The only way to make money in a true bear market is to short stocks or sell covered calls. Shorting stocks is very risky in volatile environments, but you can protect yourself somewhat with proper option strategies. Selling covered calls makes money but it tends to restrict your decisions because you are forced to hold the underlying to cover the call, when selling the stock early may have been the better decision.
I will continue to use SVM as an example, not because of any particular affinity with that stock, but because of the amplified reactions of the options to a volatile situation and the fact we have already watched it for some time.
Today, as of now, the reaction of the put premiums has been classic and also predictive of the stock action. When the latest BS report was released early this morning, some shorts obviously primed in advance started a quick fire attack to run the stops and push down the price. Predictably the option market makers increased the premiums and widened the spreads in order to protect themselves.
Just before the low of the day was hit the spreads remained wide but the premiums dropped, something that indicated that the bottom was in and that the put buyers were backing off. As the price of SVM slowly recovered, the spreads in the close months narrowed and the premiums reduced to such an extent that most are at or lower than the close on Friday even though the underlying stock is still much lower than it was at Friday's close. This indicates that the put sellers are more confident and agressive than the put buyers and the market makers modify the price to maximize their profits.
If you are new to put options, then take the time to watch the actions and reactions real time with the stock and options at various strikes and expiry months. It can be very instructive to get a feel for how the options move in response or even in advance of stock prices. Watching the calls also is useful as they do not follow the puts in many cases.
Excellent post, Vet!
Never actually thought about broker commission being a possibility, but now that you mention it.... My broker charges $15 per exercise or assignment. So my verticals get real expensive.
Nice move on the NXG - will have to look at that strategy in a bit more detail!
At Interactive Brokers exercise & assignments are free. Commissions are cheap but variable in that it is almost impossible to predict exactly what you are going to be charged, but I have never been charged a total of more than 75 cents a contract and sometimes it can be as low as 15 cents a contract.
Their option trading platform is quirky and takes some learning to set up and use efficiently, but fills are good and generally I am happy with them. I would not recommend it to a novice, but for someone familiar with options trading they seem to deliver.
I'm going to look into IB a bit more. Thanks again!
but now I see the TA guys trying to fit their magic lines to the mess caused by the fraudulent short selling manipulation... The interesting thing about TA is that it is like religion.... it can be interpreted to fit any believers perception no matter how outlandish, and very few ever return to failed predictions; they just reinterpret their original convictions and conclusions. That being said, simple TA, moving averages RSI and MACD are nice for determining buy and sell points in a stock trading without any appreciable changes in fundamentals, for no other reason than they are followed by many and become self fulfilling because of that alone.
IMO SVM will now trade along with the other silver miners but as it is still fundamentally undervalued and the volatility has been high the trend should be up and selling puts into the invariable dips on the road back to fair value are still going to be put selling opportunities.
I am still holding short puts Dec and March strikes of $7, $9, $10 and long calls (synthetic trade paid for by a short put) for March $7 strike. All are profitable at the present time.
With gold and silver looking a little more promising, if you think the bottom is in there are quite a few decent opportunities for selling puts in many of the PM stocks that have turned but haven't made significant gains yet.
Another strategy to revisit is the synthetic long. I put on a synthetic long on AUQ today. I sold the June Expiry $8 strike put for 86 cents and bought the same strike and expiry call for $1.63. So in effect I now own an in the money $8 June expiry call on AUQ for just 77 cents outlay and it is already in the money by 70 cents. (all prices include commissions). The spreads mean that I can't immediately cash it in until either the stock price improves or some time passes but as long as the stock ends up in June over $8.77, (or trades higher sometime between now and June), I'm in profit.
These synthetics don't always make money, but they are a cheap way to get exposure in a market trending up, and if the market goes against you, the call premium is lost but the put can be rolled out to salvage some of the cost. If the bull market takes off the upside is unlimited and it is a cheap gamble for quality stocks at or near their lows.
I'm sure this thread will come back to life as we get a new upswing in the metals. You provide a steady hand in this area.
