Cody Kiss & Tell: Using Common vs. Options, VIX Alternatives and Detailed Options Strategies for Beginners

Here is the transcript to this week’s Live Q&A chat. Join me next Wednesday at 2pm EST at http://TradingWithCody.com/chat or send me an email with your question at support@tradingwithcody.com.

Sorry I’m late, hit me with anything you got.

Q. Cody, You trade a lot in options and it would appear make a “bank load” of $. I’m not comfortable enough with that yet and only deal in common stock. So, my question is when you trim, sell and buy calls and puts in a stock can this also be interpreted as a time for a buy or sell of common in that same stock? As an example you are long FB but are also trading options in FB and recently trimmed on your call I’m assuming because of the recent run up in FB. So, your thinking may be because of the run up an expected pull back will happen. So, would you use the same logic in common FB stock?

A. Yes, that is exactly what I’ve been trying to tell subscribers who don’t want to trade options for a long time — buy the common in tranches and sell the common in tranches instead of the options when you see me do those trades. I definitely think it’s better to NOT trade options if you’re not comfortable doing so and trading the common stock around the ups and downs as you see me doing in both the common and options is ideal. Thank you!

Q. In lieu of trading options you have recommended using common shares. There is no common VIX so what do I do?

A. Hmm, good question. You could use this VIX ETN for short-term VIX trades. Or just trim some of your longs and raise cash when you see me buy VIX. Mainly right now the VIX calls are hedges to help lock in our portfolio’s gains.

Q. Hi Cody, I know almost nothing about VIX other than I believe it to be a measure of volatility. Please provide a brief primer on the basics of VIX. What are you trading? Where is it traded and in what form? What do the amounts mean? What are you looking for as a goal for this trade both in terms of the level you expect to reach and the timing of the trade?

A. Great questions about the VIX. Let me tackle that in a complete article for tomorrow.

Thanks! works for me.

Q. My brokerage does not show any options for VIX. Should I be looking for an ETF like VIX or change Brokers?

A. Check for VXX options instead of VIX options. I wouldn’t concern myself too much with trying to emulate my VIX trades as they’re not exactly huge anyway and they’re not worth changing brokers over. In fact, hearing all this feedback from you guys, I’ll try to taylor my commentary around alternative ideas to any VIX trades I do in the future.

Q. Thanks Cody. A more technical question: If I’m holding call options on company XYZ expire in Dec, and it’s acquired by company ABC in an all cash deal closing in Sept. What would happen to my calls if I don’t do anything?

A. I have no idea! I would assume they’d convert over to some sort of calls in the ABC name, but I’ve always just taken the gains and sold the calls when the acquisition news hits one of my longs.

Q. I appreciate the concerns and consequences of Black Swan events. My question is Why Now? Is the late summer / early fall historically a bad time? Why Sept.? Are you anticipating a large pullback or just C.Y.A. ?

A. Look at the chart of COMEX registered gold available for delivery. That thing has crashed to historically low levels and meanwhile trading in the GLD and SLV are hitting wildly volatile levels. A spike in the price could force the dealers to scramble to find enough gold to match their GLD buying certificates and at the same time all those who demanded physical gold delivery on their contracts will also have to be respected. Finally, look at the stock chart in that article — it’s insane in its steady move higher accelerating into the straight up action of this summer.

Thanks!

Q. Just to confirm: if there is (continues) a spike in the price of gold (per your scenario above), since GDX is a basket of gold-mining companies, not a paper promise -to-deliver investment, it (GDX) would continue to be a great place to be, right? Second best to only actual gold ownership?

A. I wouldn’t say “Second best to only actual gold ownership” but I do think GDX would go to $50 or more if gold heads back to $1800 in the next six months. None of which is “likely” but all of which is “possible”.

Thanks!

Q. Would you say it’s a good time to add more GDX or should I wait for a dip?

A. Tough one. I’d go with my usual “use a tranche buy approach” answer. Do 1/3 or 1/2 as much as you want to add to your GDX here and then do the rest on a pullback.

‘k. Think I’ll wait for a dip for tranche #1.

Q. If you were doing the Aug CSCO calls, what would you buy?

A. Probably the Aug $24.50s or $25s, looking to pay no more than 20-30 cents over the stock price. That is, if the stock is trading at $26.30, I’d look to buy the $24.50s for $2.00 or the $25s for $1.60.

Q. Thanks Cody. What do you base that 20-30 cents on? A ratio for all calls, just this one…would love to understand the logic behind the targeting.

A. Great question. I base the 20-30 cent premium on the idea that your August options are just about to expire, so you’re basically looking at either a homerun or a total loss on the trade over the next day or few days at most. By paying just about 1% (20-30 cents on a $26 stock) over the price you’d pay for the common stock, you’re setting yourself up to maximize any upside gains that would come with the stock popping just 1% from where you bought it at. And by using the $24.50s and the $25s, you’re essentially guaranteeing yourself a stop loss at those levels. That is, you could buy 1000 shares of CSCO for $26,300 right now and if the stock pops say, 10% tomorrow, you’d make $2.63 cents per share for a $2630 gain. If the stock dropped ten 10% tomorrow, you’d lose $2630. On the other hand if you bought 10 of the CSCO $25 Aug call options for $1.60, and the stock pops 10% tomorrow, you’d sell them for about up to $4 each, or about $2400 in profits. Whereas if the stock drops 10% tomorrow, you’d be stopped out at the $1600 you spent on those CSCO $25 Aug call options. So with the options, if you paid just a 1% premium for the options over the common stock price, you’re cutting into your gains by about $200 or so. But you’re also quantifying your total potential loss at $1600 instead of dollar for dollar after it drops past $25. Did all this make sense?

