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For those of you who have been following the Facebook (FB) trade that was proposed in my blog entry of 8/15/12, the residual option position is now showing a profit of 76%. Since the residual position includes the long Jan 16 call that will be expiring this Friday (1/18/13), a decision needs to be made. The basic choices are: (i) sell the Jan 16 call and collect the profit, (ii) exercise the call to become the owner of 100 shares of FB stock at a price of $16 per share. (iii) roll the Jan 16 call into a later month. If you wish to continue participating in the price movement of FB, choice (iii) provides that opportunity without the need for extra capital to purchase the stock. Even after choosing (iii), there are further selections to be made in terms of which expiration month and which strike price should be used. Rolling the Jan 16 call into a June call option will provide for another five months of participation in the FB price movement. Here are a couple of possibilities involving June options : (iii-a) Roll the Jan 16 call into the Jun 17 call for a small profit that will cover your commission costs. The Jun 17 call has a delta of 0.96, which means that this option will capture essentially all of the price movement of the stock. (iii-b) Roll the Jan 16 call into the Jun 23 call, which will produce enough profit to cover the cost of your Jan 16 call and thus represents a free trade for the next five months. The Jun 23 call has a delta of 0.83, which will also mimic the price movement of the stock quite well. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.

Dr. W. Edward Olmstead Olmstead Options Trading Strategies Now that many stocks have weekly options, there are new strategies available to protect the price of a stock following an earnings report. Stocks often experience their biggest declines in price after an earnings report fails to meet the expectations of investors. Weekly options can offer cheap, short-term insurance to lock in a minimum sale price of a stock that might be vulnerable to an earnings setback. It has always been possible to use monthly put options to protect the price of a stock through the date of the company’s earnings report. The problem with monthly puts is that they can be quite expensive, particularly when the expiration date is substantially later than the earnings report. Weekly options are cheaper and offer more flexibility in providing short-term protection. Not all stocks have weekly options, but when a stock does have them, it is prudent to know how to employ them to circumvent an earnings report disaster. A timely illustration of a protective options strategy will be presented for Facebook Inc (FB), which has its next earnings report on January 23. FB stock is currently trading around $26, which represents a nice 30% increase since mid-November. With the company’s earnings report scheduled for January 23, there is concern about losing those recent gains if the report is less than spectacular. Let’s explore an inexpensive strategy to protect the price of FB by using a combination of weekly options. This protective strategy assumes the ownership of 100 shares of FB stock. While this trade may be appropriate for the protection of FB stock purchased at any price, it is designed primarily for stock purchased below the level of $25 per share. It is easiest to present this protective strategy as a combination of two separate trades. The first trade is the purchase of a weekly put that expires two days after the FB earnings report. For 100 shares of FB stock, buy one contract of the Jan 25.5 put that has an expiration date of January 25. The current cost of this put is $1.65 per share. This put will allow you to liquidate your stock for $25.50 per share if the earnings report on January 23 leads to a collapse of the FB stock price. The second part of the strategy is intended to lower the cost basis of the long Jan 25.5 put. In this second trade, sell one contract of the Jan 29 call and one contract of the Jan 24 put, each of which expires on January 18 (these particular weekly options coincide with the monthly options). Currently, the premium received from the sale of these two options is $.75 per share. This sale will reduce the cost basis of long put from $1.65 per share down to $.90 per share. The recent price range of FB stock will likely hold for the next few weeks leading up to the earnings report on January 23. This suggests that the short Jan 29 call and short Jan 24 put will expire worthless on January 18, five days before the earnings report. The residual option position will be long one Jan 25.5 put with a cost basis of $.90 per share that is valid through the week of January 21-25. With the FB earnings report on January 23, there will be two full days after the report to observe the response of the stock price. If the price of FB stock falls significantly after the report, the stockholder will have the choice of either (I) liquidating the stock at $25.5 per share or (ii) selling the Jan 25.5 put for a profit that will offset some of the loss in the stock price. Of course, it is possible that the price of FB stock will be either above $29 or below $24 when the expiration date of the short options arrives on January 18. If the stock price is above $29, the short put will expire worthless and the stock holder can choose to either buy back the short call or allow the stock to be called away for a nice profit. If the stock price is below $24, the short call will expire worthless and the diagonal spread composed of the long Jan 25.5 put and short Jan 24 put can be sold for a profit. While this weekly options strategy was presented as a protection for actual shares of FB stock, it applies equally well for an options position that represents synthetic stock. In an August 2012 blog entry (with follow up commentary), I presented an options approach to safely construct a synthetic long stock position in FB. The protection strategy presented here can be used in conjunction with that synthetic holding. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.

