Wednesday, October 29, 2014

Today's trade: Auto-parts

In an attempt to possibly help either one of the 2 readers I have mostly abandon, I'm going to start posting trading summaries on this blog and the reasons why I'm entering the trade.  Also, if you're not following my blog, (which I don't blame you) I'll re-hash a little bit of what and how I'm doing what I do.

So without much further adieu, I entered a Bull Put spread on Magna International.  They sell auto parts to all the major players on earth.  They are a Canadian company (Spoiler alert: I'm Canadian), and have been beaten black and blue this past month because of the "correction" which was more of a pot-hole than a genuine market correction.

I currently already had a position on Magna which I opened in late September (live-tweeted @short_put) but since options all work on expiry dates and strike prices, this is ANOTHER position on the same company.

So today at about 10:24 this morning, I initiated a Bull Put Spread on Magna which expires in MAY of 2015.

The "short" strike is $100 and the "long" strike is $98.  So there's the spread.  This means the worst case for me is a $200 loss (minus the premium I collect).

So I sold the $100s and got a credit of $4.75 (per share) each and purchased the $98s which cost me $4.20 (per share) each.

5 contracts represent 500 shares (100 shares per contract) and my account was credited with $260 Canadian dollars.  My commissions are $1.50 per contract on the Canadian options exchange.  (5 100s and 5 98s is 10 contracts * $1.50 = $15 commission)

So my MAXIMUM loss is $1000-$260 = $740.  And of course my maximum gain is $260.

Now to you risk/reward folks, this may not seem all that great, but seriously, on $740 of risked money, my maximum profitability is $260 which is 35%.  As this position will expire in May, that's 7 months from now.  So a 35% return in 7 months?  That's nothing to sneeze at.

Now what do I need for this to work?

Magna can go up.  (Which I expect it to do)  But if it doesn't, I'll still make this money if Magna goes sideways (Stays at it's current market price of $109 or so).  But if it doesn't, that's ok.  If magna goes down nearly 10% I'm still good for the full profit. 

Now if Magna falls more than 10% then I might have to do stuff. (A roll) But there's PLENTY of time between now and April for Magna to recover if the markets are rocky.
Stay hungry my friends!

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