Monthly Archives: August 2010

A little options strategy

The story

I got burned by options a couple years ago, and have stayed away ever since.  But in the last few days, I’ve been learning how to manage risk using options, especially by using spreads.  I decided to try out some spreads today in my optionshouse practice account.

WARNING: If you are not familiar with options, the next part is going to be gibberish.  Use Google to find a good resource on educating yourself about options if you are at all interested, and please use a virtual account to try it out before putting real money in the market.  Cheers.

2 of them are Bull Call Spreads, which means buying a call option on a security at a realistic strike price out-of-the-money, and at the same time selling a higher-priced out-of-the-money call.  What ends up happening is pretty awesome – a lot of the cost is cancelled out since you’re buying and selling a contract, but not all of it since you’re buying the less risky option.  If the security goes down in value, you and the person you sold to lose, but your losses are less than they would be just buying a call.  On the other hand, if the security rises in value, which one who enters this spread assumes will happen, but not enough to bring the sold option into the money by the expiration date, you keep your profits.  The best part is that even if the sold option goes into the money, it doesn’t really matter as long as you keep your call around as long as they do.  If they exercise early, all the better, as you can take your profit in safety.

The other spread I’m trying is an Iron Condor.  To explain this, you need to understand what a Bear Call Spread is and what a Bull Put Spread is.  I’ve linked both of these, so I suggest you read them, especially the examples (that’s how I learn).  Now that you know that, imagine combining them.  This is what’s known as an Iron Condor.  Basically, instead of being bullish or bearish on a security, you are banking on it staying in some range.  You can manipulate this range using the strike prices of the options you buy and write.

For Example

Here’s a graph from my new favorite discount broker, Zecco:

What’s happening here is an Iron Condor (slightly modified for an upside move).  Maximum profit is obtained from the 104-112 range.  If the final price falls much outside this range, you’re going to incur a loss.  It’s best to do this on stocks that have very little volatility – like indexes.

Conclusion

We’ll see how this goes virtually, and consider trading it a bit in real life, just for kicks.


Some stock picks…

Here’s some little stock analyses I did today using QTStalker.

Google

Fibo 50% and upward trendline should help this go up a bit, assuming Android continues to get market share.

Atwood Oceanic

These guys are in a lateral channel between the 61.8 and the 38.2 Fibo lines.  Buying around $25 looks like a win.

Cintas

This looks good – a bounce off the 38.2 at the same time as a bounce off the uptrend.  Also, the RSI is getting back into buyable territory.

Intel

At less than $20, this looks pretty good.  It’s also about to hit long-term support, as well as the 50% Fibo.

TEVA Pharmaceuticals

This company makes a bunch of medication.  And look at that RSI!  It’s also had a perfect bounce off the 38.2 line, and is flirting with the 50% line.  I think this one has a bright long-term future with the mass retirement coming up.

Hillenbrand

They make coffins.  How can you go wrong in the next 20 years?

Take Two Interactive

These guys make Grand Theft Auto and a bunch of other games.  As more and more adolescents continue to play more and more video games, this stock should soar.  Also, it’s really beaten down right now, just bouncing off of major support, and it’s extremely oversold as indicated by the RSI.  Buy!

YUM Foods

Oh man.  I could go for some KFC right now.  Or maybe some Taco Bell.  Guess what – they’re both owned by one company, Yum Foods!  It’s in an upward channel right now, but currently isn’t a good buy as it’s nearing a peak again.  Wait for it to drop to channel support and buy.

Wide adoption fails originators

I think almost everyone has experienced the following phenomenon at some time in their lives: you and a close circle of friends are involved in something wonderful, and it’s ruined when the community at large adopts it. I can think of several examples: the BBS community and the Internet, the HAM Radio community and cellular phones, and early Facebook adopters and the current state of Facebook.

When I was young, I was logging into several BBSs per week, having loads of fun playing LoRD, reading classifieds, downloading free software like Frogger, etc. Then, I got Prodigy, which opened up a whole new world for my family and I. We could now access information and chat with people worldwide! I later tried several other networks, such as ImagiNation, CompuServe and AOL. I used the interfaces created by these companies to browse since I didn’t know about the world wide web yet. Eventually, Mosaic was brought to my attention, and I tried that out. Since then, I’ve really never looked back. Yet, I find myself missing the communal aspects of the BBS – no matter what, everything was pretty localized. Any upcoming meeting or party you read about was almost certainly within a 50 mile radius. The Internet has various facilities for communal postings which I won’t iterate here, but it doesn’t feel as special.

I was never into HAM radio as a kid, and I just earned my license about a year ago. Yet, now that I’m part of the community, I’ve realized how marginal it’s become. This is mainly because of cellular phones; now everyone carries a radio and doesn’t mind paying an arm and a leg for it. HAM radio has many advantages though – on VHF, you don’t get telemarketers calling you. And even if you did, the communication is broadcast-based. Cellular communication, on the other hand, is connection-based, so you either have to hang up on them, answer the call, or get the number blocked, rather than just ignore them. There are various repeaters in populated areas that you can use a bit like cellular towers. You can easily talk to total strangers who are also interested in your hobby. You can use IRLP and Echolink to connect to other HAMs all over the world for free. Many argue this last capability kills HAM radio a bit, but I disagree. The poison for a hobbyist community is not worldwide access to other hobbyist communities of the same bent, but rather adoption by the community at large, bringing in the yahoos. BBSs had ways of connecting together for chat events, MUD access, and the like, but that was awesome – it just brought like-minded people together.

Facebook has also gone through this metamorphosis, driving many of the early adopters away entirely (myself included). I got a Facebook account a very long time ago (around 2005), and just cancelled it this year. In its beginnings, Facebook was set up for colleges, and your specific school had to be added by the developers manually. You could search for and add people in other schools as friends as long as their school was also on Facebook. The communities and groups were all related to your school. It was like a little BBS, but online. Everyone loved it, obviously. Later, they started allowing random people to sign up, which completely ruined it and turned it into the new MySpace. This was a huge mistake. Now, the main point of Facebook seems to be terrible webgames. Once I received one too many invites for some zombie game, the mafia game, and the farm game, I left.

Currently, identi.ca is in the same situation in which all these other technologies began. It’s a free micro-blogging network like Twitter, but completely free and open source (and it won’t have ads like Twitter will soon). At some point in the future, perhaps people will migrate away from Twitter to places like identi.ca, which will turn it into a massive community of UNIX geeks into a disgusting online nightclub like the rest of the Internet, filled with pithy comments about the latest celebrity scandal.

So, in conclusion, call me an elitist, but there’s nothing wrong with a social network that’s not open to everyone (even if the criterion is making an effort to educate oneself). In fact, the way to ruin it is to let everyone in.  Perhaps what’s needed is an elitist network – one that only allows those who’ve proven themselves to enter.  College education was a decent way of doing this, and Facebook should have carried that forward.  This is sadly the fate of all successful technologies; they start with a small community of smart, excited developers who carry their ideas forward, only to end up facilitating the transfer of images featuring people vomiting.  But that’s what life’s all about, I guess.  I’ll deal.