MU Buy-Write

[spurge0n 0]

Bought MU at $26.98. Wrote the Oct. 18 27 Call at $.80.

 

This is a fast money play, but I believe in MU so even if the stock doesn't hit the strike on Friday, I'm willing to hold it for a while.

[Optrader 146]

Nothing wrong with this strategy, but any strategy which caps low returns and does not protect on downside is not a good strategy.

 

If you are willing to hold MU, why not write a cash secured put at 25, then at least you get the stock at 25 and if not, you can keep the premium.

It still is not attractive strategy as it ties up too much cash for very small % return.

 

Instead I would use the same amount and buy a MSFT straddle which will cost the same, but has not much downside and at least 10% upside

[Yowster 9,862]

  On 10/15/2014 at 6:11 PM, spurge0n said:

Bought MU at $26.98. Wrote the Oct. 18 27 Call at $.80.

 

This is a fast money play, but I believe in MU so even if the stock doesn't hit the strike on Friday, I'm willing to hold it for a while.

For a stock with no dividend like MU, you could create a trade that would make the same amount of dollars while using much less capital by using a DITM call a few months away from expiration as your long position (instead of buying the stock). 

[spurge0n 0]

  On 10/15/2014 at 6:17 PM, mukundaa said:

Nothing wrong with this strategy, but any strategy which caps low returns and does not protect on downside is not a good strategy.

 

If you are willing to hold MU, why not write a cash secured put at 25, then at least you get the stock at 25 and if not, you can keep the premium.

It still is not attractive strategy as it ties up too much cash for very small % return.

 

Instead I would use the same amount and buy a MSFT straddle which will cost the same, but has not much downside and at least 10% upside

 

Can't fault your analysis, but I'm in the money right now. We'll see what happens on Friday.

[spurge0n 0]

  On 10/15/2014 at 7:18 PM, Yowster said:

For a stock with no dividend like MU, you could create a trade that would make the same amount of dollars while using much less capital by using a DITM call a few months away from expiration as your long position (instead of buying the stock). 

 

That's not a bad strategy, either. I'll consider that in the future.

[SeanM 29]

Compared with the suggestions offered in the comments, I much prefer your actual trade.  Like you said, it's a quick money trade, and you're getting 3% for a 3 day trade!  Worrying about a capped upside or unprotected downside is unnecessary (guess I should knock on wood with the VIX hitting 31 today and VXX up sharply AH).  Also, selling a naked 25-strike Put certainly wouldn't solve the capped upside issue, plus commissions would eat up a very meaningful % of the dime or so of premium you'd collect.  So, my opinion is you played this the right way.  

 

As for your willingness to hold the stock, over the past few weeks I've been inching closer and closer to taking a long position in MU.  At 5.5x current year EBITDA, the reward/risk profile is incredibly attractive.  If you're interested, here's a link to today's JPM upgrade piece.

[Optrader 146]

My thinking is this

If you are looking for minimal returns of 3%

Why trade options

You can just day trade the stock

Mu can easily go up above 30 if rally happens

Then you can make 10%

And more as it keeps going up

But the poor covered call buyer made only 3%

And lost the opportunity as well as the stock

Well you would argue that yes i am happy with 3%

Thats ok

But if you start doing this often you will get caught on wrong side once that will take away all the gains one day like black swan and will be hard to come back in the game

Mu is great stock but at that time there are so many fallen heroes that it is a difficult decision to choose your hero

That is what happened to me in 2008 crash

I could not decide what to buy when there was sale everywhere

What if your chosen stock does not rally and whole market rallys

Good luck with your trade

[Optrader 146]

5.5x EBDItA

And JPM

These numbers can change as outlook changes

Stock market cares less

How many people who are selling today are reading it ?

You may argue that they are fools

Well may be they found better prospect may be in beaten down energy sector ?

They may come back say after 2 years

In meantime you may be left holding the mu bag

In meantime it was missed opportunity to make money on investment and that miss is more painful than having a loss in a bad trade

[spurge0n 0]

  On 10/16/2014 at 10:22 AM, mukundaa said:

You can just day trade the stock

 

 

Not me. I don't have time to babysit it. My philosophy is to put it on autopilot with some downside protection and let it convert this weekend.

 

I could have added a married put for some additional downside protection, but I didn't see the need here. I've done that in the past here.

 

Also, the potential still exists for me to make a return better than 3%. If it's at 26.90 on Friday, then I can just hold it on Monday for that eventual 10% gain. Plus, I keep the money I made from selling the call. Or, I could write the November monthly and generate some decent income. Lots of possibilities here.

 

But you're right that one bad trade can wipe away a lot of gains. That's why I typically use married puts with this strategy.

[spurge0n 0]

  On 10/16/2014 at 5:06 AM, SeanM said:

Compared with the suggestions offered in the comments, I much prefer your actual trade.  Like you said, it's a quick money trade, and you're getting 3% for a 3 day trade!  Worrying about a capped upside or unprotected downside is unnecessary (guess I should knock on wood with the VIX hitting 31 today and VXX up sharply AH).  Also, selling a naked 25-strike Put certainly wouldn't solve the capped upside issue, plus commissions would eat up a very meaningful % of the dime or so of premium you'd collect.  So, my opinion is you played this the right way.  

 

As for your willingness to hold the stock, over the past few weeks I've been inching closer and closer to taking a long position in MU.  At 5.5x current year EBITDA, the reward/risk profile is incredibly attractive.  If you're interested, here's a link to today's JPM upgrade piece.

 

Thanks. I think it's a great company. Whether or not the market will recognize that in the next couple of days is another matter.

 

It was up yesterday when the market was down, so it has good relative strength.

[Optrader 146]

  On 10/16/2014 at 1:12 PM, spurge0n said:

Not me. I don't have time to babysit it. My philosophy is to put it on autopilot with some downside protection and let it convert this weekend.

 

I could have added a married put for some additional downside protection, but I didn't see the need here. I've done that in the past here.

 

Also, the potential still exists for me to make a return better than 3%. If it's at 26.90 on Friday, then I can just hold it on Monday for that eventual 10% gain. Plus, I keep the money I made from selling the call. Or, I could write the November monthly and generate some decent income. Lots of possibilities here.

 

But you're right that one bad trade can wipe away a lot of gains. That's why I typically use married puts with this strategy.

 

You can also buy at 27 and put a sell stop order at 28 and not watch it  which is same like what you did with buy write.

[spurge0n 0]

  On 10/16/2014 at 8:20 PM, mukundaa said:

You can also buy at 27 and put a sell stop order at 28 and not watch it  which is same like what you did with buy write.

 

Correct. In retrospect, this strategy would probably have been better for MU.

 

Of course, I didn't expect the price to shoot up like it did.

 

So I'm losing opportunity, but that's far better than losing money.

[spurge0n 0]

This call was assigned for a 3% gain. I could have made as much as 9% if I just bought the stock. As of Friday's close, I think the gain was 6%.

 

However, I'll take what I can get in this bloodthirsty stock market.