Portfolio Management
The most effective way to widen your option portfolio is to choose one option from 6 to eight different industry groups. Diversification is significant in developing a profitable portfolio. If your portfolio is concentrated in just 1 or 2 industry groups a market correction in an industry group could devastate you portfolio profits and cause big losses. If you are distributed across 6 to 8 different industry groups, any losses sustained with a correction in one industry group would likely be recovered by profits in the other industry groups. In addition to Apple, the 6 stocks listed below qualify as MVP Option System stocks. These are the stocks I am currently trading in my MVP option portfolio. I use the option cycle price info below to choose the option time length (option expiration). These six stocks have an analogous accuracy rate to Apple for the 1 month, 3 month, 6 month and Jumps option cycles. I thus typically trade the 3 and 6 month options and now and then LEAPS options.
Accelerating Option Cycle Accuracy with Option Spreads
As well as option purchases I use the option cycle info to help select strike prices for option spreads. Trading in-the-money option spreads can increase the precision of option cycle trades as in-the-money spread trades can be profit-making whether or not the underlying stock declines in price. Let's take a look at a example of a trade I took to illustrate the profit/loss potential for an in-the-money spread trade. Intuitive Surgical Incorporated symbol ISRG qualifies as a MVP Option Plan stock and my brokerage confirmations that follow show that on March 25th I acquired 10 of the ISRG April 250-Strike calls for 78.96 points and sold 10 of the ISRG April 280-Strike calls for 53.76 points. The April calls expire in under one month.
The cost of this spread was 25.20 points or $2,520 and is worked out by taking away the premium received of 53.76 points for the sale of the 280″Strike call from the premium price of 78.96 to purchase the 250-Strike calls.
Price of 78.96 Minus Sales Cost of 53.76 = 25.20 Cost
ISRG stock was trading at 330.22 so both the 250-Strike and 280-Strike calls were in-the-money. The spread order debit cost of 25.20 I entered was halfway between the bid and ask price for the 250-Strike option purchased and the 280-Strike sold.
Option Spread Order: “Buy to open 10 of the ISRG April 250-Strike calls and sell to open 10 of the ISRG April 280-Strike calls at a net debit of 25.20.”
I was filled on this order and the Spread Analysis table on the following page exhibits the reward/risk profile for this trade. The 1st row of the table is labeled ‘% Change ‘ and thinks assorted % changes in ISRG stock at option expiration from a 15% increase in price to a -15% decline in cost. The second row is labeled ‘Stock Price ‘ and is the ISRG stock price that compares with the percentage change on the row above. The seventh row labeled ‘Spread Profit ‘ exhibits the overall greenback net profit/loss for the spread that corresponds with the share price in Row 2. And the last row exhibits the % return for the trade assuming the 25.20 cost for the spread.
The Spread Research shows that this ISRG in-the-money spread has a 19% monthly potential profit if ISRG stock increases in price, remains flat or decreases. I suspect the reward/risk profile for this in-the-money spread trade strikes a decent balance between an excellent monthly return potential and significant downside protection if ISRG stock declines in cost. Notice the column to the right in the Spread Research table which is circled. This column exhibits the profit/loss linked with a -15% decline in ISRG stock at option expiration. This spread trade produces a 19% profit if ISRG stock price declines 15% at option expiration.
Let’s take a look at the ISRG option expiration price info table below for 2007. This table lists the ISRG share price on option expiration day every month and the percentage gain/loss from the month before.
Increased Accuracy
The biggest monthly loss for ISRG stock in 2007 was a -10.1% loss on Jan 19th option expiration. Implementing a monthly ISRG. Spread trade in 2007 similar to the example trade just presented would result in all winning trades in 2007 as the monthly data doesn't show any ISRG stock losses bigger than 15%. Implementing in-the-money option spreads allows us to increase the accuracy of monthly option cycle trading compared with an option purchase system as in-the-money spread trades can be profit-making whether or not the underlying stock declines in cost. In-the-money 3 month and 6 month option spreads can also be implemented to increase the precision of the 3 month and 6 month option cycle trading.
ISRG In-the-Money Option Spread Research
Strike Price Selection
After deciding the time length for an option purchase the subsequent important decision is to choose a strike price. Selecting a strike price can be tricky as there are such a lot of strike prices available. For example, currently the Apple July options have 55 different strike price choices. You can recall from Chapter 4 of the MVP Systems book that the value of a choice is composed of time value and natural value. At option expiration options lose all time value and are composed of only intrinsic price. An ‘in-the-money ‘ call option comprises both time worth and natural value. The deeper an option is ‘in-the-money ‘ the more intrinsic price it will have. ‘Out-of-the-money ‘ and ‘at-the-money ‘ options are composed of only time value. The time worth bit of a choice is a decaying asset. You therefore want to maximise intrinsic value and decrease time value when you buy an option.
Out-of-the-Money Call Purchase
Let’s inspect an example of an ‘out-of-the-money ‘ call option purchase. Today is June 23rd. The option quote below shows that the Apple July 185-Strike call options are trading at 3.15 points. Apple stock is trading at 173.25 so purchasing the 185-Strike call would be considered an ‘out-of-the-money ‘ call purchase as the strike price is above the current price of the stock. The 3.15 point premium would consist ever value and no natural value. The breakeven price for this call option purchase would be a share price of 188.15 at option expiration in about one month. Apple share price would need to increase 14.9 points or 8.6% to break even on this trade.
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