After reading this I believe that you will have what is referred to as a Ha-Ha or Light- Bulb moment. The basis of this concept isn't a new revolutionary type of technical analysis, but it is a powerful common sense approach to understand the interaction between buyers and sellers. Find someone else teaching the same - and you'll have found a formal Pristine student. Frankly, there isn't anything new or revolutionary when it comes to technical analysis. However, there are different ways of interpreting the same raw data that we all use. Most do this with a hodge-podge of indicators. Some even make a business out of selling you their proprietary indicators or indicator based system that will tell you what to do and when to do it. Knowing what to do and when to do it sounds great and why so many buy into these marketing indicator schemes. Maybe you remember or bought the once popular red light - green light trading system that many paid thousands for in the mid-2000 period. If you're interesting in a long-term approach to technical investing or trading, the history of the red light - green light indicator approach (gone) and others like it isn't it. The use of indicators or indicator systems attracts virtually everyone that becomes interested in trading the markets. I was no different when I started and tried many indicators and wrote a few of my own. The idea of removing the guess work and the uncertainty is attractive. It is also a powerful way of motivating those interested to buy into their marketing. Been there? Here's the concept I want to share with you....... There are buyers at prior price support (a demand area) and sellers at prior price resistance (a supply area). If you're thinking; I knew that already, that's it? You don't realize what a power concept this is. Let me explain. Virtually all price indicators/oscillators (there are hundreds) attempt to define when prices have moved too far and will reverse, right? Sure, but it doesn't work except in hindsight. These indicators have absolutely nothing to do with prices reversing. If you doubt it, think about why does what becomes overbought or oversold either stays that way or becomes more so without returning to the other extreme so often? It's not that you're using the wrong indicator or settings either. That's thing will keep you in search of the Holy Grail and the next indicator. Next there are technical tools like Fibonacci Retracements, Gann Lines, Moving Averages, Elliot Waves, Andrews Pitchforks, Bollinger Bands, Regression lines, Median Lines, Trendlines and they go on and on. All of them are supposed to locate the area where prices will find support or resistance. All of this hocus-pocus analysis is insane! So, what's the answer? An in-depth understanding of price support and resistance pivot points or consolidations as reference points are where you need to focus. This is where buyers and sellers interacted in the past and will likely do so again. Once you have a reference point, wait for a price pattern signaling slowing momentum and reversal. At Pristine, we define a Support Pivot as a bar or candle having at least two higher low bars to its right and left. A Resistance Pivot is a bar or candle having at least two lower high bars to its right and left; simple. The trend of prices, the arrangement of the candles, changing ranges and volume are some of the other concepts to consider that increase the odds of follow through, but that's for another lesson. As far as where prices are likely to stall, it's the basics you need to follow. There are buyers at prior price support (demand) and sellers at prior price resistance (supply). Let's look at a couple of chart examples. As Google (GOOG) moved lower on the left side of the chart, it formed a Resistance Pivot. As you can see, sellers came in at the same location. You didn't need an indicator to guide you where sellers would be, did you? You only needed to look at the chart for a pivot high. Once the trend was violated, look for buyers (demand) to overcome sellers (supply) at a Support Pivot. As prices move higher in an uptrend, the concept of what was resistance becomes support applies. However, in the strongest trends prices will not pull back to what was resistance. I'm sure you've seen that in the past. At these times, don't chase. Wait for a Support Pivot to form. Once it does, you have a new or created reference point of support where buyers will step in again. Reversal candles are you confirmation at those points. In the chart of Facebook (FB), prices moved up from a low pivot point and there was no clear resistance area to the left. However, once a Resistance pivot formed there was a clear point where sellers (supply) overcame buyers (demand) and that would likely happen again. Once FB broke lower many will look for a retracement to sell, which is fine. However, when supply is overwhelming demand - prices cannot retrace that much. Don't chase out of fear of missing the move, even though that may happen. Wait for a Resistance Pivot to form. Once it does, use that reference point and your Candle Analysis to tell when to act. In the chart of the New Zealand Dollar versus the U.S. Dollar (NZD/USD.FXB) a climactic move lower occurred. This created a Pristine Price Void above and once a pivot low formed we had a reference point where buyers (demand) would show up again. However, we cannot know for sure if that low will hold, and we don't want buy in such a strong downtrend without confirmation. Rather, we want to wait to see if a reversal will form in the same area. If it does, we have that confirmation on the retest and a strong buy signal. I hope this Chart of the Week has provided you with the Light bulb moment I promised. All the best, Pristine Capital Holdings, Inc.

