my new way of gambling in stocks

[KTP]

I have recently become interested in call spreads as a way of investing/gambling in the market. My current strategy is to buy fairly deep in the money call LEAPs during low volatility or during a down cycle and then later selling an at the money LEAP for nearly the same cost, leaving me with just small amount at risk and a big potential return.

Right now I have a few in play, all expiring Jan 2013.

My favorite one is:

Microsoft bought $20 @ $4.95 sold $22.50 @ $4.05, leaving $0.90 at risk for a $2.50 return

Also working on ones for AAPL, INTC, and GLW. Trying to work all of them such that the stock can be lower than it is today in 2013 and I still make some money. I bought GLW $15 calls today for $4.50...hopefully it will turn around soon such that I can sell the $17.50 calls for $4 soon, leaving $0.50 at risk for a $2.50 return. GLW is Corning and has a PE of 8.


Oh, the beauty of this type of trade. No tax due until 2013 and any gains will be long term capital gains.

[elessar78]

How much of your portfolio is dedicated to this kind of activity?

[KTP]

How much of your portfolio is dedicated to this kind of activity?

It depends on how you value the investments. At any one time it might be as much as 5% of my portfolio, but sometimes falls to less than 2%. For instance, if I buy a call for $5 then later sell a further out call for $5, do I have 0% of my portfolio tied up in this activity or do I calculate the potential return of the spread?

[Slug]

I would say you should calculate it by whatever your brokerage considers available funds for trading. If this situation makes no change to those available funds, then it would be 0%. I doubt that's the case though.

[elessar78]

well, since 0% isn't worth talking about. 2%, for me, is a reasonable amount for a speculative venture but 5% of portfolio starts getting high in terms of "gambling".

[Slug]

I'm trying to understand where your strategy fits in this list. Option Strategy Finder | The Options & Futures Guide

[KTP]

I'm trying to understand where your strategy fits in this list. Option Strategy Finder | The Options & Futures Guide

I guess it would be the first one (bull call spread) with a twist of lime

They don't really have an example of legging into a bull call spread, which is what I am doing.

Example. Yesterday I picked up 1 contract of Apple $300 Jan 2013 call for $60 (lol, I know..one contract, big spender!, but a) it is still $6000, and b) I have 94 free trades left at optionshouse)

I was going to wait a month and see if Apple revovered from the ~$315, but today it spiked up to over $325 (go figure) and I sold a $315 Jan 2013 call for $60, leaving me with $0 at risk and a Apple spread that will be worth $1500 if Apple closes above $315 by Jan 2013.

I am now not really sure that I have the tax situation figured out though. By selling a slightly in the money call (the $315) and leaving me with $0 on the table, it would seem that something is not right tax wise. Do I really get to let this spread ride risk free until 2013, thus having a zero risk investment that is 2 years tax deferred? Obviously until one or both legs of the spread are closed I have not realized a loss or gain (actually it is impossible to realize a loss unless I bought back the $315 call for some unknown reason).

I am not going to do too much more of this until I figure out for sure the tax situation. The info is not easy to find.

[KTP]

I am not going to do too much more of this until I figure out for sure the tax situation. The info is not easy to find.

I now am leaning toward closing out all of my spread positions. The tax reporting looks to be insane, especially if you hold a spread over multiple years or close out just one leg. Too bad, because it would be an interesting way to play around with a little bit of the portfolio.

I have only initiated 3 spreads so far, and unless the market crashes tommorow I should be able to close them all out for around $1800 gain, so hopefully next year it will not be too painfull figuring out how to report them. I think my dream of having 40 or 50 of these running would turn into a nightmare next April.

flat tax anyone???

[Slug]

I'd go with the FairTax, but that's another conversation.

The Apple trade alone will pay someone else to do your taxes :-)

Look at BKS. I've bought and sold the July call options twice for major coin over the last couple of weeks and there could be a good entry point this morning b/c it sold off at the end of yesterday's session (where I should have gotten in but was paying attention to my real job).

[jpg7n16]

I am not going to do too much more of this until I figure out for sure the tax situation. The info is not easy to find.

