DAMN I LOVE THIS STOCK !!
If you remember I said that I covered my short last week at approx. 46, and that I went long on 500 shares at 47 and then wrote some calls when the stock hit $49.
Well, the calls I wrote were Aug. 45 and I got about $5.00 for them.
now those calls are trading for about $1.00
Even though I lost about $2.00 on my 500 shares I bought at $47.00
the option I wrote protected me on the way down. In fact, I am still ahead about $2.00
If I bought those calls back right now, (and I think I may), I would have to pay about $1.00 Since I sold them for about $5.00 I would profit $4.00
The stock has gone down only about $2.00 since I bought it at $47.
Therefore, I am still up about $2.00 per share.
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I have found the best way to play VTSS is to buy in on up swings and then write some in the money covered calls. This puppy always backs off.
If you would like to be a little more aggressive, I would suggest you buy on the next up swing, wait for the stock to show signs of being overbought. At that time write a good premium providing covered call and then use the funds from that call to purchase some puts.
This is a artificial short. I holds no risk to you, because the worst thing that can happen is that the stock would go up instead of down and you would get called away at a higher price than you bought in. You would lose the money you spent on the put, but since you didn't spend your own money, (the money was provided to you from selling a covered call), you should still make money on the transaction since you will get called away at a higher price than you bought in.
For example,
Lets say you buy 100 shares of VTSS at $45.00
In the next week or so it goes to $49.00
You check the option prices and you see you can get a $3.00 premium for selling the Sept. 50 Covered calls.
You then chart the stock or have someone chart it for you.
Lets suppose the chart says that the stock is way overbought.
You then write the Sept. 50 call and you take in $3.00 per contract.
This adds up to $300 (1 contract x $3.00 x 100 shares per contract)
You then look to see what the Puts are selling for.
You find that the Sept. 45 put is now selling for $1.00 per contract
You feel that since the stock is oversold (according to your chart), VTSS has a good chace of nearing $45.00 again.
You proceed to buy $300 worth of Puts. That gives you 3 contracts.
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Scenario # 1 The stock goes down
1. You are not going to get called away since the stock in not higher than the strike price of the option you wrote Sep. 50
2. The puts you purchased with the funds from writing the covered call have now increased by a factor related to how much to stock has declined in price.
3. you sell those puts now and take profits.
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Scenario # 2 The stock goes up beyond the option strike price
1. You get called away at $50.00 since you wrote the Sept. 50 calls.
You make $5.00 a share ($500) since your original buy in was $45.00
2. The put you purchased expires worthless and you lose the $300 you spent. ** Note ** this $300 came from the covered call you wrote so in essence, you didn't lose your own money.
3. You wait for an opportunity to try this again. Now if the stock has gone up to $60 you have lost $10.00 in opportunity cost, because you had to sell your stock at $50.00, but that is the tradeoff for attempting this no risk short. You are still ahead $500.
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Scenario # 3 The stock does nothing.
1. you don't get called away
2. the put you purchased expires or you sell it at a cheaper price, keeping what is left over.
3. make some money if you can sell your put, but even if it expires worthless, you still lost nothing, only wasted some time. You can consult the chart and see if you should attempt this again, or long.
I have found that this strategy works best with volatile stocks that can move down $4 to $5 as easy as they move up $5 to $10 in a week.
VTSS fits this criteria perfectly. |
