Friday, February 18, 2011

New Trade: Selling (RMBS) MAR 25 Naked Calls

Trade Update 2/22/11: I sold 18 strike puts today for .28, which now leaves me short an 18/25 strangle at .58. The original call sale and trade idea as well as updated charts are below.

The short FEB 19 puts expired worthless today. IN THE MONEY TRADES: New Trade: RMBS Short FEB 19 Puts And earlier today I decided to short the MAR 25 calls for .30 and here is why:

  • IV is elevated again in the low 50's (favors selling premium rather than buying)
  • HV has been flat at under 20% since October. Which means the IV bid has been wrong the last four months and speculators haven't been getting paid.
  • We failed at resistance this morning at roughly $22.00
  • There is a second possible resistance line above near $23.50
  • Third possible resistance line at 52-week high of $25.50. Keep in mind that was an intra-day high and the largest closing high the last 12 months is $25.03, which is under our break-even point of $25.30. 
  • Getting to $25 from here in four weeks looks like a stretch. In fact, the largest gain between options cycles in the last 12 months is just 7.19%. That means we can double the largest move seen in the last year and still have these calls expire worthless. If you want to throw in the largest percentage move intra-month, that's only 11.1%. Getting to $25 from here is a 15% move (25-21.70)/(21.70), so I really think you're getting paid more than a fair price to sell premium here.
  • Earnings aren't until April so shouldn't be any upside surprises for March expiration. Stocks don't crash to the upside, a takeover rumor is my worst known fear here.
But let's be honest here, literally anything can happen and this is a trade that initially carries unlimited risk. The credit from a spread sale just wasn't attractive to me so I went with naked calls instead. If we take a run at $25 in a short quick manner then I would expect IV to increase even further, so I could roll out to another month and higher strike if I'm worried. If we continue to fail at resistance and pull back I will possibly either take the trade down early for a small profit in exchange for zero future risk, or limit and define my risk by purchasing the 26 strike calls and rolling in to a 25/26 call spread. I will also consider selling 19 strike puts again on a pullback which would mean I roll in to a 19/25 short strangle. If anyone has any questions or comments feel free to contact me.

2/22/11 Trade entry on put sale. Filled at 20.81 for .28

Updated Chart after selling puts. Break-even points are now essentially at 52-week Hi/Low levels. There are three possible resistance lines above current price, and three possible support lines below.


  1. Hi Jason,
    I like the trade idea and thesis. Just Curious do you compile your own OPEX data, or is there a specific place within thinkorswim where the information is presented.

  2. I just created an Excel sheet myself using the data from the 1-year daily chart. It took about ten minutes to create. I had eyeballed the chart and it looked like the distance from current price to my naked call was pretty large on a relative basis, but I wanted to quantify it to get a better feel. Thanks for writing.

  3. Very sound trade logic...sounds like a good trade.