Sideways Plays

Playing the Expiry: December 9, 2011

Detecting the sideways action of the American markets has given option traders yet another upper hand in the battle for riches. Although I have not posted a PTE blog post in a while (I mean, maybe ten people read this anyways), you surely would have beaten the market by doing absolutely nothing! Let's take a look at some trades I implemented this week which could prove profitable.

The sideways market has kept many shares trading in a tight range with no sign that volume will re-enter to push it one way or another. Shares of Las Vegas Sands [LVS:NYSE] have been caught between $42 and $48 with most of the price-action in between $44 and $47. A short combination or strangle is an appealing trade here. The December 9 call and put options are bidding $0.31 and $0.32 respectively. That nets $0.63 a pair or 1.40 per cent return against market value. The shares, trading at about $45.10 currently, would have to fall 3.84 per cent to $43.37 or rise 3.39 per cent to $46.63 before a loss would occur. Considering we have two days and one hour left, those are pretty good odds.

International Business Machines [IBM:NYSE] also known as IBM, has broken above the $190 resistance level and has continued to slowly push higher. It is currently trading at roughly $193.50. Although some technical traders might see the shares moving higher, I don't believe it will make a massive move in the short-term. The shares should remain above $190 but will most likely stay below $195 by Friday. Consider writing the 195 call and 190 put options. The current bids are $0.83 and $0.48 respectively; that nets $1.31. The break-even range is $188.69 to $196.31 or a fall of 2.49 per cent to a rise of 1.45 per cent. The return would be just 0.68 per cent because IBM is a very low volatile, stable company.

Lastly, this sideways market has also affected commodities too. Silver has shown a lack of volatility over the past three months and especially over the last 30 days, where a trading has constricted to $30 to $32. The iShares Silver Trust [SLV:NYSE] is currently at $31.54; consider writing a strangle with a 31 and 32 strike price. The 31 puts are only $0.20 and the 32 calls now only $0.24. But at $0.44 against the market price, that represents 1.40 per cent return for the next few days. This trade also gives you a break-even range of $30.44 to $32.44, which provides downside protection of 3.49 per cent and upside protection of 2.85 per cent.

I thought it would be more effective to also include the real-life returns to show that returns against market value (as posted above) are well below the real returns. The average options writer should be able to earn 3 per cent a week. This table will now be included in the final section of each PTE post. All trades assume normal margin requirements and options expire worthless by Friday.

Company Name	Premium per pair	Approx. margin per pair	Return Against MV	Real Return
Las Vegas Sands	$63	$1,380	1.40%	4.56%
IBM	$131	$5,850	0.68%	2.24%
iShares Silver	$48	$960	1.40%	5.00%

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are considered and executed transactions for my account and should not be taken as professional advice.