sorts of things become. I would not recommend attempting to do this on a company if you are not familiar with its fundamentals way in advance of the news story or event. Good Job TJ! Paul Madison Very cool Ira. I guess you had more faith it would recover quickly! Laurie Frederiksen
Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio Follow Us on Google+ On Wed, Apr 3, 2013 at 3:14 PM, Ira Haas <haasil@ct.metrocast.net> wrote:
Call that a Stand Up Double? I would! Nice at
bat. But I still won't have a robot poking around in my tummy... especially when you see Windows OS running the computer! Blue screen, perforated bowel, buy the extended stay ticket at chateau day surgery. Giants are at 500! Whoo hoo! Malcolm On 4/3/2013 12:14 PM, Ira Haas wrote:
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