May 29 th 2013 In this week s Cash Cow Newsletter I d like to look at the recent performance of the S&P 500 Index, and look at several new profit opportunities we can take advantage of. As I anticipated in last week s newsletter, the S&P 500 Index is down on the week: The stocks (CELG, BBH, DIS) we looked at for last week s profit opportunities are, on average, up.28% since Thursday s close. We took a less leveraged approach and used an expiration date that is further out in time, so these positions won t expire until June 22 nd. We should continue to 1
hold these positions in anticipation of the market resuming its intermediate up-trend. For this week s profit opportunities I d like to focus on trading spread strategies that can profit if the underlying stock/etf increases, remains flat, or even decreases. We will continue to take a less leveraged approach and use the monthly June 2013 expiration date. Using the monthly expiration instead of the weekly expiration will produce higher premiums for us because of the added time value. These higher premiums from using the monthly expiration make a call option debit spread strategy worth initiating. Usually a call option spread strategy is not worth trading with weekly options because of the rapidly decaying time value. The two spread strategies we will be utilizing this week are a buy-write (covered call) strategy and call option debit spread strategy on leveraged ETFs. Leveraged ETF s offer higher option premiums than their non-leveraged counterpart. If we sell call options on leveraged ETFs we can take advantage and collect these high premiums. Keep in mind that leveraged ETFs hold more risk than non-leveraged ETFs, which accounts for their rich premiums. To initiate a Buy-Write (Covered Call) trade we simply purchase 100 shares of the underlying ETF and Sell to Open a call option on the same ETF. This is a low risk neutral/bullish strategy that offers us good downside protection should the underlying ETF decrease in price by expiration. To initiate a Call Option Debit Spread (aka Bull Call Spread), we would Buy to Open an In-the-Money call option on the underlying ETF, and Sell to Open a related call option with a higher strike price. The call option that we sell will generate a cash premium for us. This premium helps lower the cost of the call option we bought, and gives us some downside protection should the underlying ETF decrease in price. 2
Let s take a look at some actual examples of these two types of trades for this week s profit opportunities. The first profit opportunity we ll look at is FAS (Financial Bull 3x ETF): FAS is a leveraged ETF that tracks 3x the performance of the Russell 1000 Financial Services Index. As you can see from the chart, this ETF has done noticeably well in recent months. The ETF is currently in a 50/100-Day EMA up-trend that is confirmed through the presence of an up sloping On Balance Volume. We can take advantage of future price increases in FAS by initiating either a Buy Write or Call Option Debit Spread for the June 2013 expiration. 3
At current prices the FAS June 2013 70-strike Buy Write is offering a 6% profit potential with good downside protection: We will profit if FAS increases, remains flat, or decreases -2.0%. The sale of the 70-strike call offers us some downside protection and helps reduce our losses if FAS decreases in price by expiration. 4
At current prices the FAS June 2013 54/69-strike Call Option Debit Spread has a 27.1% profit potential: This trade offers us an excellent return if FAS increases in price, remains flat, or decreases -2% by expiration. It s important to keep in mind that with this excellent return potential there is some added risk if FAS decreases far enough in price by expiration. Unlike a Buy Write trade, a Call Option Spread can only offer us a certain amount of downside protection as you can start to see in the Analysis above. Be that as it may, Call Option Spreads can offer us excellent returns and give us a little room for error. As you can see from the analysis, both the Buy Write and Call Option Spread strategies offer us excellent lower-risk alternatives to direction stock and call option purchase strategies. Let s analyze in detail another profit opportunity using these two strategies to further supplement these ideas. 5
The profit opportunity we will focus on now is TNA (Small Cap Bull 3x ETF): TNA is a triple leveraged ETF that tracks the performance of the Russell 2000 Index. This index is comprised of the smallest 2000 companies in the Russell 3000 Index. This ETF is currently in a 50/100-Day EMA up-trend that is confirmed with the presence of an up-sloping On Balance Volume. We can use either a Covered Call or Call Option Spread strategy to take advantage of any future price gains in TNA. Looking at an analysis of TNA for both of these strategies: 6
The TNA June 2013 51-strike Buy Write offers us a good profit potential with good downside protection: The TNA June 2013 39/50-strike Call Option Spread offers us a great profit potential with decent downside protection: 7
In conclusion: When added uncertainty exists in the market, we can help lower our risk by taking a less leveraged approach and using monthly options instead of weeklys. Using a monthly expiration instead of a weekly expiration will produce higher premiums for us because of the added time value. Leveraged ETF s offer higher option premiums than their nonleveraged counterpart. If we sell call options on leveraged ETFs we can take advantage of these high premiums. A Buy Write (Covered Call) is a low risk neutral/bullish spread strategy that offers us good downside protection. A Call Option Spread is a neutral/bullish spread strategy that can offer us excellent returns with a little downside protection. Click on the link provided below to access the Cash Cow Archive. Cash Cow Newsletter Archive: http://weeklyoptiontrade.com/archive.html 8