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Strategies & Market Trends : Calls and Puts for Income -- Ignore unavailable to you. Want to Upgrade?

To: Robohogs who wrote (5590)	11/21/2012 10:30:07 PM
From: Robohogs	Read Replies (1) \| Respond to of 5891

I have just finished perusing some of the research reports. In the coal space, I have seen in various places predictions that James River, Alpha, or Arch was the most likely next bankruptcy candidate. After reviewing the research reports and predictions on the balance sheets, however, it really looks to me like it's either James River or Arch, with Alpha actually having perhaps the best or second-best balance sheet in the group. Alfa is challenged, however, byit's high-cost positioning in the met market, but this could be a blessing if the market actually turns. In terms of balance sheet overall, net leverage is now lower at Alpha then at Walter and the balance sheet is fairly liquid. Additionally, Alpha was expected to be cash positive for 2012, an event I find mind-boggling given its higher cost structure. Management seems to be switched on at Alpha taking the right steps. I plan on leaving a short term long via short puts (very large) on James River paired with longer-term shorts there (way OTM) and am now adding longer-term short puts on Alpha to go with deep ITM puts which expire soon, and which I will roll over. A quick note on risk and capital requirements. On Alpha, I had shorted Jan 2013 puts a long time ago at the $13 strike level. I am deeply underwater, but I have been selling calls along the way so that my losses actually have been managed fairly well. But in thinking about risk, those $13 cuts or not a bad way to play a rebound. I think the stock is getting down to a bottom line price level, and if it does recover I will make money fairly quickly on the way back up with the delta being close to one. On the downside, if I am wrong there are perhaps 6 1/2 dollars of downside. That downside goes along with a similar amount of upside, maybe a little less. I just shorted January 2014 $3 puts for about $.30-$.35. There my upside to downside is about 1 to 8. Now the odds are lower for this downside but we have to acknowledge that it does exist. On the capital side, it gets more interesting. The deep in the money puts actually cost less money than it would appear. Take 20% of the current stock price or call it $1.50. They are in the money so there's no reduction for being out of the money. The minimum charge for these puts is 10% of $13 or $1.30. $1.50 rules. Fairly cheap for an instrument which has about $5-$6 of upside. The actual return could be multiples of 100%. On the deep out of the money puts, however the maximum rate return is just over 100%. Of course, to make money on the deep in the money puts you must be right on a rally. For the deep out of the money puts, you have to just not be too wrong about the stock having little downside. I might add that perversely the deep in the money puts capital requirements will go up on you as the stock moves the correct direction. And following the deep in the money put strategy also makes hedging less expensive. Often times, when I sell calls above the market just in case, those calls end up costing me a lot more than the original investment in capital. This takes away from margin do other trades. In the deep in the money put case, that is probably not the case since those calls should be out of the money. Jon