Over the past few months I have written four different ideas on option plays that have meant to be educational for option traders. Since three of the four articles were using a January strike price, I thought it would be beneficial to update the trades to see how they are performing.
If you have never traded options, a good way to start is by "paper trading". Paper trading is simply writing down an option idea and following it through until expiration. This will help prepare you for your first trade, or in other cases, help improve your trading skills. As an option trader, I still sometimes paper trade to see how a particular option trade may have played out because I didn't actually invest money.
The first option play I wrote about was Harrah's Entertainment (HET, $82.52) and the January 75 2007 (HETAO, $7.60) calls. This trade worked out pretty much like I had hoped as the calls have doubled. More importantly we were able to use a stop order to protect our profits as well as having the opportunity to wait for a higher buyout offer. The stop was never hit and Harrah's received two higher buyout offers with a final price tag of $90.
You may be wondering why the stock isn't trading at $90 and the options at $15? Well, the $90-per-share deal is still subject to shareholder approval and a regulatory process that could take a year or longer. Since the options expire in 11 days, and Harrah's has accepted the offer of $90, there is no need to keep this trade open since our original price target has been achieved.
However, it's interesting to note that although this is not a "pure" arbitrage situation, Harrah's certainly can be considered a risk arbitrage which has become one of the most popular forms of arbitrage. So, where's the risk? Like I mentioned earlier, the deal is still subject to shareholder approval and could fall through.
The next trading idea I wrote about was Apple Computer (AAPL, $85.47) and the January 95 calls (QAAAS, $0.80). This trade has not worked as well due to some negativity surrounding the company and its options-backdating issue involving its CEO. The stock rebounded nicely after the SEC's internal investigation found "no misconduct by current management", but the damage has been done as the January 95 calls have lost over half their value.
I had mentioned how risky this trade was from the outset and normally I would have already been stopped out as I always use a 50% stop from my original purchase price. However, there may be hope in this trade as Macworld began today and the company announces earnings on the 17th.
WalMart ($47) is up 2% since I wrote about NOT buying out-of-the-money (OTM) calls because they were cheap. The January 50 calls (WMTAJ) were going for 10 cents are now trading at three cents. The bid is likely zero making this a 100% loss.
However, since WalMart is such a great company it is hard to ignore the potential safe option plays on the stock. For instance, just because you realized that the January 50 call may have been a bad trade by BUYING an OTM call, the flip side is that maybe it is worth looking into SELLING a call...that's another article.
And finally, it's nice to see a straddle shape up like you had planned. Before the New Year, I took a long look at a straddle idea on Altria (MO, $87.98). The stock hit a 52-week high today and is up $3 since. Overall, the trade is up 10% in about two weeks as the June 2007 85 calls (MOFQ, $6.30) have gained 20%. The June 2007 85 puts (MORQ) closed at $2.80.
The stock appears to be gaining momentum as investors are betting Altria will likely spin off its Kraft Foods division in the next six to 12 months. Another driving force seems to be the belief that Altria will not face a serious lawsuit in 2007 as the company was granted another "temporary stay" last month in a lawsuit involving "light" cigarettes.
Given the strength that Altria is showing, it might time to start thinking of placing a stop on the puts or outright selling them.
