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GGB Closed on Friday June 19th at $10.18.

We started this trade on January 27th

We had an update here, herehere and here.

The call that we sold has been exercised, the call the we held long was used to cover the trade.  We had a gain of $1.10 on an initial capital requirement of $4.20, including all trading costs.  This represents a 5 month gain of 26% ($1.10/$4.20) or almost 63% APR.

This trade was posted January 27, 2009.

Diagonal Spread Example:

Sell GGBBU            Feb 2009    7.5 Call            $0.35

Buy KDMAZ            Jan 2010   2.5 Call             $4.40

 

Net Cost                      $4.05(+Trading Costs)

 

Maximum Loss            $4.05(+Trading Costs)

 

GGB is trading for        $6.54 at the close on Tuesday 01/27/09

———————————————————————————————-

GGB is now trading for $4.85 on Tuesday 03/17/09.

 

 

Sell GGBDA          April 2009     $5 Call          $0.40

 

The KDMAZ (Jan 2010 2.5 Call) is now trading for $2.65.

 

Net Cost                       $3.65(+Trading Costs)

 

Maximum Loss is now   $3.65(+Trading Costs)

 

If this option is exercised we will have a loss of $1.15 (+ Trading Costs) on this Trade Idea, if this option expires we will look at the next trade.  For this trade, we have had the worst scenario for a Diagonal Spread, which is the underlying stock (GBB) has declined dramatically (almost 26%).  If GGB stays below, but near, $5 we should be able to salvage this trade, provided it’s fall does not continue.

The last post talked about buying a PUT.  Also in a previous post I described how the risk/return graph changes when we take an opposite position. 

Lets use the same INTC March $12 Put (symbol NQOM).  If you buy the Put (Long the Put) your risk/reward at expiration looks like this:

$12 March 2009 INTEL Put

$12 March 2009 INTEL Put

And if you sell the Put (Short the Put) your risk/reward at expiration looks like this:
$12 March 2009 Intel Put - Short

$12 March 2009 Intel Put - Short

For this example I have assumed that you can sell the option for the same price that you can buy it.  In reality, if you look at these bid/ask prices in the previous post, you can sell the option for $0.72, a 3 cent difference.  Also, because the spread is 3 cents, it MAY be possible to buy or sell this option for $0.73 or $0.74. 
Notice that the graph is just mirrored about the x-axis.
If INTC closes above $12 at expiration, you will have a gain of $0.75, if INTC closes at $11.25, you will not gain or lose anything.  As GE goes below $11.25, you will start to have a loss, with the maximum loss being unlimited (to INTC going to $0, which would be a loss of $11.25).  And if INTC closes between $11.25 and $12.00 at expiration, you will have some gain.
If you sell the Put, also known as WRITING a Put, you have an OBLIGATION to purchase the underlying stock, in this example INTC, for $12.00 if the holder of the option exercises the option.  It is the buyer of the Option that has a choice, or option. 
I do NOT recommend writing NAKED options, because the maximum loss is unlimited.  Naked means that you do not have another position that limits the downside risk.  Understand how options work and paper trade them before taking any positions.
To be continued–

The last post talked about buying a CALL.  Also in a previous post I described how the risk/return graph changes when we take an opposite position. 

Lets use the same GE March $5 Call (symbol GEWCE).  If you buy the Call (Long the Call) your risk/reward at expiration looks like this:

$5 March 2009 GE Call

$5 March 2009 GE Call

And if you sell the Call (Short the Call) your risk/reward at expiration looks like this:
$5 March 2009 GE Call - Short

$5 March 2009 GE Call - Short

For this example I have assumed that you can sell the option for the same price that you can buy it.  In reality, if you look at these bid/ask prices in the previous post, you can sell the option for $5.10, a 10 cent difference.  Also, because the spread is 10 cents, it MAY be possible to buy or sell this option for $5.15. 
Notice that the graph is just mirrored about the x-axis.
If GE closes below $5 at expiration, you will have a gain of $5.20, if GE closes at $10.20, you will not gain or lose anything.  As GE goes above $10.20, you will start to have a loss, with the maximum loss being unlimited.  And if GE closes between $5.00 and $10.20 at expiration, you will have some gain.
If you sell the Call, also known as WRITING a Call, you have an OBLIGATION to purchase the underlying stock, in this example GE, for $5.00 if the holder of the option exercises the option.  It is the buyer of the Option that has a choice, or option. 
I do NOT recommend writing NAKED options, because the maximum loss is unlimited.  Naked means that you do not have another position that limits the downside risk.  Understand how options work and paper trade them before taking any positions.
To be continued–

There are two types of standardized options. They are American Style or European Style. For the purposes of this blog I will always be talking about American Style Options unless I specifically make reference to European Style Options.

What is the difference between American style versus European style?

American Style Options can be exercised at ANY time.  There are few reasons to exercise an option early, however with American Style Options it IS a possibility.

European Style Options can ONLY be exercised on the exercise date.