Mistake on explanation of DNDN trade

OK I apologize for a stupid newbie mistake that might have confuse some of you and I am sorry.

When I wrote this -

2.) DNDN announcement comes and is negative and the stock tumbles way past your $15 sold option. Try and hold on for the volatility to drop and buy the spread back for less than you sold it still a profitable trade. One caution here is that you may be put the stock but you can turn around and put the stock to someone else with your bought 12.50 put causing a loss. Most likely not to happen as everyone is buying and selling the options right now at high premiums.

I made an error, if the stock tumbled way past $15 (like it did) the intrinsic value of the spread would be $2.50 so you would be at a full loss of the trade, just due to intrinsic value. Sorry I was not thinking about it as I wrote it, then I forgot about it. When I looked at the trade at the time of the gap down I was like oh well it lost, no big deal because it was a low capital trade. Well I looked on my posting just today and realized what I had written and all I can say is sorry for the newbie mistake.

Credit Spreads are a pure directional trade, with high volatility you can make low capital trades like the DNDN trade so you can be a bit more risky and take a little more profit but realize that that close to the money will cause a total loss if you are wrong on the direction.

credit spreads, DNDN, newbie mistake

Aggressive Credit Spread

I know I am all about conservative plays but this one may be too good to pass up. It does not follow my system but it is another way to use credit spreads. BTW I also posted this trade on Superior Investor, click here to see the post - www.superiorinvestor.net/showthread.php?p=46078#post46078

DNDN (Dendreon) is a pharmaceutical company that is expecting an announcement from the FDA on a new drug for the treatment of prostate cancer. The deadline is May 15th for the announcement. There is a lot of hype surrounding this stock and volatility is through the roof, so lets see if we can make a play off the volatility.

Volatility is high so this means we should be looking to sell options. This will be a directional credit spread with a twist. OK, DNDN is currently at $17.20 lets look at a current month close credit spread and see what we get… Sell the Bull Put Credit Spread 12.50/15.00

We would sell the May $15 put for around $4.15 and we would buy the May 12.50 puts for around $2.85 this would give us a credit of $1.30. the spread is $2.50 but because of the $1.30 credit we would only be risking $1.20. This gives us a profit of 108% within the next 16 days. So what happens, here are the future scenarios….

1.) DNDN announcement comes and is positive and the stock soars way up. Wait for volatility to come down with in the next day or two after the announcement and close the trade for a big profit.

2.) DNDN announcement comes and is negative and the stock tumbles way past your $15 sold option. Try and hold on for the volatility to drop and buy the spread back for less than you sold it still a profitable trade. One caution here is that you may be put the stock but you can turn around and put the stock to someone else with your bought 12.50 put causing a loss. Most likely not to happen as everyone is buying and selling the options right now at high premiums.

3.) DNDN announcement comes and the FDA decision is delayed - Volatility may not come down and the stock may decline past your $15 Strike causing a loss. But realize your maximum loss right now is only $1.20 per credit spread.

Use only the money that you can afford to lose. This is not a typical conservative credit spread, but the risk vs reward is very appealing. The fact that volatility is high and is most likely to come down after the announcement even if the direction is wrong the play may still be profitable is also very appealing. If you are unsure how this is going to work out paper trade it or sell only one spread, think of it as $120 educational class with the possibility of double your money back if the class works out.

bull put spread, credit spreads, Dendreon, DNDN, volatility

Credit Option Spread exit strategy - roll up, buy back, or leave alone?

OK our credit spread for this month was a May bull put 1395/1400 spread that was easily sold for .65 on April 11. Many of you could have sold it for .75, but we will go with .65 because that was the example given.

Well now what has happened the past week is astonishing. The market has skyrocketted - (use caution here because it has done this on average volume.) So what do we do with our spread trade. Here are some exit strategies -

1.) hold on to it till expiration with it going so high and now having at least two levels of support between the current price and the spread we should be OK.

2.) buy back the 1400 put and sell the 1410 - this is a good choice as it does not raise the risk considerably with the sold put being right at the last level of support, but it does raise your capital risk because the spread is now larger. I would buy back the 1400 put for $3.60 and sell the 1410 for $4.30 this will net you another .60 in credit almost doubling your original credit. However now because of the increased capital risk your play becomes only an 8% gain

3.) buy back the entire spread for .45 making a gain of .20 in the last week and roll into the next spread trade taking a look at the 1410/1415 bull put spread for .70. This would increase your credit for the month to .90 or a 20% gain (averaging the two capital risks)

Now lets imagine if the market did the opposite and had dropped, this is how I would have exited the trade. If for any reason the SPX closed below 1410 I would close the trade, most likely for a loss. We could roll back into another lower spread trade say 1385/1390, but why would I if I had read the market or the stock wrong or thesituation has changed then I want out of the trade completely, take my loss and move on. So that is the trigger, if the indice or stock closes below the support I was using for my estimates in the trade then I close the trade. Otherwise I just wait.

Now there is another time I would close a trade early. Lets say the SPX continues its rise and my spread becomes worth only .20 or less, and we have a week or more left till expiration, I feel it is too risky to leave my trade open for the measly little credit left, just close the trade. Take the .45 or .50 gain and be happy.

bull put spread, capital risk, credit spread, exit strategies, spread trade

Another Credit Spread

Here’s a credit spread trade for you from blogger Brent Archer. It has a little more risk due to earnings coming out on Amazon on the 24th, but he explains this well in his post.

The two problems I do have with this trade are 1.) too much time involved, in his defense he can not use the May options because there is no credit available at the level he wants you to place the trade. 2.) There is not enough credit in the July options to make me want to hold it that long to eat away the time value. We would be looking at a .15 credit on a $2.50 spread or about .25 on a $5 spread. We are looking at a 6% gain in 3 months time. Not the exact type of trade I would be looking for but he makes a good argument as to why this would be pretty probable to be a winning trade.

Check out his post here..BloggingStocks

amazon, credit spread, spread trade

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