Dr. Edward Olmstead, Professor, Northwestern University Chief Options Strategist, Dr. Olmstead’s Options Trading Strategies There continues to be considerable interest in owning the stock of Facebook (FB) even though its performance has been a disappointment since its IPO in May. At its current level of $20.40, it might be a bargain, but it could also continue lower before it finds some significant support. Here is a cheap and safe way to own FB into January 2013 (and possibly beyond). This cheap and safe way to own FB into the beginning of 2013 uses a combination of options. Instead of buying the stock, a call option will used as a synthetic version of the stock that costs less than $6 per share while providing over 80% of the FB price movement. To protect the synthetic stock, a married put option will be used to limit loss in case the stock continues to move lower. Finally, the cost of the married put will be substantially reduced by selling a near-term strangle. Here are the details of the trade base upon a one contract position (100 shares): Buy 1 Jan (2013)16 call for $5.70 per share. Buy 1 Jan (2013) 20 put for $3.20 per share. To reduce the cost of the put, sell 1 Sept 22 call for $.90 per share and sell 1 Sept 18 put for $.70 a share. At the September expiration date (9/20), this trade will show a small profit if FB is trading between $18 and $26. After the September expiration date, this trade has the potential for unlimited profit with a maximum risk at the January expiration of only $3.30 per share. Actually, the maximum risk is less than $2.00 per share prior to the beginning of December. When the January expiration date is reached, you can continue following FB by repeating the synthetic stock/married put trade for another 5-6 months. You would also have the choice of buying FB stock for $16 per share. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.

Dr. Edward Olmstead, Professor, Northwestern University Chief Options Strategist, Dr. Olmstead’s Options Trading Strategies We've all experienced the situation in which we buy a stock only to see it undergo a significant pullback in price. We still like the stock and feel that it will recover at least some of the ground that it lost. There is a low-cost option strategy that can help you get back to a break-even status when the stock regains only part of its lost value. Holders of Facebook (FB) stock and those who are under water with Apple (AAPL) may find this strategy useful. The stock repair strategy uses options to assist in bringing your stock investment back to a break-even level. This strategy is structured to attain the break-even status at a stock price that is significantly lower than the original purchase price. The great appeal of this strategy is that it involves no additional risk since it can be applied for little or no additional expense. Note that to do the stock repair strategy for little or no cost, it typically requires options with at least two months until expiration. The more time allowed, the more likely a credit will be generated. Stock Repair Strategy For this strategy to work, it is necessary for your fallen stock to make at least a partial recovery. The stock repair strategy uses options to expand that partial recovery into a full recovery of your original investment, with little or no additional expense. If the stock price remains unchanged or continues to fall, this strategy offers no help. The basic plan is to buy one at-the-money call for each 100 shares of stock that you own. You are going to pay for this one long call by selling two out-of-the money calls with the same expiration date. The idea is to use the cash received from the two short calls to pay for the one long call. Choose an expiration month for the options that is far enough out in time for the price of your stock to recover back to the strike price of the short calls. Let's look at some examples to illustrate the stock repair strategy: ‑ Example 1. You bought 100 shares of XYZ back in December when it was $35. You watched it initially go up, but then *undergo a dramatic slide to its current price in early March of $23. You still like the stock and feel that there is some hope for a recovery, although getting back to break-even at $35 seems far away. Let's see how stock repair might help. ‑ Trade: Buy 1 Jun 25 call for $3.30 per share and sell 2 Jun 30 calls for $1.75 per share. This actually produces a net credit of $.20 per share [(1.75 ¥ 2) - 3.3 = .20]. Position: Along with an extra $.20 per share in your account, you hold the combination of a covered call (long 100 shares XYZ and short 1 Jun 30 call) and a bull call spread (long 1 Jun 25 call and short 1 Jun 30 call). See Figure. 