Options trades: Naked puts on C, JPM, LOW, COP, AMGN, STD, CSX, HOGS, TEVA, MDT & more

I’ve made many new options trades recently (see below) as the market has continued to drop and as volatility has continued to rise. With the market looking like it could go lower, risk reduction was my top priority and most of the trades reflect that.

Typically this has meant buying back deep in-the-money options (intrinsic value) and then selling longer-dated expensive out-of-the-money options (time premium) to offset the cost. In fact, I had no expiring options positions going into this past week’s options expiration as they had all been either closed out or adjusted.

Not all the trades were risk adjustments, however. With the VIX in the 40s I’m also not passing up the opportunity to initiate new naked put option positions (see below). And I have additional standing limit orders to sell put options that will likely be triggered on further market weakness.

New positions:
CSX (CSX) – On 8/10/11 I sold some February 17.50-strike put options against CSX for $1.10. This is one of my watchlist stocks that has fallen into or within reach of (by selling naked put options) my “buy” range.

Entergy (ETR) – On 8/10/11 I sold a January 57.50-strike put option against ETR for $3.40. This electric utility faces some regulatory issues over one or more of its nuclear plants, as well as uncertainty over general economic conditions, but a stock price in the $50s will probably be reflecting most of this, and the dividend should be safe.

Illinois Tool Works (ITW) – On 8/8/11 I sold some January 37.50-strike put options against ITW for $2.10. This is one of my core watchlist stocks that has fallen into or within reach of (by selling naked put options) my “buy” range.

Lockheed Martin (LMT) – On 8/10/11 I sold a January 60-strike put option against LMT for $3.20. This is one of my core watchlist stocks that has fallen into or within reach of (by selling naked put options) my “buy” range.

Closed/Adjusted positions:
Amgen (AMGN) – On 8/10/11, in a risk reduction move, I bought back the January 52.20-strike put option I sold against AMGN on 4/21/11 (for about a $3.00 loss on the trade) and then sold a January 2013 50-strike LEAPS put option against it for $7.97, for an overall net credit of about $4.70.

Banco Santander (STD) – On 8/11/11, I bought back the December 9-strike put options I sold against STD on 6/24/11 (for about a $1.35 loss on the trade) and then sold an equal number of March 8-strike put options against it for $1.95, for a net overall credit of about $0.60. This is a relatively small position and I made this move mainly to take advantage of high current option premiums. I probably won’t adjust it again, as I’m currently comfortable owning STD at a net cost basis of under $7.50 per share if it’s ultimately put to me.

Cameco (CCJ) – On 8/9/11, in a risk reduction move, I bought back the December 24-strike put options I sold against CCJ on 5/6/11 (for about a $3.00 loss on the trade) and then sold an equal number of March 21-strike put options against it for $3.45, for an overall net credit of about $0.30.

China Mobile (CHL) – On 8/18/11, in a risk reduction move, I bought back the September 45-strike put options I sold against CHL on 2/22/11, for a net profit of about $1.60 or a six-month net return of about 3.7%.*

Citigroup (C) – On 8/10/11, in a further risk reduction move on this stock, I bought back the March 34-strike put options I sold against C on 8/5/11 (for about a $2.80 loss on the trade) and then sold an equal number of January 2013 30-strike LEAPS put options against it for $8.77, for an overall net breakeven.

Computer Sciences (CSC) – On 8/9/11, in a risk reduction move, I bought back the December 35-strike put option I sold against CSC on 5/26/11 (for about a $3.90 loss on the trade) and then sold a January 2013 30-strike LEAPS put option against it for $5.55, for an overall net credit of about $1.60. A current, conservatively calculated, fair value estimate for CSC is $45+.

ConocoPhillips (COP) – On 8/8/11, in a risk reduction move, I bought back the November 70-strike put option I sold against COP on 5/3/11 (for about a $5.90 loss on the trade) and then sold a February 65-strike put option against it for $8.38, for an overall net credit of about $2.45.

Exelon (EXC) – On 8/9/11, in a risk reduction move, I bought back the October 39-strike put options I sold against EXC on 3/15/11 and on 4/8/11, for a small net profit of about $0.20 or a five-month net return of 0.5%.*

General Dynamics (GD) – On 8/5/11, in a risk reduction move, I bought back the November 70-strike put option I sold against GD on 4/4/11 (for about a $2.50 loss on the trade) and then sold a February 65-strike put option against it for $6.05, for an overall net credit of about $3.50. Then, on 8/9/11 in a further risk reduction move, I bought back the February 65-strike put option (for a loss of about $3.65 on the trade) and sold a January 2013 60-strike LEAPS put option against GD for $10.60, for a net overall credit of about $4.40. A current, conservatively calculated, fair value estimate for GD is somewhere in the $60s.

