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)
Sell Short the Morgan Stanley (MS) September $12-$14 put spread at $0.18 or best
expiration date: 9-21-2012
Portfolio weighting: 5%
($5,000/100/$0.18) = 60 Contracts
There is a risk that I am dead wrong in my expectation of a market selloff in September. Therefore, I want to protect my exiting position in the (MS) October $13-$15 put spread from a continued sideways, or move up, in the market.
I intend to do this by converting my existing (MS) October $13-$15 put spread into a 1:1:1:1 September/October $15-$14-$13-$12 put ratio. I will do this by selling short the Morgan Stanley (MS) September $14-$12 put spread at $0.18 or best, and keeping the existing October $13-$15 put spread. I know this sounds complicated. But it is the best way to cut your cost of entry to your (MS) $13-$15 put spread in a margin efficient way, while still participating on the downside.
Please also note that I am shorting September (MS) put spread against my long October (MS) put spread. This is known as a calendar spread, or a cylinder, and should reduce your margin requirement. This means that I will have limited downside participation until the September 21 expiration in 15 trading days, and unlimited participation after that.
If (MS) stock stays above $14 by the September 21 expiration, this should add (60 X .18 X 100) = $1,080, or 1.08% to your performance for the notional $100,000 model portfolio.
Here are the trades that you should execute:
Sell short the September, 2012 (MS) $14 puts at??$0.24
Buy the September, 2012 (MS) $12 puts at????.$0.06
Net Premium Proceeds:????.???????…$0.18