Options versus using a Stop

I have been in an email exchange this week with a client prospect where a very important question came up in our discussions:  what is my Risk Reward approach for those that are very focused on keeping positions “safe”.

This once again brings up the debate on Options versus using a Stop so I decided to provide an example to the prospect on what I would do with a particular trade. Here are the details:

One of the Tools that I use is Options. This tool provides several important benefits in trading stocks including protecting a position fully (beyond what a traditional Stop can do). As an example for the prospect, I enclosed this Trade setup to show how I would do a trade to meet their goal of safe – within a 6-month time-frame:

Ticker:   VHT  (Vanguard Healthcare ETF)

Current price:  $135.5
Account Size:   $250,000
Position Size:   $50,000
# of shares:   369
Amount to Risk:   $2,500
50 SMA:   $130.77

Stop:  $128.73

Long Puts expiration:    September 2015
Long Put strike:   $135
Long Put cost:   $6.00   (600 per contract x 4 contracts = $2,400). You would be fully protected under the $135 level until September with a similar “Amount to Risk” as the Stop info above

Scenario:  Price moves above the $140 level between now and September I would  then sell Calls against the Long stock to recoup the cost of the Puts. I would expect to have several opportunities before September to sell Call premium – say at the $140 or $145 level – to slowly recoup the cost

Daily chart on $VHT:


- DM 12:25 PM CST


Swing Account review

No new positions this week. A few existing positions that have seen activity this week: $FB $SWKS. Here are the 6 positions:

  1. $FB  I am Long the March 13 weekly 79/80 CS. Options Net is: $1.16
  2. $SSYS  I am Long stock at $55 (since 2/13) and have a March/March 13w $65 Collar. Options Net is: $1.71
  3. $SWKS  I am Long stock at $63 (since 12/05) and have an Aug/Mar 85/80/75 Diagonal Collar PS. Options Net is: -$.68
  4. $UNP  I am Long stock at $113 (since 01/23) with Short January 2016 $120 Calls (covered calls). Options Net is: $2.08
  5. $URI  I am Long stock at $90 (since 2/11) with a March 95/90/82.5 Collar PS. Options Net is: $8.47
  6. $UVXY  I am Long the ETF at $24.64 and Short the March $30 Calls. Options Net is: $5.65


- DM 12:05 AM CST


Position Review

The February OpEx is today so a quick review of what I have left to tend to:

ResMed $RMD  I am Long the $65 Calls (part of a Call Calendar). I will likely take stock at $65

Cyber-Ark Software $CYBR  The Long 30/35 CS will auto-exercise for +$5

LyondellBasell $LYB  I am Long the 80/85/90 Call Fly with Long stock at $86.75 (a hedge). I will exit the trade by letting the Long CS auto-exercise for +$5 and the stock gets called away for -$1.75

Tractor Supply $TSCO  The Long 80/70 1×2 Put Ratio goes poof (was protection for a prior Long Stock position)

Fossil $FOSL  I am Long the 97/94/91 Put Fly. I am undecided still. One path: sell Puts at $90 in an expiration further out (use proceeds to unwind mid/bottom part of Fly) and take Stock Short at $97

Bunge $BG  The Short $85 Puts will get assigned and will unwind the Short Stock piece at $85. The Long CS will go poof (other part of the RRCS)

Ross Stores $ROST  The Short $87.5 Puts will go poof (remaining part of a Short Strangle)




- DM 8:30 AM CST


Achillion Pharma trade update

Sometimes a trade looks ok – and then sometimes they suddenly don’t. For my $!@rr##*Ts## position this week I bring you $ACHN:


I have had a March 14/18 CS in the IRA for a while (Long $14 Calls since 1/14, added Short $18 Calls on 1/27 to make the CS). I am using Options so that I can participate in a move but in a way where the Risk is well-defined.
Well, I may have gotten too complacent by letting it fade all the way down to near $10 now.

Time to reassess now.

Now on the bright side, I do have $2.85 in booked gains on a Stock trade. There is an Options Net of $1.75 too. My luck the CS will expire and then they’ll get bought out in April lol.


- DM 10:30 AM CST

Tractor Supply – a look at an existing position into Earnings

I have had a position in $TSCO for the Submarine Basket since 09/25/2014. Here is the current position info:


I received a few comments today about letting the Long stock position stay “capped” into Earnings. If you review the chart above, you can see that my priority should be to protect the recent gains. It has had quite an UP move from the October lows so it is my view that the risk may be to the downside now.

If I am wrong? No harm no foul. I can sell premium in a future expiration to buy back the Short $80 Calls at February expiration. The Put Ratio would go poof.

Worth noting: I have an Options Net of $1.10 & accumulated booked stock gains of $7.07 up to this point.


- DM Noon CST


The Outerwall is crumbling

I still don’t get the name change for $OUTR but that’s not what this post is about. Yesterday it was announced that CEO had resigned (from the Board too) and the stock subsequently crumbled below the flat 200 SMA.

Here is a Daily chart showing the mild attempt to bounce today:


As RSI is probing the 30 level – and reviewing the past history for price behavior when this happens – I have been keeping an eye on the stock for a potential new trade in the Submarine Basket (for more info on this Basket, just search this Blog).

One of the most frequent trades I construct is the RRCS – the Risk Reversal Call Spread. With this trade structure I am:

  • Long a Call Spread
  • Short Puts (takes margin until this piece is closed)

With that in mind, let’s look at a few different trade choices:

  1. Long the February 65/70/55 RRCS. Must be comfy owning at $55 (and/or hedge with stock if need be). This trade costs: $.35 debit
  2. Long the February 65/70/75 Call Fly with Short $55 Puts (1/2 size on the Puts) for EVEN. Must be comfy owning a 1/2 size position at $55 (and/or hedge with stock if need be)
  3. Long stock at $63 and Long the March $65 Puts. Once the stock starts to run up, sell Call premium to cover the initial cost of the Puts (expensive right now at $6)


ETF Short strategy starring TNA TZA FAS FAZ

I got asked recently about the ETF Short strategy that I do involving $TNA $TZA and $FAS $FAZ pairs. It has been a while since I have had these trades on but thought I would do a quick review of the goal of the trade as well as show some current performance info.

First, the goal of the trade if to be short each ETF and manage them as a pair. You could use Options as the initial trade or in conjunction with the ETF. The point it to capture decay even as price whipsawed around.

Now on to some performance metrics. In January 2013 the $TNA $TZA pair traded at $69.61 & $12.29 respectively. The Friday close in each: $71.74 & $12.76. Basically flat now after 2 years. It is likely that the only way you made money – if still holding this trade – was to sell Option premium along the way against the Short trade.


For $FAS $FAZ in January 2013 the pair traded at $133.20 & $13.50 respectively. The Friday close in each: $112.44 & $14.12


- DM 10:00 AM CST


The Bear Collar starring Foundation Medicine

I have a short stock position in $FMI ($57.82) and I wanted to add protection using Options. I elected to do the following yesterday:

  • I BtO the February $35 Calls (ITM) for a $9.50 debit (see here)
  • I later StO the May $40 Puts (OTM) for a $4.16 credit (this is to help offset some of the cost of the Long Calls)
  • I have an Options Net of -$5.34

Let’s take a look at where $FMI is trading now (5-minute chart):


Now let’s look at a few scenarios to see how this Bear Collar trade structure works:

1) The stock drifts up to $55 by February expiration. I would let the Long Calls exercise thus closing the short stock piece. This would be a gain of $22.82 and leave me Short the May $40 Puts

2) The stock fills some of the Gap below to $40. I would let the Long Calls exercise thus closing the short stock piece. This would still be a gain of $22.82 and leave me Short the May $40 Puts. I would want to evaluate whether to remain short the Puts or not (close them, adjust to a future expiry, etc.)

3) The stock is at $60 at February expiration. I would let the Long Calls exercise thus closing the short stock piece. This would still be a gain of $22.82 and leave me Short the May $40 Puts


BtO = Buy to Open
StO = Sell to Open
ITM = In the Money
OTM = Out of the Money


- DM 10:30 AM CST