Hudson City Bancorp (HCBK) – On 8/8/11, in a risk reduction move, I bought back the October 10-strike put options I sold against HCBK on 3/2/11 (for about a $2.50 loss on the trade) and then sold an equal number of January 9-strike put options against it for $2.38, for an overall net debit of about $0.15. When rolling out this position I would have preferred to have been able to go further out in terms of time, but currently no options beyond a January 2012 expiration date are available. So this move was more of an interim trade to buy some time – and reduce the chances of an option assignment – until later-dated options become available.

Itron (ITRI) – On 8/8/11, in a further risk reduction move in this position, I bought back the February 45-strike put option I sold against ITRI on 7/28/11 (for about a $5.50 loss on the trade) and then sold a January 2013 40-strike LEAPS put option against it for $8.40, for an overall net debit of about $0.70. A current, conservatively calculated, fair value estimate for ITRI is somewhere in the $40s.

JPMorgan Chase (JPM) – On 8/8/11, in a risk reduction move, I bought back the December 40-strike put options I sold against JPM on 5/13/11 (for about a $2.85 loss on the trade) and then sold an equal number of March 35-strike put options against it for $3.55, for an overall net credit of about $0.70.

Lowe’s Companies (LOW) – On 8/9/11, in a risk reduction move, I bought back the January 21-strike put options I sold against LOW on 6/13/11 (for about a $1.95 loss on the trade) and then sold an equal number of January 2013 17.50-strike LEAPS put options against it for $2.91, for an overall net credit of about $0.95.

Medtronic (MDT) – On 8/8/11, in a risk reduction move, I bought back the August 34-strike put options I sold against MDT on 3/15/11 (for about a $1.00 loss on the trade) and then sold an equal number of January 30-strike put options against it for $2.41, for an overall net credit of about $1.40. I debated whether to adjust this position or not, as MDT is trading at a price at which I’m almost tempted to just buy it outright. However, I couldn’t resist buying back my original put options at virtually intrinsic value and paying for them by selling the expensive time premium of the out-of-the-money January put options.

Merck (MRK) – On 8/10/11, in a risk reduction move, I bought back the January 33-strike put options I sold against MRK on 7/29/11 (for about a $2.50 loss on the trade) and then sold an equal number of January 2013 30-strike LEAPS put options against it for $4.95, for an overall net credit of about $2.40.

MetLife (MET) – On 8/10/11, in a risk reduction move, I bought back the January 35-strike put options I sold against MET on 7/18/11 (for about a $4.35 loss on the trade) and then sold an equal number of January 2013 30-strike LEAPS put options against it for $5.98, for an overall net credit of about $1.60.

Navios Maritime Partners (NMM) – On 8/10/11, in a risk reduction move, I bought back the December 15-strike put options I sold against NMM on 7/25/11 (for about a $1.70 loss on the trade) and then sold an equal number of March 12.50-strike put options against it for $1.60, for an overall net debit of about $0.15.

Northrop Grumman (NOC) – On 8/11/11, in a risk reduction move, I bought back the January 60-strike put options I sold against NOC on 7/28/11 (for about a $7.00 loss on the trade) and then sold an equal number of January 2013 55-strike LEAPS put options against it for $10.80, for an overall net credit of about $3.65. A current, conservatively calculated, fair value estimate for NOC is somewhere in the $60s.

Transocean (RIG) – On 8/8/11, in a risk reduction move, I bought back the November 55-strike put option I sold against RIG on 5/11/11 (for about a $4.40 loss on the trade) and then sold a January 50-strike put option against it for $5.65, for an overall net credit of about $1.25.

Ship Finance International (SFL) – On 8/8/11, in a risk reduction move, I bought back the November 17.50-strike put options I sold against SFL on 5/25/11 (for about a $5.25 loss on the trade) and then sold an equal number of February 15-strike put options against it for $4.55, for an overall net debit of about $0.75.

Teva Pharmaceutical Industries (TEVA) – On 8/9/11, in a risk reduction move, I bought back the January 45-strike put option I sold against TEVA on 4/21/11 (for about a $3.70 loss on the trade) and then sold a January 40-strike put option against it for $6.76, for an overall net credit of about $3.08. A current, conservatively calculated, fair value estimate for TEVA is somewhere in the $50s.

Zhongpin Inc. (HOGS) – On 8/8/11, in a risk reduction move, I bought back the September 12.50-strike put options I sold against HOGS on 4/12/11 (for about a $3.60 loss on the trade) and then sold an equal number of March 10-strike put options against it for $3.90, for an overall net credit of about $0.30.

* As always, the return on sales of cash secured or naked put options was conservatively calculated based on the option premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for the possible option assignment (i.e., my being put the shares of the underlying stock).

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