Welcome back to my weekly options strategy column.
The past week has been one of cautiousness as trading volume continued to decline amidst widespread expectations of a pullback. The Dow continued trading within its short term neutral trend netting a weekly gain of 36 points.
With the outlook being of long term economic recovery, many stocks were upgraded throughout the week for their long term potential. In fact, Huntington Bancshares trading under the ticker HBAN, was cited by Jim Cramer last Friday as his next favorite bank stock to play the “bottom in the housing market and recovery of the banking business” after his favorite bank stock, Bank of America.
Huntington Bancshares operates over 600 branches in Indiana, Kentucky, Michigan, Ohio, Pennsylvania and West Virginia and was upgraded by Goldman Sachs last Thursday. HBAN’s insiders were also buying the stock aggressively in a demonstration of faith in its long term prospects. Jim Cramer calls HBAN a “speculative bank stock”. What this really means is, if it survives, it explodes. If it doesn’t it collapses. With this much uncertainty and the probability of an explosive gain, what can we do as options traders?
There is no better way to control risk and maximize profits than the Fiduciary Call Options strategy. Buying call options is a widely misunderstood strategy and one which has emptied many trading accounts. What the Fiduciary call option trading strategy does is it simply replaces the buying of the stock with buying it’s at the money call options instead. If the underlying stock goes up, it returns an explosive ROI but if it doesn’t, the position could go all the way down to zero. What makes this strategy dangerous is the fact that most options traders abuse the leverage and then dump all their money in one big bet. Doing that totally misses the risk control part of the strategy.
What you do in a Fiduciary Call is simply replacing the buying of the stock with buying an equal amount of at the money call options. Assuming you have $4150 right now. Instead of buying 1000 shares of HBAN shares at its last closing price of $4.15 and putting that whole amount at risk should the banking sector receive yet another blow, you buy 10 contracts of its January 2010 $4.00 call options representing 1000 shares of HBAN costing only $1200! (Asking price was $1.20 as of Friday’s close)
Now, buying call options this way allows you to control your maximum loss to just $1200 instead of $4150 should HBAN go all the way down as speculative stocks do sometimes. Plus, should HBAN stage the big rally that Jim Cramer talked about, you would be able to capture the profit as if you owned 1000 shares of HBAN less the $1200 you paid as the expense to own the options. Risk is controlled and you don’t miss out on the fun! That’s the right way to buy call options.
Assuming HBAN rises to $12 by January 2010, you would have made an ROI of about 300% if you bought the shares but an ROI of 566% if you bought the call options! What a big difference! You would also have remaining funds to diversify into other stocks if you want to. In this case, the fiduciary call risks only about a quarter of the money for almost twice the profitability.
Read my full tutorial on Fiduciary Calls.
Let’s take a look now at our previous options plays:
DRYS stock went sideways last week closing down marginally by 0.56% as Jim Cramer put its CEO on the wall of shame and continued his pessimistic outlook on the sector. Its Sep7.5/11 Bull Call Spread went down marginally this week to $0.90 and we still have 2 months to see how things work out.
EEM also went sideways in this sideways week, up marginally by 0.39%. It is now worth a credit of $1.51 as the short 37 calls. With EEM continuing to stay below $37, the position would make its net credit or more as profit depending on the actual price during Sep expiration.
NYX went sideways this week as well, closing down marginally by 0.07%. This works well for our Covered Call as the June $31 call went from a bid of $0.62 to an ask of $0.30, netting $0.32 as profit even though NYX never moved. It is expiration week for June options and as long as NYX remains below $31 through Friday, the position will net the entire $0.62 on the call options sold as profit.