As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert - (MS)
Buy to Cover short in the Morgan Stanley (MS) October $13 puts at $0.10 or best
expiration date: 10-19-2012
Portfolio weighting: 5%
($5,000/100/$0.10) = 60 Contracts
This trade has done its job well, to cut the cost of my (MS) puts by 1.5% in performance terms. That lessens the pain in my (MS) puts, which I will almost certainly have to sell at a loss.
I am coming out here, rather than run these into expiration on October 19. That allows me to free up margin to take advantage of any post Federal Reserve Open Market Committee meeting opportunities that may arise.
This does leave you naked long the remaining (MS) October $15 puts. If the Fed disappoints this week, as I expect, the market will tank. This will give me unlimited downside exposure in (MS) stock. If it doesn’t, then I will have to sell these at a loss and recover what time premium is left in these, which should be substantial.
But netting out the profits from all of my (MS) positions, including the put sales, the $13 put cover, and the $12-$14 short put spread, I still make an overall profit of around 50 basis points on the package. This is the way to manage your risk. Annual performance is often dictated by how you manage your losses, rather than your winners.
Please note that these are just ball park prices and that you should get done what you can. Deep out of the money options can be liquid. If you have excess margin, then you might as well run them into expiration. Here are the trades that you should execute.:
Buy to cover your short 60 September, 2012 (MS) $13 put at……$0.10
Profit = $0.36 - $0.10 = $0.26
(60 X .26 X 100) = $1,560, or 1.56% to your performance for the notional $100,000 model portfolio.
Please note that this is the 21st consecutive profitable closing position for the Trade Alert Service.:)