Why I buy In The Money (ITM) options

July 1st, 2008 | Posted in Investing, Stocks

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During times of high volatility, ITM options are a good way for directional trading. This is because high implied volatility will eventually normalize. When this occurs the at-the-money (ATM) and out-of-the-money (OTM) options are going to lose value.

Deep in-the-money (ITM) options will for the most part be unaffected. This is because deep ITM options have little time value. It is the time value or extrinsic value of an option that is effected by changes in implied volatility.

So that is my reason. I’m not trading the volatility per se. There are many volatility trading strategies.

For example if your stock price expectation of a stock is flat and volatility is higher than normal (market expects strong price movement), you could sell some deep out-of-the-money (OTM) options with the expectation that volatility will drop. A drop in volatility will reduce the price of the OTM options. This is one potential volatility trading strategy.

Another way to trade volatility is to trade ahead of earnings. Below is a chart of Apple’s volatility. You could buy options a few months before earnings when volatility is relatively lower. As earnings approaches the options volatility tends to spike as high as 20% (circled in chart). During those spikes option premiums go up. Of course you must balance your time decay against your gains from volatility so you’d want to have a longer term option if you use this strategy. You could buy during low volatility a few months ahead of earnings and sell near earnings.

Get back into POT

June 30th, 2008 | Posted in Investing, Stocks

It is time to get back into Potash. Potash has had a nice run in the past few days, but there is more to come. I’ve had quite a good track record trading this stock and hopefully you’ve been following my trades and making money. A few posts ago I told you to go short and then exit. Now I’m telling you to get back in long for what I think will be a 2 week run to $260.

I Expect POT to hit $240 by Wednesday and $260 within 2 weeks. The DOW is points away from confirming a bear market. It sort of like a recession. You feel the pain long before you get confirmation. Stocks that work should continue to work. Stocks that are for discretionary goods should continue to be battered. Driven by fundamentals the ag plays should do well, particularly the fertilizer stocks. POT is the best valued in my opinion, but feel free to do your research and look at Agrium (AGU) and others. Monsanto could be another good Ag play if you want some further diversification in the ag space.

Below are the positions I’ve opened:

• Dec 08 $210 POT Calls @ $40.00
• Dec 08 $165 POT Calls @ $72.60

Both positions are pleasantly to the upside. There is much more room. I would build up your position at this level as I see a $30 run from this level.

Exit your POT short positions

June 25th, 2008 | Posted in Investing, Stocks

Pot is approaching its long term trend line right around the $220 level. This would be a good time to exit your short positions if you haven’t done so. Could we have another $5-10 more to the downside? Maybe, but you are safer exiting now and waiting to see if we reverse direction and then enter long at that time.

Disclosure: I have sold all my POT Puts today as the stock fell to my $220′ish goal.

Happy trading

Short the Regional Banks

June 20th, 2008 | Posted in Investing, Stocks

You guys are probably a bit bored by now with my Potash (POT) trades.  Or more likely if you are trading along with me, you are eagerly waiting my next profitable Potash trade.  Well I’m not quite done.  I’ve reversed my position as I said I would.  I officially went short Potash yesterday afternoon.  I purchased Sept ‘08 $230 Puts @ $22.61.  So far I’m up 4.5% on that position.

Now that I’m in the shorting mood, I added one more short position.  I purchased Jan ‘09 $17.5 FITB Puts @ $8.6.  So far that position is down 9%.  I’ll have to wait a 3-4 weeks for that move to play out.

I also opened Jan ‘09 $20 WB Puts @ $5.30 this morning.  Wachovia has a juicy 8.6% dividend at this level.  I believe their sub-prime exposure will force them to cut it, driving down the stock price.

My 2 financial short positions are prone to headline risk.  Bills to save people from foreclosure tend to give some small pops on these stocks.  Also any interest rate news can move them.  Conversely you can play the pandemonium.  When one stock craters sometimes other financials follow sometimes without reason.  Some banks are in good shape.  Others are not.  If you wait for another regional bank to report bad news you’ll get the pop.

Sell into those pops. Don’t get greedy. This is a trader’s market right now.

Get out of POT today

June 18th, 2008 | Posted in Investing, Stocks

I was expecting POT to retrace back 20-30 points sometime this week. I didn’t expect it so soon. It has quite a run-up the past few days. Expect some profit taking to bring it back down. I have sold off my entire position of POT and expect a retracement back to the $220′ish level.

If you’re an investor it won’t hurt to stay in. If you’re a trader, get out and get back in on what I expect to be a retracement over the next 10 trading days.

I will be watching the Jan $145 Calls for reentry.