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.
Buy the Microsoft (MSFT) March, 2012 $28-$30 Call Spread for a net cost of $1.85 or best
expiration date: 3-17-2012
Portfolio weighting: 10% when in the money
($10,000/100/$1.85) = 54 Contracts
To execute this trade you must open two positions simultaneously:
1) Buy The (MSFT) March, 2012 $28 calls at $3.50
2) Sell Short the (MSFT) March, 2012 $30 call at $1.65
The maximum profit occurs with Microsoft stock trades anywhere over $30 on March 17, 2012. Let’s assume that at expiration, (MSFT) is at $30. Then the profit is:
March $28 call cost………………. $3.50
March $30 call premium earned…-$1.65
Initial net cost……………………. $1.85
March $28 call …..………………. . $2.00
March $30 call ……….……………-$0.00
Net Value at expiration…………….$2.00
Net profit: $2.00 – $1.85 = $0.15
($0.15 X 100 X 54) = $810, or 0.81% for a $100,000 model portfolio
First of all, a correction, with an apology. In my headline alert, I stated that if Microsoft stock does fall, I will end up owning the shares at a net cost of $27.85. The correct figure is $30.15. I forgot to delete this little snippet, sans proofreading, before I sent the alert out. This is proof that this letter is written by a human and not a machine.
Call this trade my insanity trade. In the event that the (SPX) continues grinding up to 1,400, I want to pick up some additional protection for my short exposure in the (SDS) ETF and the (BAC) puts. The (MSFT) $28-30 call spread brings in some additional premium income to offset any near term short side losses, which should disappear at a later date.
It expires in three weeks, which is about the longest that I am willing to give this market the benefit of the doubt. It should bring my portfolio a positive return as long as the (SPX) stays between 1,325-1,400 during this time.
I think if we do get a grind up, Microsoft will benefit from more pension fund inflows into this large cap, conservative, dividend paying name. An upside breakout on the charts is an added plus.
I might also add that this trade may be difficult to put on for retail accounts that don’t get professional commission rates. I have to tell you that I am shocked when I hear how much individual investors have to pay in commissions. The commissions may exceed any profit you might earn, or at least not justify the risk. If that is the case, use this as an instructional trade alert, and watch and see how it unfolds over the next few weeks. This is The Diary of a Made Hedge Fund Trader, not The Diary of a Mad Retail Investor.
Time to Add Another Upside Hedge