Short answer: any gains will be considered short term capital gains

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Longer answer: Essentially, you are hoping that both are exercised. All you did was buy an option, wait for a movement in a favorable direction and then create a bull call spread.

Upon exercise, your basis in the purchased call option will be the lower strike price + the premium paid; and your sales proceeds will be the upper strike price + the premium received

For your Apple example: Your basis per share would be $300 + 60 = $360; and your sales proceeds per share (if exercised) would be $315 + 60 = $375.

Proceeds of $375, with a cost basis of $360 = $15/share * 100 shares = $1500 cap gains; and since these options are not longer than 12 months, it would be short term cap gains.

(The IRS would also claim that since you used an option contract to lock in your gains on a position held less than 12 months, you disqualified yourself for long term cap gain treatment. Either way, it's short term cap gains.)

................

If worse comes to worse and both contracts expire worthless, then your basis would be the premium paid ($60) and your proceeds would be the premium received ($60)

And $60 proceeds - 60 basis = $0 cap gains

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The official answer:

Taxation of options:
Publication 550 (2010), Investment Income and Expenses

Taxation of 'straddles' (includes spreads)
Publication 550 (2010), Investment Income and Expenses

have fun reading those!

[gambler2075]

...Speaking of gambling in stocks, I think that TEPCO (Tokyo Electric Power Co) is massively oversold on bankruptcy rumors. Currently trades at 320 yen from a 2400+ yen less than 6 months ago.

Reminds me alot of BP, when the BS rumors of bankruptcy swirled around.

Now, this is a super speculative position, so I won't put any more than 100,000$ into it, and I would really like it to go back to 250-270 yen before I buy, may not happen. There is a small chance of BK, imo, but the stock is worth the risk for a relatively small position.

I'd expect it to hit around 600 yen by September, and 900 yen by January.
This is not advice to buy or sell, do your own research as this stock could go to 0 yen.

We'll see.

Tokyo Electric Power Co Incorporated (9501.T) Quote| Reuters.com

g

[Slug]

Have you considered buying the company's bonds instead?

...Speaking of gambling in stocks, I think that TEPCO (Tokyo Electric Power Co) is massively oversold on bankruptcy rumors. Currently trades at 320 yen from a 2400+ yen less than 6 months ago.

Reminds me alot of BP, when the BS rumors of bankruptcy swirled around.

Now, this is a super speculative position, so I won't put any more than 100,000$ into it, and I would really like it to go back to 250-270 yen before I buy, may not happen. There is a small chance of BK, imo, but the stock is worth the risk for a relatively small position.

I'd expect it to hit around 600 yen by September, and 900 yen by January.
This is not advice to buy or sell, do your own research as this stock could go to 0 yen.

We'll see.

Tokyo Electric Power Co Incorporated (9501.T) Quote| Reuters.com

g

[gambler2075]

...Speaking of gambling in stocks, I think that TEPCO (Tokyo Electric Power Co) is massively oversold on bankruptcy rumors. Currently trades at 320 yen from a 2400+ yen less than 6 months ago.

Reminds me alot of BP, when the BS rumors of bankruptcy swirled around.

Now, this is a super speculative position, so I won't put any more than 100,000$ into it, and I would really like it to go back to 250-270 yen before I buy, may not happen. There is a small chance of BK, imo, but the stock is worth the risk for a relatively small position.

I'd expect it to hit around 600 yen by September, and 900 yen by January.
This is not advice to buy or sell, do your own research as this stock could go to 0 yen.

We'll see.

Tokyo Electric Power Co Incorporated (9501.T) Quote| Reuters.com

g

Whoops, looks like I missed out on this one... 392 yen and rising...

Tokyo Electric Power Co Inc/The (9501:JP) Stock Quote & Analysis - Bloomberg

g

[KTP]

please don't pull up this thread. Every single one of the stocks I recommended in here are up, and I got out of all of them too soon.

I have great stock picking ability but no guts to stay in them.

[Slug]

The entire market was up 5% last week. I would argue it was less about your picks and more about some positive market timing. I say that not to demean your picks but to make you feel better about your early exits :-)