Q. Cody: I have been long on Apple for a while would like to ask you if you believe that the stock could hit a new record high by October or November 2013? Also, can you please provide your comments on QUAN? Even though it’s a penny stock I have been analyzing it and believe it could pop up pretty soon, what do you think?

A. I don’t think it’s very likely that AAPL is going to reclaim its $700 all-time high in the next 90 days, which is what you’re asking there. I do think AAPL’s likely to continue its upward momentum and could get to $550 or even $600 by the end of the year. But I’d be shocked to see it get to $700 again by November. Read this about QUAN. It’s a classic example of a tiny cap penny stock that I’d avoid at all costs. :-)

Q. Cody: New subscriber with Trading with Cody, would like to follow your advice for a medium trade portfolio say from 08/13 to 11/13, any advice? As I was telling you I am a long Apple and did not sell on time, but need fresh ideas?

A. Thanks for joining! I don’t think it’s a good timing or market set up to taylor a complete medium trade portfolio for the next 90 days but I do think you can follow my advice to big, safe gains over time. Investing and trading successfully is always a very difficult challenge and I do everything I can to deliver results for you guys in the manner I’m doing.

Q. Hi Cody, a while ago, you mentioned that you might consider AAPL calls again when it goes above $500. Has that thinking changed?

A. No, I do think there’s some nice upside potential in AAPL. I don’t want to buy a bunch of new AAPL calls just now though. It’s gotten to be my second largest position lately on account of its recent rally and the fact its one of the few longs I haven’t trimmed down lately.

Q. Yes, would love to hear thoughts on AAPL and new FB calls.

A. Same thing with the FB calls. I do want to scale back into some higher priced call options for a fraction of the price of the many FB calls I’ve sold for huge profits since the quarterly report popped the stock. But no rush, not right now with this straight up market action.

Q. Cody- any thought on ZNGA being a take over and that’s what the CEO is trying to accomplish vs going it alone?

A. Yes, I do think ZNGA would be a great target for a Microsoft, or an Amazon or even Barnes & Noble. Big cash balance gives a nice cushion for any potential losses the acquirer might have to eventually take.

Q. I think it was a couple of weeks ago that you counseled me not to get into ZNGA again (after the new CEO) until it dipped to $2.50. But having read what you just said about it being an attractive company to be bought out, and with the guy cleaning out at the top (and with the stock not dropping much these days), would you re-consider? Time to tranche in?

A. Yeah, I’d look at 1/3 tranche or so.

Thanks!

Q. Last tentative question on ZNGA: is it too unsure to consider modest investment in $4.00 calls dated far out (January ’14s are at around $.15) — knowing the risks of losing all?

A. Not if you’re willing to lose it all knowingly going into such a trade. It’s a huge risk but would pay huge if the stock would just got to $5.00, which is possible, I suppose, especially in this bubbling stock market. You’re already basically buying an never-ending call option for $3 when you buy the stock. Risky stuff, if you use the options.

Q. Hi Cody. What do you think about shorting MSFT? Surely their Windows monopoly is slowly going away and their Office and server businesses will follow right? And since QE tapering is coming later this year won’t we make easier money on the short side of things from now on?

A. Windows Mobile will be the driver for MSFT from here on out. As goes Windows Mobile market share, so too will go MSFT’s stock for the next six months, IMHO.

Q. And do you think Windows Mobile has any chance to improve market share significantly in the next 6 months? With the new iPhones coming, on top of their existing problems?

A. I think it’s relatively easy to go from 1% to say 3% or 5% marketshare with just a couple decent smartphone rollouts from Nokia or Samsung or whoever.

OK, thanks Cody!

Q. Hey Cody, I pulled the trigger and bought some common FIO before it’s earnings as somewhat of a gamble as you stated. Well, obviously that didn’t go so well and i’m wanting your opinion of where to go next. Do I ride this one out or cut my losses? (thankfully I took your suggestion and got some BRCD before earnings and countered some of my loss)

A. I think FIO looks completely lost here. I’m worried about its very viability in the next five years at this point.

Q. Are you looking to add to GOOG down here after its 8% decline from 925 to 867 and starting to look oversold?

A. No, I’m too leery about the broader markets and have plenty of patience to wait on further GOOG declines or to just hold what I’ve got on further GOOG gains.

Q. With First Solar’s recent dip, is this a good time to add more? If the market is ready to correct, should I wait for FSLR to drop even more?

A. I also think it’s a good time to use the tranche approach to FSLR here under $40. Buy a small piece now and then buy more if it crashes below $35.

Q. If you agree that tapering will be coming later this year, any reason to look for later-than-January puts on IEF to add to my January ones?

A. I think the steady uptrend in rates is set for a while. But I’m just riding my own profits on that trade now and am not looking to change it for now.

Okay folks, I’m hunn-ggrry and I’ve got my brother’s daughters on their way over here soon to play on the ranch. See you later!

 

Scutify is the world's best app for traders and investors
http://Scutify.com
Get the Scutify Android App today -
Sponsored Scuttle
Get the Scutify iPhone App -
Sponsored Scuttle
More in Trading
CORRECTION and tonight’s earnings reports
Close