WDIS: Back to Cool

Bullish NEM

| Nov 12, 2014
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    WDIS: Back to Cool

    Bullish NEM

    Nov 12, 2014

    Tony starts off by briefly recapping Katie’s overall portfolio performance for the year. He puts context around its current performance and draws relations to the recent market behavior. For example, Tony points out the big swings in light sweet crude oil and how that has affected her positions in other oil underlyings.

    Next, Katie and Tony switch over to the dough platform and visit the grid page. They take a close look at $NEM (a gold mining stock) because it has taken a hit to the downside along with other gold derivatives, such as $GDX and $GLD, and currently has a high implied volatility rank (IV rank) at 84 percent. Having discussed the current state of $NEM (down about 10 to 12 percent and a high implied volatility rank), Tony asks Katie what her options are in terms of strategy selection.

    Off the bat, Katie suggestions a naked put. While Tony agrees selling a naked put is a perfectly appropriate strategy because it takes advantage of the opportunity to sell the rich premium that they are seeing (as a result of the higher implied volatility), he also offers a few other strategies and encourages Katie to consider them as well.

    Since their assumption in $NEM is bullish, Tony suggests a covered call and a stock substitution for a covered call, which means using in-the-money options (ITM) instead of stock, to see if it reduces their buying power requirement.

    They open the trade page on dough and set up a covered call first. This entails buying 100 shares of stock and selling an out-of-the-money (OTM) call to reduce one’s cost basis.

    In terms of $NEM trading at $18.36, they decide to sell the 19 OTM call. The cost of this covered call is $17.78 with a 58 percent probability of success. If the stock were to stay above their break even of $17.78 the trade would be profitable. On the other hand, if the stock were to drop below their break-even, then the trade would start to incur a loss.

    Following their discussion on a covered call, Tony and Katie look at an ITM vertical call spread to emulate a covered call. Again, the reason for doing this is to try to reduce the capital / buying power required. The standard covered call they looked at required a buying power of close to $500. The vertical call spread has a 54% probability of success and requires buying power of close to $285.

    Lastly, the duo sets up a short naked put, Katie’s original strategy suggestion. This strategy has the highest probability of success at 65 percent, but also requires buying power of $500.

    To sum it all up, all of these trades are bullish and take advantage of high implied volatility. The covered call is the most capital intensive and doesn’t have the highest probability of success, but it is the trade that could make the biggest profit if directionally correct. The ITM vertical call spread is the least capital intensive, but has the lowest probability of success. Selling a naked put is capital intensive, however it does have the highest probability of success.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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