Reading Barron’s over the weekend, one of the roundtable members, Meryl Wittmer, liked Kaiser Aluminum. Since there is a Barron’s effect, where the next week stocks mentioned favorably in Barrons rise, I sold some puts on KALU. I had the added benefit of a down day on Monday. The market fell 3% overall but KALU was up.
Sell Puts Instead of Buying Stock
AA starts off the Q4 earnings season. It warned earlier that it was cutting 13% of its workforce and shuttering capacity. Then, after the close Monday, AA announce just how badly they did. Analysts were expecting a loss of 0.10, and AA came in with a loss or $1.59 for the quarter, killing most of its profit for the year. The bad news is out, so today, Today, Tuesday 13 January 2009, I sold 6 Feb 10.
I sold the puts slightly in the money. The historic volatility is 83.3% while the puts have an implied volatility of 83.4% That isn’t what I want. I want the implied to be higher than the historic. One can argue that the historic includes the huge fall in price in Oct and Nov 2008 and is unlikely to be repeated in the next 39 days. But that isn’t how I want to trade.
The put expires in 39 days and then I can repeat. I earned $765.54 in premium. My margin requirement is $2265. Of course, if it is put to me in February, I need to have 600 * 10 / 3 = 2000 to buy it on margin.
Trading Volatility
The way the ancients would do this trade is to sell the put and then sell half the stock. Since the probability to have the stock put to me is ½ , if I am short 300 shares of stock, I am covered. That way, I make the difference between the implied volotaility and the actual volatility over those 39 days.
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