So I did my first synthetic long today. I was looking at AUY and EGO but took EGO, since its just turning off a bottom in the miner:gold ratio, FWIW. With the stock around $14.80 I sold April 15 puts at $1.25 and bought April 15 calls at $1.05. So there's a little profit in setting up the position, possible unlimited gain and the stock has around $12.80 for the 52 week low figuring a loss limit of $2.00.
Thanks Vet for the suggestion. I'm still very much learning this stuff (although I have been making money, especially with the SVM puts).
I've been lurking on Turd's site for about a year and have enjoyed learning from many of the forum contributors.
Just recently set up an IB account and am thinking of selling a put on a silver or gold contract but don't want to pay for the data stream through IB. I do have a separate Scottrade account for my wife and a (small) separate TOS account as well. I know the TOS account seems to give some data but it looks like double? reality (whatever it is the #'s are wrong I think). Didn't even bother checking Scottrade.
So far I've found TradingCharts.com.
Just curious what some of you guys are using and what works for you.
PS Eric O - really enjoyed reading about some of the gold producers. Still haven't finished on that thread..
Things are definitely picking up for the miners here in '12.
Providing they are liquid and the spreads reasonable. It may seem rather crazy to sell March 2012 $175 strike GLD puts as I did in December last year when they were over $20 in the money.. GLD puts are very liquid and can easily be rolled if necessary and even well in the money puts can have a decent time premium on them.
Today the puts I sold for $22.15 (after commissions) in December can be closed for $3.90 or if GLD makes another $1.50 before expiry they will expire worthless!
These plays give you great leverage, but don't overdo it... Also look very carefully at the spreads well out in time before you decide on holding these sorts of positions. Many deep ITM puts and calls are hard to roll if the market doesn't go your way as the spreads and liquidity drop off markedly for all strikes on positions not at, or close to, the money. Also without decent time value you risk assignment maybe when you are not prepared for it.
I am considering trying my hand at buying calls. I am a complete options virgin. I cannot sell options in my account, but I can buy, and I am looking to play silver.
Up til now, I have played with USLV and DSLV, which are 3x ETF funds on silver.
When changing to use a call buying strategy, do you get additional advantage by doing so on a leveraged ETF? Put simpler, is there more upside available in buying calls to USLV versus SLV?
Thanks in advance for any advice for the 45-year-old virgin...
I am by no means an expert, but will give you my $.02 worth since no one has replied to your post.
First of all, do not start out with any 2x or 3x ETFs. Calls on these can give big rewards, but you can be wiped out if the market goes against you. Remember a 2x ETF will drop twice as fast if the market drops.
Also these leveraged ETFs all have an inherent tracking error, as they will decline in value over a relatively short period of time even if the underlying commodity remains stable in price.
Combine that tracking error with the time decay inherent to all options, and you can end up trying to unload for a dime what was worth a dollar yesterday.
I seldom play the front month. I usually go at least 2 or 3 months out to give me time to overcome a short term setback.
I have a core set of options right now that are Jan 2014. These are mostly about three months old, and some are already up 200% to 300%. Now I have 16 months for silver to explode.
My favorite plays on silver are SLW and SLV. HL shows promise, I think.
I sometimes buy calls on AGQ, but only for very short term plays. Hope this helps. DYODD.
There are no options on USLV so you are left with SLV calls. Options can have more leverage than the 3X ETFs but you can you lose your entire cost. Furthermore you are paying a time premium, that decays, for the privilege of having an option to purchase the underlying.
I have found the following calculator useful for comparing option prices for different strike prices by simply adjusting the volatility to match the option price you can see if any are badly over/under priced. You can also simulate results for stock gains/losses and look at historical option prices.
Finally always buy options where there is a large open interest so there will be good liquidity when you sell.
I would like to buy a gold futures contract. I have not done so before. I understand how it works. I only have an account at Scottrade now and they don't do futures contracts. Is there an easy way to do this without plunking down alot of money at some institution. I don't know whether I'll ever buy another one after this. Thanks for any info.