Posted by: Tyson Heyn | August 28, 2009

September 2009 SPY Condor Closeout

Taking advantage of price action to break down 50% of remaining call side of September 2009 SPY condor. SWGIZ at $1.49 and SWGIC at $0.54. If pricing gets attractive enough, I’ll close the whole thing out.

Posted by: Tyson Heyn | August 28, 2009

Addition to November 2009 SPY Long Iron Condor

Nov 2009 SPY Condor - Updated

Nov 2009 SPY Condor - Updated

One of the great benefits of net credit transactions such as the long iron condor is that time is on your side, even on weekends. Setting up a condor on Monday and waiting until Thursday offers the same advance of time decay as a Friday setup going into Monday. Personally, if I have a choice, I’ll take as much time decay as I can over the weekend when markets aren’t moving.

In light of that, I’ve added 21 lots on the put side of this condor (SWGWQ/SWGWN) for net credit of $0.57. ($2.36-$1.79) This helps to make me a little less delta negative while also boosting the long-term income potential of this trade. The attached chart is updated to reflect the new position.


Maximum yield on September 17 is 5% at 100, with a 37% chance of being profitable.

Maximum yield on October 9 is 27% at 101, with a 67% chance of being profitable.

Maximum yield on October 30 is 58% at 101.75, with a 72% chance of being profitable.

Maximum yield on November 21 (expiry) is 83% at 95-109, with a 72% chance of being profitable.

November 2009 SPY Long Iron Condor

November 2009 SPY Long Iron Condor

For those of you waiting for trade ideas, here’s today move: a November 2009 $SPY Long Iron Condor.

Picked up 101 shares on the call side at 112/109 (SPYKH/SWGKE) for a net credit of $0.82.

Also added 80 shares on the put side at 95/92 (SWGWQ/SWGWN) for a net credit of $0.57.

Current probability puts a 19% chance of the upper-range sold call to be ITM and a 14% chance of the lower-range sold put to be ITM, for a total ITM probability of 33%. (Roughly, a 72% profitability probability, 67% fully profitable.)


Maximum yield on September 17 is 9% at 99.5, with a 51% chance of being profitable.

Maximum yield on October 9 is 27% at 100, with a 68% chance of being profitable.

Maximum yield on October 30 is 50% at 101, with a 72% chance of being profitable.

Maximum yield on November 21 (expiry) is 72% at 95-109, with a 72 % chance of being profitable.

Long iron condor was established to be slightly delta negative with a 10% volatility upside to cover a potentially rough September/October.  I would love to hold through all of October, but I’ll start looking at bracketing this trade in late September in order to ensure gains are realized.

Posted by: Tyson Heyn | August 26, 2009

What can you do with stock options?

As mentioned yesterday, one of the key benefits of trading through stock options is your ability to control exactly how much risk you take as well as how quickly that risk is realized.

Options are to stocks as LEGO is to a pre-fabricated toy: you still can end up with the same result, but with the former, you have much greater control on the specifications of what you want.

Here are some real-world, everyday examples of how you can use options to meet your own requirements:

  • Insurance.  Suppose you were smart enough to buy 100 shares of Apple (AAPL) stock earlier in the year and have enjoyed a very nice gain.  You believe that the stock still has considerable upside going into the Christmas season, but you also know that there might be a few bumps along the road.  How can you continue to own the stock while protecting your gains?

    Stock only:  Set a sell order trailing stop for a few dollars below the current valuation.  So, for example, if the stock ($169 today) were to go below $165, the shares would automatically be sold in order to lock in the gains from the past few months.  With a trailing stop, if the stock headed to $179 without any major turbulence, the trailing stop would rise with the appreciated stock price to $175 and be triggered if AAPL then dropped below $175.

    The downside to this strategy is how to re-enter AAPL.  At what price?  Did you pick the correct bottom?  What if you buy in again at $160 and the stock just continues to drop?  This is where options can provide significantly improved cover.

    Stock with a purchased put:  A put is a guarantee that you can sell your stock at a pre-determined (“strike”) price on or before a pre-determined (“expiration”) date.  Most puts cover 100 shares of a stock.  Buying one put for AAPL with a strike price of $165 through September 19 costs $342.  That’s still less than the $400 you’d lose if AAPL dropped below $165.

    Stock with a purchased put and sold call:  If you don’t like the idea of paying $342 to insure your investment, there’s good news: financing is available.  You can sell a call and essentially cap the maximum reward you can realize on the stock by the expiration date.  The proceeds of the call help to finance the purchase of the put.  So, for instance, if you’re willing to limit your profit on AAPL stock to a $180 share price between now and September 19, you’ll earn a $159 credit towards the put protection being bought, bringing the net cost down to $183.  For reference, this sort of transaction is called a collar.

  • Leverage.  With stock, the percentage of profit made from a single position holds a 1:1 relationship to the share price.  In other words, if the Acme Inc. stock you own rises from $100 to $110, you’ll make a 10% profit.  The same goes for losses, as well.

