I went to exchange my Ipod to the Apple Store of my city on Sunday. There were people in line waiting for the store to open at the time I got to the store. The reason: the new Iphone is selling like hotcakes. I returned to the store at 1:00 pm and it was still packed. In addition, there was a line still for people interested in purchasing Apple products. I guess that Apple is not feeling the effects of the recession.

These are the type of clues you need to look for if you are interested in entering a position in a stock. Is the product selling? Do they have a new product or does the product improves an existing one? For example, the new Iphone has a copy-paste feature not found on previous versions. In addition, it can now record video which basically puts it on par with the rest of the smart phones.

Peter Lynch (former Fidelity Magellan fund manager and author of "One up in Wall Street") once said: "Buy what you know". I am a technical trader but Apple at these levels looks enticing. However, the summer months are usually negative for the markets. The mantra is: Sell in May and go Away.

I can see that Apple is trading around the 140's. It could attack the prior highs around 180. I also believe that the stock market is deteriorating right now and it might pull back. You need to remember, the stock market does not care about what we see or what we think.

I have the following questions for Iphone users: Is the new Iphone better than previous versions? Should I ditch my Blackberry?

        

Description

A Vertical Spread (A.K.A. - Bull Spread or Bear Spread depending on the options selected) is built buying a Call option (or a Put) and simultaneously writing another Call option (Put) with the same expiration date but at a different strike price. The ratio of the options bought and sold is the same (i.e. Buy one call and sell one call or buy one put and sell one put and so on).


Depending on which option is purchased and which is written, a vertical spread can either have a bullish or bearish sentiment.

Bullish Spreads:

* Purchase a Call option and sell a Call at a higher strike. (Debit Spread) AKA Bull Call Spread
* Purchase a Put option at a lower strike and sell a Put at a higher strike price (Credit Spread) AKA Bull Put Spread

Bearish Spreads:

* Purchase a Put strike and sell a Put at a lower strike. (Debit Spread) AKA Bear Put Spread
* Purchase a Call at a higher strike and sell a Call at a lower strike price (Credit Spread) AKA Bear Call Spread


When to use:

Bull Spread: Used by an investor who may like to buy a call and at the same time lower the price paid for the call. The strategist sentiment is bullish (stock price going up). In addition, a credit spread with bullish sentiment (Bull Put Spread) can help the strategist take advantage of time decay of the short option (option sold).

Bear Spread: Used by an investor who may like to buy a put and at the same time lower the price paid for the put. The strategist sentiment is bearish (stock price going down). In addition, a credit spread with a bearish sentiment (Bear Call Spread) can help the strategist take advantage of time decay of the short option (option sold).

Risk/Reward Characteristics

The second option in a vertical spread is generally added because the investor wants to either reduce the cost of a purchased option or cap the loss potential of a written option. The investor is in effect "hedging" his or her opinion.

Break-even Point: Vertical Spread (Call): Lower Strike Price + Spread Price; Vertical Spread (Put): Higher Strike Price - Spread Price

Volatility: The impact of a change in volatility on Vertical Spreads depends on whether one or both of the options are in-the-money and the amount of time until expiration. It is recommended that the option sold has higher volatility than the option bought to take advantage of time decay and volatility reversion to the mean. However, in vertical spreads, volatility of the short and long option is similar and volatility skew is minimal.

Assignment Risk: As is the case with all written options, the investor must continuously monitor the spread for possible assignment of in-the-money options prior to their expiration.

        

I will like to present you a hamburger of a stock as my gift for Father's Day. McDonald's will be pissed at me but the stock is BKC (Burger King). The King Diamond system gave me this pick and I kind of like it even though the options premiums are not fat as I would like.

However, an examination of the stock chart gives me the following clues that this might be a good trade with a primary target of 20 dollars. Why 20 dollars? According to Tim O'Brien's Timing the Trade book, stocks tend to gravitate to open gaps. There is an open gap that happened on April 13 to 14th from 19.78 to 22.61 that needs to be tested.

First Target: 19.78 - Second Target: 22.61 - Third Target: 23 (Top of the consolidation).

The trade setup is as follows: Buy the stock in multiples of a 100 shares and sell the 17.50 July call at 0.40 cents or better. Place a stop at 15.25. If you even want to be more aggressive with your stop, you can place it at 16.00 which is the bottom of the current trading range.

Happy Father's Day.

        

Now you can follow me on Twitter at twitter.com/BadStockPicker/

I will follow you on Twitter if you post your username on the comments section and I will not charge you a dime. If you like my blog do not forget to dig, stumble, or technorati my blog. Thanks in advance.

        

The first installment of the series is here.

BK is making us some money and now the short option is in the money. We have two options: let it expire and get assigned or roll the short call. I chose to roll the June 29 call to a July 31 call and get a credit of 40 cents at the same time. I like that!

No adjustments necessary for RHT and FE as their short calls are for July.

        

CPLA blasted through the 55 resistance point and will face a lot of overhead resistance at 60. Therefore we will adjust the short June 55 call by rolling it to a July 60 call. We will incur a debit of 1.4 dollars. That is ok as we are making money due to stock appreciation and the calls we sold in previous months. Move the trailing stop to 52.09 dollars. We are winning for once hurray!

Previous posts of this case are here and here.

In addition, set the stops for todays feature trades for FE at 36.00 and BK at 25.50.

        

Buy FE at the open and sell the July 40 call.
Buy RHT at the open and sell the 20 call against it. Set your stop at 17.

In addition, I entered a trade in BK a while back for my paper account. The trade can still be had at the price I paid in the paper account. Do not pay more than 28.38. With BK you have the option of selling the 29 or 30 July calls since they have good premiums (above 3%). Set your stop around 25.

I also have a real trade that is July 09-January 10 calendar spread @ 12.5 for VNDA that is crapping out since the price of the stock is getting deep in the money for the options (VNDA is at 11.02). Deep in the money calendars are very hard to adjust, but not impossible. Out of the money calendars can be converted to calendarized credit spreads easier with the downside of adding additional risk to the position. I am hoping the support at these levels hold until July where I can get out of the trade hopefully with a profit or adjust the trade accordingly. I am busting my neurons thinking of creative ways to adjust the position for a profit it needs be.

It is my opinion that we are heading for a little pullback. I am not sounding the alarms yet. Be careful and trade hedged.

I will be opening a Twitter account, would you be my friend?

        

I discussed a two month calendar spread on Citibank that consisted on buying the September 3 puts and selling the May 3 puts for a total price of 0.42 cents debit (42 dollars). I closed the position yesterday as the volatility of the long option collapsed. The short May option expired out of the money as Citibank closed above 3 at expiration. I made about 25% return on the trade including commissions in about two months (0.61-0.42-commissions). I could have made more if Citibank would had gone down yesterday instead of up. A winning trade is food from heaven and that is always good.

The initial post can be found here.

        

In the initial installment of this series, I recommended to buy CPLA around 51 and sell the May 55 call against it. CPLA moved around 49 to 51 the previous month so that the May 55 call expired worthless like yours truly. That means that I collected the premium of 1.35 points that I sold. I adjusted the position yesterday to sell the June 55 call at a premium of 2.05 or about 4% premium (I approve it anything above 3%). In addition, CPLA is around 53.38 so the trade is a winning trade so far. The stop is set around 47 as we moved it from 44. We will discuss this position in the future. So far so good.

        

Yesterday the GM trade was closed at a loss after hitting its stop at 1.44. It seems that this sucker is going kaput. No pain, no gain.