October Expiration Review

stevenplace
October 19th, 2008

I took an hour and reviewed some of the calls I’ve made in the past couple videos, and I do say that they held up fairly well in this sort of volatility. I’m going to post them here just as a quick review.

AN [Autonation]

This is one of the only bearish positions that I called two weeks ago because I didn’t believe that the market could fall this far so fast, and I was looking for a retracement. The play was to buy January 09 puts at the 10 strike for 1.50. The stock then proceeded to tank and is currently trading near its lows at 7.34. The contracts are now trading for 3.90, so that’s a 160% gain on options. Not a bad play at all.

CHK [Chesapeake Energy]

2 Weeks ago I said that I wanted to start acquiring shares of CHK, Chesapeake Energy. I suggested selling the front month 27.5 put at 3.40, which put your basis around 24. Watching the price action you can see that there was continued weakness and the position got underwater. If you were to hold this position past Friday, you would be assigned stock at 27.5 a share, but because you sold premium, your actual basis would be 24.1. So what you could do now is go to the November options and sell the November 25 call at 1.60, effectively going into a covered call position. This would put your basis down to 22.5 and would put your max gain at 2.50, so that would be an 11% return on basis if you do get called away. You could hold off on writing any calls if you think the stock could appreciate further, but then you would be exposing yourself to more delta risk.

I actually liked this play so much that even as it was going down, I suggested that you sell the CHK 15 puts at 3.70, which would put your basis in at 11.3. Obviously the stock rallied past that and you would keep the entire premium, which is effectively a 32% return on basis.

HK [Petrohawk Energy]

Similar to the CHK play, I suggested that you sell the HK NOV 15 puts at 2.40 to put you in the stock with a basis of 12.60. The current position is at a loss, but if it stays at this price level, the theta decay will bring the position to in the black.

AXP [American Express]

Since this was a bullish financial play, it carried the most risk. I suggested that a LEAP calendar spread be established, with the Jan 2010 35 calls bought while selling the Oct 35 puts against it. This is not a good position to hold outright, and adjustments could have been made if you were skilled enough. Strategies such as rolling down the option chain and covering the front month call you sold against are good examples. Anyways, if you did hold outright, your basis in the Jan 2010 35 calls is now 560. If you didn’t sell anything against it, this means that by January expiration in a year and a couple months, AXP would have to be at 40.60 for you to break even on this position. Obviously you want to sell calls against this still. I would wait for market strength to sell anything against this, as there isn’t much premium in the November 35′s. You could also consider rolling to the Jan 2010 25 calls. This would cost a little more but would give you a greater return in the long run.

Also, I feel that the January 2010 25s are a buy down here, if you can sell front months against it.

SKF [Proshares Ultrashort Financials]

I had two SKF calls over the past couple weeks. First was an iron condor that had originally been a bullish vertical and that expired with a max gain of $660 per set.

The other call I had was to establish a long put vertical when SKF hit 185 which was a great play when you don’t look at the volatility. The large moves the underlying has can easily shake people out, but that’s the reason verticals would be established– low, well defined risk.

CEG [Constellation Energy]

Constellation Energy was an acquisition play, where you would sell the 25/30/35 butterfly at 1.45 per set. The stock managed to stay under 25 and the contracts would be unwound at maximum loss. I still think butterfly spreads can be implemented against on this stock, perhaps centered around the 25 strike rather than the 30.

GOOG [Google, Inc.]

My experimental GOOG double calendar play worked out well. The idea was to buy a November call and put and sell front month options against them in the same strike. The play netted around $900 per set if you closed out completely. If you left the November straddle open if you think GOOG will close above 405 by November, or you could work the position into an iron condor if you wanted to keep the spread on.

The past couple examples were good samples of my thought process when I establish positions using options. It was a wild ride in October, but it was a profitable one.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: an, axp, ceg, chk, goog, hk, skf