2010 Jan 17 - Sun

Option Trading Scenarios

Most option trading books discuss the mechanics and mathematics of option trading. Rarely do they offer up any sort of in-the-trenches useful guidelines for doing what when and how. Some recent reading has enlightened me on some useful option trading scenarios.

The first one provides the dual mechanism of obtaining income and optionally paying for protection on an underlying which is already in one's portfolio. The process involves selling a kind of straddle: selling an out of the money call and an out of the money put. For example, with TSL, as of Friday's close, is at $49.50. The Feb 55 Call is at $1.75 and the Feb 48 Put is at $3.25. Selling this results in $5.00 premium. If TSL stays within the range of $48 and $55 till Feb 19, the full premium is kept. If the price goes above $55, the underlying will probably be exercised to result in a $5.50 profit, which is the premium plus the amount the underlying goes to get to the strike price. If the price goes below $48, the Put will go into the money, most likely causing it to be exercised, and you'll end up buying the underlying at the Put strike price, which may be a good thing if you are expecting the price to rebound. On the protection side, the premium earned on the put and call sale could be use to purchase twice the number of puts at the next out-of-the money price, which in this case would be Feb 45 Put. This provides protection on the original underlying plus the shares gained when the buyer exercised the puts.

Another strategy requires maintenance of no underlying. For a stock that you think will go up due to some upcoming good news, such as an earnings announcement, one could sell an out of the money put and use the funds to buy and out of the money call. By careful selection of put and call strikes, the money gained by selling the put may fully cover the price of buying the call. The downside of this is if the price of the underlying goes below the put strike price. You may end up owning the underlying in this case, but at least it was obtained at a lower price.

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They Who Have The Money

Sometime this last week, someone made the observation of the fact that there was a 'hidden buyer' buying a large amount of treasuries during the weekly US Treasury auctions. There was speculation it might be the Chinese operating through private proxy parties.

The US government has a problem with all the money they are spending. Some one has to loan it to them. Hence the regular treasury auctions.

A couple figures came to mind. I believe I recall seeing that the Chinese have over one trillion US dollars due to trade imbalance between the US and China. Another figure has to do do with the fact that the US government has added over a trillion dollars to their defict through recent spending.

If you put those two numbers together, and tie them together with the 'hidden buyer' observation, perhaps it could be said that the Chinese are converting their US dollar currency holdings into US Treasury holdings. That way, not only have they made money through their exports, but they make additional revenue through the yields on the treasuries purchased.

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Short Interest, Solar, Lithium

Many commenters have been discussing Peak Oil, with Peak Oil being the fact that we've found all the easy supplies of oil, most of which has been pumped, and that our supplies, regardless of type, are dwindling... the peak has come and gone. To be more specific, the supply of oil, of which we only have a finite supply, is decreasing, while world demand for oil is increasing. The first day of Economics 100 teaches us the supply / demand curve and the effect on pricing. Oil prices can only go up, and up until the last dropped is supplied and consumed.

In the meantime, alternate sources of energy must be found to supply the world's unending requirement. For sourcing some fraction of our energy needs, some are turning to the nearly non-ending supply of sunlight. One way of converting sunlight into energy is through the utilization of solar panels. Solar panel technology has improved recently, and has resulted in it becoming economically viable to generate electricity via these sunlight receptors.

A number of companies are in the business of producing solar panels. In a sideways fashion, I came across TSL (Trinia Solar) yesterday. Someone had run a stock screener with the settings similar to:

• stocks with high put/call ratio
• minimum stock price of $10/share
• minimum put & call open interest of 10k contracts
• minimum average daily stock volume of 100k shares traded
• trading above its 20-day moving average
• near a 52 week high

TSL has risen briskly but has some pessimism from investors based upon puts easily outnumbering calls. If the negative sentiment unwinds, it could rise further. Another area of measuring pessimism is through monitoring short interest. The web size Short Squeeze offers up information so one can see how many shares are sold sort for a company. Short Interest can also be found within the Fundamental Record of the DTNIQ data stream.

In looking at TSL on Google today, Google shows that all similar solar stocks took a decline today. It turns out that the German government will cut its solar financial incentive schem by 16 to 17 percent.

With a price correction like this, it might be interesting to look to getting into solar at this level. But the real moral of the story is that a news service which tracks a portfolio's stock symbols is probably worth its weight in gold.

Moving along with the alternate energy theme, collected energy needs to be stored. Currently technology appears to be focussing on Lithium as the mineral of choice. A common play appears to be WLC (Western Lithium). An upcoming player as mentioned in Industrial Metals magazine might be GXY (Galaxy Resources).

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