    Some folks indulge margin from their stock broker in order to try to double returns.  Here, they literally borrow money (up to 100% the value of their portfolio) to buy even more of the stock.  Again, this is great if the stock price goes up–you now own twice as much stock for the same amount of capital–but if it goes down, all of the losses come out of your balance.  To me, this is high-risk and unnecessary.

    A much safer way, again, is with options.  With a small amount of money, you can position yourself to enjoy additional upside from a stock.  Your loss is never greater than the amount of money invested into the options, which is most often a very small fraction of the share price.  (Going back to AAPL, holding a call that is the equivalent to 100 shares of the stock at $165 costs merely $782.  Just remember that any value under $165 on the September 19 options expiration date becomes worthless.)  So, if the stock increased another $5 tomorrow, your call would be worth around $1,140.  Down $5 tomorrow?  About $502 in value.

  • Inversion.  Let’s say that you believe AAPL is about to tank, but you don’t want or aren’t able to short the stock directly.  Instead, you can buy puts–the guarantee that someone will buy your shares from you at a fixed price.  You don’t need to own any shares to benefit from this.  One September expiry put of AAPL with a strike price of $165 costs you $342.  If the stock dropped $5 tomorrow, the put that you purchased would be worth about $560.  The opposite holds true, as well: if the stock went up $5, the put’s value would fall to roughly $202.
  • Income Generation.  My favorite options strategy is this one: buying and selling puts and calls in order to generate income.  Here, you’re essentially calculating a range where a given stock should remain, and the longer the stock stays in the range, the more money you make.  The risk is controlled by how tight or loose a range you make: betting that AAPL will close between $165 and $170 on the September 19 options expiration date could yield you a 26% return while a range of $145-$190 nets you only about 5%.

    There are several different ways to configure this sort of trade, all of which I’ll get into in forthcoming posts.

So think of options as your LEGO set and think about what you’d want to build.  There are a lot of different elements available to spark your imagination and trading strategy, so stay tuned as we dive through several of the most successful ones.

Posted by: Tyson Heyn | August 25, 2009

Why stock options?

Earlier this year, I decided to investigate stock options as a trading/investing strategy.  (I’ll get into the difference between trading and investing at a later date.) 

The reason was simple–while I had survived the steep market drop of Sep. 2008 – Mar. 2009 by mainly getting out of equities and into corporate bonds, I knew that there had to be a better way to manage risk and improve profitability.  I didn’t know what capabilities options offered, but I decided that it was worth the effort to educate myself.

Surprisingly, it turned out that options are much more appealing investment vehicle to me than stocks.  A lot of my assumptions about options were wrong, and there were actually plenty of benefits I had never before imagined.

Here’s a list of a few of the misconceptions about options and the reality behind them:

  • Options are high-risk.   In actuality, options offer exactly as much risk as you specify–on more flexible terms than stocks.

    EXAMPLE: Let’s say you think Acme Inc’s stock price–currently at $10–is about to go higher, and you only have $100 that you want to risk. 

    With stocks, you might buy 100 shares at $10 and set a stop limit at $9 to ensure no more than $100 could be lost.

    Unfortunately, that could happen on the very next day if the stock suddenly drops to $8 and then shoots up to $12–your stop limit is exercised before you have a chance to realize a gain.

    With options, you could buy $100 worth of calls on Acme Inc’s stock.  A call is a guarantee that you can buy a certain amount of a certain stock (usually 100 shares) at a certain price (“exercise price”) before a certain date (“expiration date”).

    Suppose $100 buys you one call of Acme’s stock at $9.  If the stock closes below $9 on the expiration date, you’ve lost your $100 entirely.

    But if the stock moves to the $12 imagined earlier, the value of the option purchased for $100 is probably somewhere between $350-$450, depending on various factors.  And yes, that’s money you can pocket immediately, rather than waiting for the expiration date to arrive.

    So options allow you to manage your risk much better than stocks.  You have the ability to calculate exactly how much risk you wish to take as well as how quickly that risk is realized.

  • Options are confusing.  I’ll admit that it takes a while to understand options.  It’s a bit like learning a foreign language in order to actually “think” in the new tongue.  But this comes with time and is very much worth the effort.  I plan to cover the basics of options trading over the course of the next few posts, but if you can’t wait, here are two complementary books that I recommend:

Options Made Easy: Your Guide to Profitable Trading (2nd Edition) 

The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies

  • Options don’t pay dividends.  True, but that doesn’t mean that options can’t be arranged as an income strategy.  Again, options provide much greater control than owning stock alone and can even be paired with stock to manage risk and losses.  Again, I plan to cover the corresponding strategies in future editions.

That’s enough for now, but hopefully, it has whetted your appetite to explore options.  Ultimately, I’ll be introducing some of my favorite options trading strategies as well as “real-world” play-by-plays of how I’m using options to grow my portfolio.

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