16-1 for a risk graph that depicts this position. Payoff: If XYZ is above $30 at the June options expiration, the stock will be called away at $30 per share, for a $7 per share gain over its present price of $23. The bull call spread will be worth $5 per share. The total gain (including the $.20 credit received) is $12.20 per share [7.0 + 5.0 + .2 = 12.2], which is equivalent to a stock price of $35.20. Thus, you will have reached slightly better than break-even, although the stock is still as much as $5 below your original purchase price. ‑ Example 2. You bought 100 shares of YZX back in December when it was $19.50. Now in early March the stock is down 15 percent with a slide to $16.50. Let's see how stock repair can get you back to slightly better than break-even in only 10 weeks with the stock recovering just 6 percent from its *current level. Trade: Buy 1 May 15 call for $2.40 per share and sell 2 May 17.5 calls for $1.10 per share. This does require a small cash outlay, specifically $.20 per share [(1.1 ¥ 2) - 2.4 = -.2]. Position: It has cost you an extra $.20 per share to hold the combination of a covered call (long 100 shares of YZX and short 1 May 17.5 call) and a bull call spread (long 1 May 15 call and short 1 May 17.5 call). Payoff: If YZX is up by only 6 percent from its current level to $17.50 at the May options expiration, you will be slightly better than break-even. The stock will be called away at $17.50 per share for a $1 per share gain over its present price of $16.50. The bull call spread will be worth $2.50 per share. Allowing for the small extra cost to establish this trade, the net gain is $3.30 per share [1.0 + 2.5 - .2 = 3.3], which is equivalent to a stock price of $19.80. Thus, you have reached slightly better than break-even with the stock recovering less than half of its loss. In comparing Examples 1 and 2, note that the stock repair for 1 was done for a small credit, whereas 2 required a small debit. The explanation for this is the amount of time until the options expire (June versus May). Reminder: to do the stock repair strategy for little or no cost, it typically requires options with at least two months until expiration. The more time allowed, the more likely a credit will be generated. Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.

Since the listing of FB, the stock has dived. I've added AAPL, GOOG & NQ for comparison. As I'm sure you're aware, it hasn't exactly been a smooth few days for stocks since the FB IPO, but then FB has done particularly poorly. Why is this? An over-ambitious pricing of the stock perhaps? Or a less than brilliant vision in the eyes of investors for how the company intends to make money? Or maybe it's something to do with all that technical nonsense that happened on the day at the Nasdaq? Well clearly none of these things help. But that's not really why FB has done so badly is it? I don't think so. Technical strength is built on fundamental timing. When the overall market is clearly risk averse, with US and German bond yields continually dropping and the specific risk event of the Greek election looming with the backdrop of a wider European sovereign debt crisis, what is the likelihood of seeing persistent strength in any stock? So why has it dropped so much? When stocks drop they often do so quickly when they are breaking from perceived value. What then supports them as they drop? Previous accepted value which we can indentify by studying technical price charts. But there's no previously accepted value for FB is there? Noooooooooo. Whoops. So where exactly does it stop? Anyone willing to take a gamble? The lesson is that if you're a company wanting to list, think long and hard about doing so before you do. Make sure that investors really believe in you. Make sure that you list when the market is moving the right way or at least not waiting for some big risk event to pass. You are not too big for the market to turn you into a flop. Anyway, whatever. I guess that MZ is still mega loaded and I still think FB sucks. :doh: