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A day late and $1,000 short: due to my P C blowing up and having to buy and format a new one, this edition is late. Thankfully, due to a great technician - CSG IT Solutions (510-647-6590 - my problem was solved timely and expertly,


In my 30 years of investing/trading both stocks and equity options, IMO there has never been a more timely strategy for the current Fed ex Machina zero interest rate environment (ZIRP) - a paucity of positive returns (ROI) - than the plan I borrowed from one of my Schwab premium option group clients: the Leap Strangle!

For those readers who are not familiar with Strangles, they are just like Straddles, but with different prices for the Calls and Puts. Compare riding a horse (straddle) with riding a bicycle and stopping at a stop light with one foot on the ground (strangle).

In the present case, it is more of a "covered, short Strangle", using the most conservative - least risky option plan of covered Calls and cash-covered Puts, sold (not bought) on a quality stock in the $5 to $20 range, hopefully with some dividend.

The concept is to buy the stock and immediately sell both options (covered Call and Put) bringing in a high percentage of the stock cost - anywhere from 25% up to 100%. Wherever the stock price goes, that money is irrevocable from you and lessens any possible future loss when the options either are called or expire the third Friday of a certain January. Since both options are sold OTM (out-of-the-money), unlike my previous strategy of Deep-in-the-money covered calls, there is the possible, even probable, case for appreciation, as well as dividend and option premium. The stock candidate should have options with a high Implied Volatility (IV), hopefully around 50 - most brokerage platforms show this. High IV increases the amount you SELL the Put and Call for. To give an example:

Buy a stock @ $8/share; sell a covered Call at 10, and a Put at $7 - both out of the money. At this time of year the only Leaps available are 2015 and 2016 - the 2017 Januarys should be out @ this October. The sale should net (of commissions) $345 for 5 calls on 500 shares of stock, and $400 from the Put. So you spent $4000 for the stock and brought in $745 by selling the options. Add $100 from dividends and $1000 from appreciation if called away in 2016 above $10. Net profit = $1845 from a $4000 investment over 1 1/2 years. 46% over 18 months, or 30.75% annualized over 12.

If the stock stays below $10, you keep the stock and do another "tranche" of Leaps two more years hence- you already own the stock. If it is still a quality stock, but dips below $7 temporarily (usually they will V-Spike back up before expiry); if not you will be assigned 500 more shares at the $7 price you sold the Put at - then your next Strangle set might be $5 Put and $8 Call. Unlikely that you will suffer even a temporary (paper) loss factoring in the $1845, plus the new Strangle!

Additional profits can be had by rolling up a few strike prices and out a year, by monitoring the stocks occasionally. Although I own over 20 Leap Strangles, the ideal portfolio would be 15 to 20, so if one does blow up (with a loss much less than if you merely owned the stock unhedged), your overall gain is much better than 1% MMFs of CDs.

In actual trading so far ( the trades usually do not close out until Leap expiry - Januarys of 2015, 2016, and soon - 2017), of the stocks in my accounts, only two have been finalized - both due to a poor decision in selection, causing a major downturn. Trini Solar, a Chinese solar company was bought at just below $9 and raced up to 18. A volatile stock ( volatility makes for high IVs and optimal choices), the downside is that it usually flares on downmoves, which is what happened to TSL! I bailed out at $10.45 - above my buy price- but only netted a few hundred $ profit. Still, better than a loss.

As the LEAP plan is also a great hedging strategy, as well as a high return one, it paid off in my other closeout - ACI. Everyone knows the Coal industry is not the one to be in under the current regime. 1,000 shares of Arch Coal were bought at just under $7 before the coal hit the fan, and I bailed at $3.24, a loss of $3,718 on the stock by itself. Fortunately, the 19 months I held it, even rolled the Calls down - part of the fine tuning process for extra profits. My eventual loss was then only $765 - 20% of the loss just owning the stock.

As mentioned before, profits on the majority of other stocks in the portfolio will make up for occasional losses, and surprises also occur on the upside. Here are a couple:

YRC Worldwide Freight - a good industry with the economy improving, had a threatening volatility- the IVs on the Calls and Puts respectively were 100 and 120. Unheard of !- I gained enough selling those to pay for the stock purchase just below $19. Opening the position in Jan. 2014 (6 months ago, with 18 to go, I have already realized a 65% net profit (if I closed it out right now). The 100% return should actually increase with the appreciation factor ($19 to the $20 call-away price). Its current price is over $28, so being called is likely - I might even roll up the $17 Put for more $$ (aka Insurance).

Another egregious example is the triple-strength Gold ETF, based on the GDX miners index. Deviating from the norm, I bought this at $35, selling the 30 Put and 40 Call with IVs just under 100, and lots of wiggle room. Gold has been, IMO, oversold and should continue to rise if it is eventually "referenced" , not pegged, to global currencies in this globalization era. NUGT is currently at 52, well above my Call take-away price; again I shall roll up the Puts. I hesitate to roll up Calls, as they must be done at a debit, although releasing $$ by raising the call-away price. In NUGT's case the stock was bought at $3600 (100 shares) and options sold at $2925.


SF Bay Area Options Group Monthly Meeting

Saturday July 19, 2014, from 9:00 AM to Noon
Room C-235, Fort Mason Center, San Francisco


Register FREE today for any of this month's live online events, and we will send you a reminder email on the day of each event to remind you to LOG ON live.

Space is limited, so don't delay!

John Bollinger

Basics of Bollinger Bands: Find Profitable Set-ups


July 15, 2014


1:50 pm - 2:50 pm EDT

Martin Pring

How to Preserve Wealth in the Second Lost Decade


July 16, 2014


10:00 am - 11:00 am EDT

Ralph Acampora

A Technical View of the Second Half of 2014


July 16, 2014


1:10 pm - 2:10 pm EDT

Phone: 800/970-4355