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Mr. Blonds’ Calendar Spread

Mr. Blonds’ Calendar Spread. Webinar. HPQ. 7/10/09 HPQ trading at 37.20 . Nice consolidating price action. We have strong horizontal support as well as support from a 200 day MA. That shoots right below the lows of the last 4 candlesticks.

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Mr. Blonds’ Calendar Spread

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  1. Mr. Blonds’ Calendar Spread Webinar

  2. HPQ 7/10/09 HPQ trading at 37.20 Nice consolidating price action. We have strong horizontal support as well as support from a 200 day MA. That shoots right below the lows of the last 4 candlesticks. We also have confirmation from our slow stochastics down below. We like this and decide to move forward. We see that the 42.50 strike looks like a nice potential target for our strike prices. 200 MA

  3. Option chain With all the chains closed we see what months are available. Looking at July we quickly add 3 months and we know that we should start looking at October. With no October available we select Nov.09. To start we will sell the Nov. 09 Calls.

  4. Strikes We calculate our strike by looking back 3 months at price , going to the current high and adding the difference to current price. We get about $6.00 so we add $6.00 to current price and we get $43.20. We are going to look for a strike near the 43.20 range.

  5. We select the 42.50 November calls and we see that we can BUY them for $1.20. We also see that the delta is .27*** On slide 2 we set a stop at $35.00 giving us a risk of $2.20 on the chart. To calculate what that equates to in the option premium simply multiply the $2.20 x’s the delta of .27 and you get a .59 cent risk in the option premium. So if we pay 1.20 then we can see that .59 cents is right at 50% of our money that is at risk. If you know that when you put this trade on 50% of your money is at risk based on your stop, then you can allocate accordingly.

  6. Delta • A delta of .27 means when the stock moves $1.00 the options moves by .27 cents. So a $2.20 move is .27 x 2.2 = .59 cents. • This is handy to see what's really at risk. The other immediate risk to consider it theta.

  7. Theta • This had a theta of .04 • This means that everyday the option premium goes down by .04 cents. • That’s .04 cents in time decay – EVERYDAY • So if it went down $2.20 in 3 days you would lose .59 plus .12 cents in time decay for a loss of .71 out of that $1.20 premium. • That’s a 59% loss of your premium.

  8. Why This Crap? • I say all this so you understand that 100% of your premium isn’t at risk. • If you only want to risk $500 in this trade you could actually allocate more to the trade with a stop in place.

  9. What's at risk • If we BUY 10 contracts at 1.20 that’s $1200.00 • If we had a stop set at $35 for $2.20 at risk and our delta is .27 then only $590 is at risk. • $2.20 x .27 = .59 cents • .59 cents x 100 shares (1 contract) = $59 • X’s 10 contracts = $590

  10. Buy long calls • We buy the Nov.09 42.50 CALLS for $1.20 • 10 contracts = $1,200 • We set a stop for $35

  11. 3 days later… 3 days later we look to establish our short calls on strength.

  12. Problem is there’s no 42.50 in the chain for the July’s, + there’s only 2 days left so there is no premium. The Aug-42.50’s are at .30 so we wait.

  13. 4 days later we sell the Aug-09 42.5 calls for .65 = $650

  14. Price blows thru strikes 7 trading days later price blows through our strikes. We now have to buy back the short calls for a loss. However our long calls are kicking butt.

  15. We buy back the short calls for $1.30 or $1300 dollars. We had originally sold them for $650 sold we lost $650 on these calls.

  16. Our long calls are now worth $2.70 or $2,700. Not bad.

  17. Our LONG $1,200 calls are now worth $2,700 = $1,500 • Our SHORT $650 calls are now worth $1,300 = (-$650) • Total profit = $850 • Total investment $1,200 • 70% • We can now sell a higher strike like the Aug-45 for .35 = $350 • We roll the $42.5 November long calls into the November 45 calls • Sell 42.5Nov for $2,700 BUY 45 Nov for $1,700 = $1,000 profit.

  18. So as you can see when we buy back the 42.50 calls for 1.30 = $1,300, we can also sell the 45 strike for .35 = $350

  19. We keep the $350 from the short call Aug 45’s. Our long Nov.45’s are now worth $2.40 = $2,400

  20. Sell our long Nov. 45’s for $2.40 buy the Nov. 47.50’s for $1.40 locking in another $1,000 We need to sell the current month 47.50’ strike

  21. With no 47.5 strike we sell the 47 instead for .35 = $350

  22. On 9/18 our short calls expire and we keep the $350. Our long calls are worth $1.50

  23. ($1200) - Long Nov. 42.5 calls $650 - Sold Aug-09 42.5 ($1300) - BUY Aug09 42.5 $1.30 $2700 - Sell Nov.-42.5 calls $2.70 ($1700) - BUY Nov. 45’s $1.70 $350 - Sell Aug 45’s .35 $2400 - SELL Nov. 45’s for $2.40 ($1400) - BUY Nov. 47.5’s $1.40 $350 - Sell Sept. 47.5’s .35 $1500 - SELL long 47.5’s $1.50

  24. Vertical Spread • In the next slides I sell a call vertical spread to take back a $200 loss. This was diffacult to find because if you follow the directions this doesn’t happen very often. This is an example of what you would do if the trade went against you right after you purchased your further dated long calls… • Keep in mind that this stock is truly down trending so we should have skipped it, but for the purpose of showing you a sacrificed, failure this will work.

  25. HPQ On 6/27/8 we find weakness at support. Nice support as well going back quite a ways. We set a stop for $43 because we are buying long calls right here and if this support area gets violated we want to get out immediately. Based on price action and a look at the option chain we elect to go with the $50 strike price…

  26. We look at the available months knowing we want 3 to 5 months for our long dated option we select the month of November to go long.

  27. We buy 10 contracts of the November calls at $1.50 = $1,500. We see the current month is July and the 50’s are at .05 x .10. We wait for strength to try and see if we can get a nice premium…

  28. 2 days later our support is clearly violated and we have to close our long calls. Additionally to confirm that our support line is void, price actually closed below this support line making it a resistance line. We dump our long calls for a loss…

  29. We sell our long calls for $1.30. We might have tried for $1.35 but for this example lets just sell at the bid. This gets us $1,300. When we bought them remember we paid $1,500 so we have lost $200 dollars. Now were ticked! We decide to sell a vertical call spread to recoupe our loss. So while we are looking for a new trade we sell the 45/47.5 vertical for .47 cents

  30. We sell 10 contracts just like we did the long calls and we collect $475 dollars. This happened on 7/1 just 2 trading days after we entered. So far we entered our long calls for $1,500. Then when support was clearly null and void we sold back our long calls for $1,300 losing $200. Now we sell a vertical call spread for $.475 = $475 dollars.

  31. On 7/14 the Vertical Call Spread we sold expires worthless and we KEEP the $475.

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